Home / News / World /  Sri Lanka imposes 10% tax on gold imports

Colombo: Sri Lanka has imposed a 10% tax on gold imports with immediate effect to curb overseas purchases by traders looking to take advantage of a favourable price arbitrage with top consumer India, two government officials said.

While Sri Lanka did not have a duty on gold prior to this, its neighbour India hiked import taxes for the metal by 33% earlier in June to rein in a ballooning trade deficit. Sri Lankan customs have recently nabbed a number of people suspected of smuggling gold out of the country at airports.

“There is an increase in gold imports and we have seen some people using the situation as an arbitrage with India having a tax. We also have found some leakages and we want to prevent this," a top Sri Lankan government official told Reuters on Friday on condition of anonymity.

“The government has imposed a 5% customs duty and another 5% surcharge on gold imports," said the official, who is involved with the decision making.

Treasury secretary P.B. Jayasundera also confirmed that the customs duty was imposed “to prevent arbitrage with India", though he did not say how much the tax was.

Sri Lanka’s imports of the precious metal jumped 46.7% from a year ago to $110 million in the first four months of this year. It imported gold worth $50 million in April alone, provisional data from the central bank showed.

The value of gold imports sank to $170 million in 2012, from a record $604 million in 2011 after the central bank tightened monetary policy twice and adopted a flexible exchange rate.

“This is a sensible and timely move to prevent another balance-of-payment and exchange rate crisis," a currency dealer said on condition of anonymity. “If imports increase, there will be a depletion in foreign currency reserves as we experienced in 2011, thus pressurising the exchange rate."

Sri Lanka has also seen a surge in gold pawning, a popular method of borrowing against the metal, and commercial banks’ exposure to this grew 20% to around Rs33,940 crore ($2.64 billion) in 2012, or about 14.4% of the year’s total loans, central bank data showed.

Some bankers said the exposure was now more than Rs50,000 crore and that recovering this money had become difficult with a drop in global gold prices.

Spot gold has plunged 22% so far this year, after gaining for the last 12 years.

“A tax would help to adjust the prices," Central Bank’s economic research department chief Swarna Gunaratne said. “The central bank has already advised banks on pawning as we had a concern on this."

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