Nepalese traders will soon have to start using letters of credit (L/Cs) when buying from or selling to traders in China and India.

The new rule responds to concerns about revenue losses believed to be largely the result of the undervaluation of imports on documents seen by Nepal's customs operations. Now it appears that smuggling is a big problem too.

L/C decision

The decision to require that traders use L/Cs was made at a meeting of Nepal's Revenue Leakage Control High-Level Monitoring Committee, chaired by finance minister, Yuba Raj Khatiwada.

Payments are currently made and received via telegraphic transfer or demand draft or in cash.

Reference pricingNepal is also trying to strengthen its revenue collection by introducing reference pricing so that customs officers can compare the price of goods shown on import and export documentation with a reference price list.

But since reference pricing was introduced in January for certain items, Nepal has witnessed a substantial drop in imports of tobacco and garments, both of which appear on the reference list.

Smuggling

The authorities believe this indicates a significant increase in smuggling and anticipate that the introduction of the L/C requirement will bring trade in goods such as tobacco and garments back into the formal economy where revenue can be collected.

Nepal's traders are already required to transact on L/C terms with all other countries except India and China.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.