Import duty cut sparks big drop in gold price

Consumers were taken by surprise when gold prices in the domestic market dropped significantly on Monday. Gold price had gone up by Rs 1,700 per tola (11.664 grams) to Rs 167,000 on Sunday. It, however, fell by Rs 15,900 per tola overnight to Rs 151,300 on Monday. 

This significant drop in gold price is linked to the government's decision to reduce customs duty on gold imports from 20 percent to 10 percent. A cabinet meeting held on Thursday had taken the decision, which took effect from Sunday, according to the Department of Customs.

The decision to reduce customs duty was primarily motivated by two factors. First, there was a dramatic decline in gold imports through the formal channel during the first four months of the current fiscal year (2024-25). Official data from the Department of Customs reveal that Nepal imported 132.56 kg of gold worth Rs 1.42bn during the review period. This is an 87 percent drop compared to the same period of 2023/24 when the country imported 1,000.5 kg (worth Rs 8.2bn).

Nepal allows only designated commercial banks to import gold. Associations of gold dealers then take the gold from banks and distribute it among its members.

Second, and perhaps more concerning, was the emergence of increased gold smuggling activities from India to Nepal. This illicit trade was fueled by India’s decision to lower its customs duty on gold to six percent from 15 percent, creating a significant price disparity between the two countries. With gold becoming significantly cheaper in India, smugglers exploited this price differential, which led to a significant surge in illegal import of gold from the southern neighbor.

Alarmed by the significant drop in revenue from gold imports, the government decided to lower customs duty to 10 percent. The policy reversal comes just months after the Pushpa Kamal Dahal administration increased the duty from 15 percent to 20 percent in mid-July 2024 through the budget for fiscal year 2024-25.

While consumers have already benefited from the decision to lower customs duty on gold, which immediately made the yellow metal cheaper, the success of this policy adjustment will depend on several factors: the recovery of legal gold import volumes, reduction in smuggling activities and stabilization of gold prices in the domestic market.

It’s still unclear if this policy intervention will be sufficient to combat gold smuggling as Nepal’s 10 percent customs duty is still higher than six percent in India.