565kg illicit gold seized in Bangladesh in 2013-14  

The gold smuggling in Bangladesh has risen day by day, penetration by gold smuggling cartels of the national airlines of Bangladesh was all over the news recently, but government took strict steps to prevent gold smuggling and a record 565kg of gold was seized by the government in 2013-14, Chairman of National Board of Revenue (NBR), Ghulam Hussain told the Customs Today here the other day.

He added that low gold import duty in Bangladesh, compared to that of India, encouraged smugglers to use Bangladesh as a transit route to channel gold into India.

GoldSmuggling goods (such as gold) involves moving goods illegally into and out of a country. In case of gold, this happens when gold is illegally imported into Bangladesh and also when it is illegally exported outside of Bangladesh. From a businessman’s perspective, smuggling is a highly risky endeavour. The entire consignment of goods can be confiscated by customs; there can be no legal insurance for smuggled goods; there is no legal forum for dispute resolution between parties and no legal protection from the threat of violence. From a purely economic perspective, the risks of engaging in gold smuggling are quite phenomenal.

A rational investor, that is, a person who is motivated by self-interest and profits, would only engage in such a risky activity if the payoff is substantially high.

As of December 20, one bhori (11.664g) of 24 karat, or pure gold cost approximately Tk 34,662 on the international market. In contrast, one bhori of 22 karat gold sold at Tk 42,000 in Dhaka. Sp there is a price differential of about 26-30 per cent per bhori of gold. Since gold is a heavy and dense metal, it is quite possible for someone to smuggle large amounts of it inconspicuously in their luggage. If someone smuggles about 15 kg of gold, they would be able to make a gross profit, conservatively speaking, of about Tk 12 million. Given the high demand for gold, smugglers are able to liquidate it very quickly.

This means that these traders are able to reinvest the capital into another consignment very quickly and maximise their profit. Arguably, the difference in the price of gold in the international market and the national market can be attributed to the duties charged by the government on the importation of gold.

Since the Indian government has increased taxes on the import of gold, the price of gold has gone up in India. Whatever the policy objective might have been for the Indian government, the immediate effect of the tax was to increase the price of gold within India. However, the tax has not had any effect on the price of gold in the international market because that price is determined by global market forces – upon which the Indian government has, arguably, little influence.

This means that investors would be able to increase their profit if they can smuggle the gold into India, i.e. import the goods into India outside legal channels. Since Bangladesh has an enormous border with Bangladesh, Bangladesh seems to have become the transit route of choice for traders involved in international trade of gold. Assuming that gold smugglers are rational investors, the confiscation of large consignments of gold recently seem to indicate that the payoff for engaging in such activity is sufficient to off-set the risk of engaging in gold smuggling despite the huge risks associated with these activities.

From a trade perspective, gold smuggling as they have been taking place is not necessarily a bad thing for us. Gold, like any good, is imported into the country and then exported to India because suppliers can fetch a higher price for gold in India then they can here or in any other country. The gold bars are imported into Bangladesh and then they are physically transported across the country to the border regions, from where the gold is transferred into India through unofficial channels.

Provided that the smuggled gold does not enter our local markets without the payment of local taxes, such as VAT, the increase in trade is beneficial for our economy because channelling the gold through Bangladesh creates economic activity in Bangladesh by stimulating demand for transport and reliable employees to carry the gold across international borders among other things. As long as people here do not use the gold for their personal use, the transit of gold does not affect the consumption tax base of Bangladesh. In fact, it may even help the tax base because it might generate economic activities which can be taxed.

Evidence seems to indicate that gold smuggling is not going to stop anytime soon. Since it is not going to stop, then I submit that the best way to manage the gold smuggling epidemic in Bangladesh is to eradicate the restriction on the import of gold bullions for the time being and charge a very low import duty (e.g. 0.25 percent) on them. Since these activities are taking place anyway, it might be more prudent to bring them within the folds of the law so that the government would be able to collect some revenue from such activities.

Furthermore, cheaper gold would mean that there would be a boom in the jewellery industry. This in turn would mean the creation of more skilled and higher paying jobs, thus, boosting the earnings of Bangladeshi nationals. Since jewellery would be relatively cheaper in Bangladesh, it could also increase the number of international tourists into Bangladesh who could come here to purchase the finished products and take it back to their home countries. Thus, legalising the trade of investment gold would could significantly boost the economy of Bangladesh and increase the tax base.

Liberalising the gold policy, furthermore, would help Bangladesh reduce its trade deficit with India (US $2.910 billion, 2009-10) because most of the gold bullions and the finished products would likely be exported into India.

Although it makes perfect economic sense for the government to legalise the import of investment gold for re-exportation, there are numerous impediments for changing the policy. Two of the most important challenges are: vested interests and foreign pressure. People (e.g. corrupt officials and members of the gold syndicates) who currently benefit from gold smuggling are likely to resist any changes to the established order because they will stand to lose substantially. India could also use its clout to pressurise Bangladesh from changing its policy towards gold because that could have a substantial negative impact on the Indian tax base.

In the end, the government ought to keep in mind that the policies of the Indian government may not be in the best interest of the people of Bangladesh. Given that liberalising gold policy could lead to increased capital inflow, a larger tax base and reduction of the trade deficit of Bangladesh with India, the rational choice for Bangladesh would be to adopt a more liberal policy towards the import of gold.

– Customs Today