New Delhi: After a surge in import of gold from South Korea, the Directorate General of Foreign Trade (DGFT) in the commerce ministry on Friday banned duty free imports of the yellow metal from the country.

Under the India-South Korea free trade agreement that came into force in 2010, India has allowed duty free import of gold and silver items. However, it imposed 12.5% countervailing duty to offset the equal level of excise duty on gold and silver jewellery items produced domestically.

After goods and services tax (GST) was implemented starting 1 July, countervailing duty was abolished as the new tax regime subsumed excise duty and only 3% GST was imposed on gold. This created a situation where importing gold via South Korea became profitable due to its duty free status even as government continued to impose 10% basic customs duty on import of gold from other countries.

Gold imports from South Korea surged to $339 million between 1 July and 3 August against import of only 70.5 million in the financial year 2016-17.

DGFT on 14 August had prohibited export of gold items above 22 carat as it was feared traders are using the South Korea route to round trip gold items by importing at a lower cost and exporting it at a higher price without much value addition.

India is the world’s second largest gold consumer after China, with consumption of 674 tonnes in 2016. Demand is projected to rise to between 850 tonnes and 950 tonnes by 2020 from an estimated 650-750 tonnes in 2017 buoyed by the new GST regime, according to the World Gold Council.