They face two major hurdles before they can commit themselves to importing bullion in right earnest.

The first relates to the Mumbai Sales Tax Act, which states that the sale of bullion to gem and jewellery units in the state is exempt from sales tax if it is used in products which are subsequently exported.

"But this exemption, under Form G, is given only to sales done by the State Bank of India and the Minerals and Metal Trading Corporation of India," World Gold Council's financial institutions' manager Derrick Machado said.

With sales tax on bullion currently pegged at two per cent in Mumbai and margins in gold-based products being so thin, no exporter in his right mind would approach any other agency for import of the yellow metal, Machado said.

Not only does this defeat the entire exercise ofliberalising gold imports, it puts Mumbai in a position of considerable disadvantage too, as the sales tax in the neighbouring states of Gujarat and Karnataka are just half a per cent. Mumbai banks have already made a representation to the sales tax commissioner, who has assured them a speedy redressal.

The second irritant comes from the interpretation of Section 59 of the Customs Act, 1962. In order to extend the benefit of exemption of customs duty on the gold imported for products which are subsequently exported, the banks are supposed to give a guarantee to the customs in the form of bank bonds. "The amount of these bank bonds, as notified by the customs earlier, was equal to the customs duty of Rs 250 per 10 grammes of gold imported," Machado said.But since the banks would be importing gold and stocking it in their vaults till they deliver it to the exporters, the section 59 requires a warehouse bond from the banks for the amount of gold imported. "The amount of this warehouse bonds is twice the actualduty, totalling to Rs 500 for every 10 grammes of gold imported," Machado pointed out.

This puts a strain on the bank resources. The eight banks engaged in the bullion business have registered a reasonable growth in gold imports--an average of around 40 tonnes a month. However, the share of gold imported on behalf of exporters has remained negligible.

Bankers are hopeful that recommendations made by the Capital Account Convertibility Committee, headed by former RBI deputy governor SS Tarapore, on liberalising gold imports, particularly those related to hedging mechanisms, would soon be implemented.

"Not only would this see a surge in the demand of the yellow metal from exporters, but will also encourage banks to come out with a number of gold-based financial products like gold loans, gold accumulation plans and gold deposit accounts," a senior banker said.