Gold Price Surge Leads to Accounting Manipulations Among Jewellers
Amid spiralling gold prices, some jewellers have reportedly manipulated accounting rules to suppress profits and pay lower taxes. The Income Tax (I-T) department has identified several units that violated regulations by altering the way they value their inventories. This strategy has allowed these jewellers to record lower profits, sources informed ET. Allegations suggest that this has been ongoing for the past five to six years. Notably, one jewellery house has paid close to ₹100 crore in taxes on the suppressed earnings.
These jewellers have switched their valuation strategy from FIFO (first-in, first-out) to LIFO (last-in, first-out). This shift lowers the valuation of closing stock, which includes unused gold purchased as raw material, semi-finished products, and unsold finished jewellery. A lower closing stock value directly impacts profits—lower stock means lower profits, leading to a reduced tax obligation.
The I-T department suspects that numerous jewellers, capitalizing on the surge in gold prices, have adopted this tactic to evade taxes. Officials have been directed to investigate cases where LIFO has been utilized.
Under the FIFO method, older inventory is sold first, so the value of the remaining stock reflects the more expensive gold purchased or stocked later. This results in a higher pre-tax profit since the cost of goods sold is lower. Conversely, with LIFO, the latest purchases are sold first, meaning the remaining inventory consists of less expensive gold. In this case, a higher cost of goods sold results in lower profits.
Using LIFO constitutes a breach of the I-T Act, which mandates that businesses use either FIFO or the ‘weighted average cost’ method for inventory valuation since the 2016-17 assessment year. The constitutionality of this mandate has been upheld by the courts, which rejected pleas from jewellers pushing for the right to use the LIFO method.
In a rising market, selecting one method over another can significantly influence the timing of profit recognition, especially since gold prices have been steadily increasing in recent years. However, experts argue that profits are not directly generated from the closing stock itself. According to Ashish Karundia, founder of Ashish Karundia & Co., valuing unsold inventory at the end of an accounting period is merely a step in calculating trading results and does not inherently create profit.
With gold prices soaring since the pandemic—exacerated by geopolitical tensions and substantial purchases by central banks—many jewellers may have found the LIFO valuation tactic too tempting to resist. For context, the price of gold in India increased from ₹31,000 per 10 grams in 2019 to ₹35,000, later surging from ₹48,720 in 2021 to ₹77,913 in 2024, currently standing at ₹97,681.
The I-T office has the authority to examine the accounting systems of assessees to determine the appropriateness and accuracy of profit deductions from maintained account books. While ICDS II permits a third methodology for non-interchangeable items and project-specific goods, it clearly prohibits LIFO for large quantities of ordinarily interchangeable inventory items like jewellery. Paras Savla, a partner at KPB & Associates, emphasized that the chosen formula should reflect the most accurate representation of actual costs incurred in bringing inventory to its present location and condition, ensuring consistency in application across financial periods.
Radhika Goyal is Author of Taxconcept Gurugram head office, for deeply reported tax, gst and income tax articles on issues that matter. He splits her time between New Delhi and Bengaluru, and has worked as a reporter, a podcaster and an editor for publications across India.