KARACHI: The State Bank of Pakistan (SBP) has asked the Ministry of Finance to formalise gold imports as the existing two facilities to import the commodity were being misused.
One of the policies allows import of gold against export of jewellery without any import payment; only jewellery making charges are received through banking channel from abroad.
High import duty in India at 10 per cent is the main cause of smuggling of gold from Pakistan to the neighbouring country. Moreover, artificial jewellery in the garb of original one is being exported in order to fulfil legal requirement.
Central bank’s report is based on conjecture and misinformation, says merchants’ body
In another option, gold imports are allowed on the condition that importers arrange their own foreign exchange to make payments. Thus gold import payment cannot be made from banks or exchange companies and gold importers resort to hawala channels. This leads to the appreciation of the US dollar against the rupee in the open market, and the interbank follows suit.
In a letter to the finance ministry, the State Bank said gold imports should be formalised by allowing payments through the interbank market. It has also suggested that the existing two modes of importing gold may be discontinued.
Customs duty on gold import and other applicable taxes may be imposed on a par with India to discourage smuggling of gold. In case imported gold is converted into jewellery and then exported, duty drawback may be allowed to the jewellery exporter once export proceeds realised.
Besides, in order to prudently monitor the process, two banks may be designated through auction of licence to manage gold imports.
A high-powered committee within the SBP may decide quota for gold imports (consignments based only) on a quarterly basis. Only selected large importers of gold with adequate financial resources through auction of licence may be allowed to import the commodity.
The SBP believes these proposed measures would help manage the imports as only two designated banks will be allowed to open letters of credit (LCs).
The central bank will also allow payments against imported gold to be remitted through interbank market which will not only provide legal channels to the importers but will also ease the pressure on the kerb market.
Foreign exchange resources currently being diverted to hawala channels to finance gold payments will come into the banking system, thus reducing interbank-kerb differential.
The SBP has informed the finance ministry that a similar practice is being observed in other countries, including India, China, Singapore and Turkey, where central banks regulate gold import and allow payments through formal channel.
The SBP urged the finance ministry to take up the matter with commerce ministry, the Federal Board of Revenue (FBR) and the Trade Development Authority of Pakistan (TDAP).
SBP letter ‘misleading’
On the other hand, All-Pakistan Gem Merchants and Jewellers Association (APJMJA) Chairman Habirur Rahman said the SBP’s letter addressed to finance ministry was misleading and “is based on conjectures, misinformation, and incorrect figures and analyses”.
At present, the duty structure under mode-I of gold import, there is one per cent withholding tax, customs duty of Rs2,500 a kilogram, whereas sales tax is exempted under schedule-VI.
The SBP has alleged that under mode-I, payments are made through hawala which puts pressure on interbank-kerb exchange rates. “During the past years there has been no import under mode-I which is evident from the figures published by statistical department,” Mr Rahman said. “The import is subject to above taxes and duties and as the government has not recovered any taxes on this account, it proves that no import was made; hence pressure on exchange rate is vehemently refuted.”
He said the SBP should investigate the flight of capital from Pakistan to all over world, including Panama, and figures of investment in real estate in the United States, United Kingdom and the United Arab Emirates.
He said that under mode-II import procedure, no misuse has been reported in the last three years after the introduction of statutory regulatory order (SRO) 760 on Sept 2, 2013.
The TDAP is religiously monitoring import of gold and export of jewellery through stringent measures. All transactions are recorded in ‘jewellery passbook’ which are authenticated by the TDAP, customs authority and the bank concerned.
“This data is shared by all relevant authorities and all imported gold gets exported. How come gold gets smuggled to India?” he wondered. He also pointed out that while the Ministry of Finance and the SBP were alleging that gold was smuggled to India, no Indian government agency or media has ever reported any smuggling from Pakistan.
On the SBP’s suggestion to introduce quota system under which wealthy parties would be given licences to import gold, he said such a system had already been abused in the past and long-drawn litigations were still pending in courts. “This system will only lead to foul play to benefit some influential elites.”
He also expressed his surprise that the SBP expects gold will be imported with a 10pc customs duty. “At present only 1pc withholding tax and customs duty of Rs2,500 per kg is levied and there has been no import of even one gram in the last several years,” he claimed.
“Gold is highly valuable and 10pc custom duty means Rs500,000 per kg. This business is for 2-3pc profit. Who will export gold and get 10pc of his money stuck with the FBR?”
He said Pakistan was a market of 150 tonnes of gold per year according to World Gold Council report. “The SBP should work out the foreign exchange required to finance 150 tonnes. India is spending $40 billion on import of precious metals annually,” he added.
Published in Dawn, August 17th, 2016