Gold Price in Nepal Takes a Freefall: How Illegal Imports and Tax Loopholes May Have Contributed to This Drop!

Recently, gold prices in Nepal dropped faster than anyone expected — first by Rs. 15,900 per tola yesterday, and further by Rs. 2,600 per tola today to settle at Rs. 148,700 per tola.?

You may be wondering if that’s due to no new marriage dates this month or next month as only Mangsir 8 was considered auspicious. But did you know, these factors or even demand and supply do not affect the gold price in Nepal.?

So, what happened that the gold price plummeted by almost 10% in just one day? Well, the big culprit is the government’s decision to slash import taxes on gold from 20% to 10%. And if you see, that’s by how much the gold price went down.?

But why did the Government slash the custom duty on the gold import by 50%? And was this import duty reduction necessary in the first place? And most importantly, what does it mean for the future of Nepal’s gold market? We try to answer all these and some more. Let’s dive in!

How Did the Tax Reduction Pull Down Gold Prices?

Gold prices aren’t just random numbers. They’re the result of a very specific formula, which includes factors like international gold prices, exchange rates, and — surprise! — custom duty. Here’s the basic math:

Gold Price in Nepal = (International Price per Troy Ounce × Purity × Grams per Troy Ounce × Exchange Rate) + Freight/Costs + Import Tax + Margins (banks & traders).

Let’s put this into context:

• The international price of gold is around USD 2,628 per Troy ounce.
• A Troy ounce equals 31.1034768 grams.
• The Nepali exchange rate to USD is 135.22.
• Add a 20% import tax, and voilà — gold becomes way pricier!

When the government halved the import tax from 20% to 10%, it slashed a massive chunk off the price. Think of it as removing a big “tax burden” from the calculation. This naturally caused the price to nosedive by Rs. 15,900 per tola, that’s around 10%, making gold significantly cheaper almost overnight.

Why Did the Government Reduce the Tax?

This wasn’t just a random act of generosity. The call for reducing the import duty had been there for sometime from various stakeholders engaged in gold and silver trade, primarily the umbrella organizations of gold and silver jewelry and handicraft entrepreneurs. The Government did not want to miss out on the import taxes though until they felt compelled to do so. So, what triggered this decision? Particularly the following troubling trends in Nepal’s gold trade:

A. Declining Legal Imports of Gold

Let’s look at the numbers for gold imports during Shrawan (the first month of Nepal’s fiscal year):

• 2079/80: 206,000 grams of gold imported.
• 2080/81: 200,000 grams (a slight dip).
• 2081/82: 100,105 grams (a shocking 50% drop!).

Why the steep decline? Demand didn’t fall — people still want their wedding jewelry and festive gold. The issue lies in smuggling.

B. Smuggling: The India-Nepal Tax Gap

India reduced its gold import tax from 15% to 6% during Shrawan 2080/81 (July 2024). This created a huge price gap between Nepal and India. Smugglers saw an opportunity:

• Buy cheaper gold in India.
• Smuggle it into Nepal, where gold was taxed at a whopping 20%.
• Sell it at a profit while undercutting legally imported gold.

The result? Legal gold imports plummeted while illegal smuggling flourished. By reducing the import tax to 10%, Nepal hopes to narrow the price gap, discourage smuggling, and bring gold trade back into the legal fold.

C. The Jewelry Loophole

Here’s another twist: gold jewelry imports were taxed at just 10%, compared to 20% for raw gold. This led to a clever (but shady) workaround:

• Import raw gold disguised as jewelry to dodge the higher tax.
• Once inside Nepal, melt it down and sell it as raw gold.

The government likely noticed this loophole bleeding revenue and decided to streamline taxes to prevent misuse.

What Was the Government’s Big Idea?

The tax cut wasn’t just about cheaper gold. It’s a strategic move aimed at fixing several problems:

• Fight smuggling: By reducing the tax gap with India, the government hopes to make smuggling less attractive.
• Boost revenue: Legal gold imports mean more customs revenue for the government.
• Support traders: High taxes were choking the legal gold trade, forcing banks and traders to deal with falling demand and illegal competition.

This isn’t just about economics; it’s also about fairness. Smugglers and loophole exploiters shouldn’t have the upper hand over honest traders and consumers.

So, What’s Next?

If you’re a gold buyer in Nepal, you’ve got reason to smile. The price drop makes gold more affordable for weddings, and festivals. However, there’s more at play:

• Will smuggling stop completely? Probably not, but it should slow down.
• Will prices stay low? That depends on international gold prices, exchange rates, and how well the government manages the trade.

What About Those Who Bought Gold Before The Price Dropped??

Well, gold is not typically traded in Nepal and usually held for a longer term. So, it may seem like a loss at the moment, but it’s not a real loss unless they actually start selling. And hopefully, they will hold the gold they’ve purchased for a few years and by then the price will certainly go higher than their purchase price. Same goes with the businesses that deal with gold and silver jewelry because they always sell their stock, adding charges for making and process-loss. And this should be enough to cover their losses. So, nobody’s actually at a loss (of course other than those who bought when the price was high and sold in panic when the price dropped).?

The Bottom Line

The government’s decision to cut import taxes wasn’t just about making gold more affordable; it was a calculated move to outsmart smugglers, rescue dwindling legal imports, and restore fairness to the market. By closing loopholes and narrowing the price gap with India, Nepal hopes to strike a balance between revenue, regulation, and demand.?

But here’s the real question: will this tax cut be enough to boost legal imports, or will smuggling and loopholes find new ways to tarnish the system?