GST is calculated on the difference between the purchase value and the resale price of used goods.

Through Rajat mohan

In everyday life, buying and selling old products is a common occurrence. When a product is purchased, it is charged with GST. When a business entity resells the same product after refurbishment, tax is again levied on the value resulting in double taxation. To solve this problem, the GST law contains a provision known as the “Margin Plan” which aims to solve this anomaly. The margin system model applies to the person involved in the buying and selling of used products. In this diagram, GST is calculated on the difference between the purchase value and the resale price of used goods.

The question here is whether, in the case of the sale and purchase of second-hand jewelry, the application of the GST should be limited to the difference between the sale and purchase price or would it be invoiced on the gross value?

This issue was raised by Aadhya Gold (P) Ltd. in front of the Karnataka Authority of Advance Ruling (“AAR”). In this case, the plaintiff was purchasing used / second-hand gold jewelry from unregistered persons (“ordinary man”). The applicant used to sell used / second-hand gold jewelry that was purchased from the public, “as such”, without further processing. These used gold ornaments were sold in the same form after cleaning and polishing but without altering the nature of the ornament.

Karnataka AAR observed that the Applicant did not melt the jewelry to make it into ingots and then recreate it into new jewelry, but instead cleaned and polished the old jewelry without changing the nature or shape of the jewelry purchased. Therefore, AAR concluded that in this case, GST is payable only on the margin between the sale price and the purchase price.

This move will result in a massive reduction in the GST payable on an item that is primarily considered an investment in India. Currently, the industry generally charges GST on the gross sale value received from the purchaser, regardless of the underlying facts.

Understanding with an example: ABC & Co., a jeweler bought used jewelry from an unregistered customer MZ for an amount of Rs. 1000. ABC & Co. sells the same jewelry after cleaning and polishing for Rs. 1300. ABC & Co. will only be liable for GST on the difference between the buying and selling price of the used goods, which would be (1300-1000) = 300.

Let us now come to the practice of the industry. All the big players basically melt the old jewelry and use the molten metal to create new jewelry. As there has been a change in the shape of the jewel, this transaction does not qualify for the marginal regime. Thus, in such cases, the tax will practically be levied on the gross value unless the big players change the current practice.

However, the smaller players in the industry, after buying second-hand jewelry for the purpose of reselling it, melt the jewelry and use the molten metal to create new jewelry. After this move, the industry’s malicious dealers will melt their jewelry and use it to make new jewelry, keeping the department in the dark, and continue to pay taxes under the fringe regime. This will result in a significant loss for the department from a long-term perspective.
Karnataka AAR, in the case of Attica Gold and Maharashtra Appellate Authority of Advance Ruling in the case of Safeset Agencies, has already approved the margin-based tax regime for the jewelry industry.

Thus, these decisions will have a significant positive impact on the industry by reducing the tax cost for the end consumer. In a post-covid scenario, the gemstone and jewelry industry has good reason to rejoice and hope that this would bring many customers back to their doors.

(Rajat Mohan is Senior Partner, AMRG & Associates. The opinions expressed are those of the author.)