Introduction
As gold prices in India cross ₹1,00,000 per 10 grams in 2025, the jewellery sector faces increased attention not just from customers—but from tax authorities. While higher prices should reflect in better profitability, many jewellers have reported surprisingly low taxable income. The Income Tax Department has begun investigating whether certain businesses have manipulated inventory valuation to reduce tax liability.
A key concern is the use of the LIFO (Last-In, First-Out) method for inventory valuation, which is not permitted under Indian tax law since the Assessment Year 2017–18. Several jewellers are alleged to have switched to LIFO during this period to show reduced profits. One jewellery group reportedly settled over ₹100 crore in back taxes due to such practices.
This guide explains the legal position, the reasoning behind restrictions, and how jewellers can ensure compliance in both spirit and form.
Rising Gold Prices and Tax Exposure
Gold prices have surged consistently over the past six years. From ₹35,220 per 10 grams in 2019, the price rose to nearly ₹1,07,000 in mid-2025. This sharp increase has naturally inflated the value of unsold gold inventory held by jewellers.
In normal circumstances, this would lead to higher reported profits due to a higher value of closing stock. However, tax authorities have noticed a mismatch—rising gold prices, but stagnant or declining profits in some businesses. Investigations suggest this is partly due to the use of the LIFO method, which undervalues closing stock and reduces taxable income.
FIFO vs. LIFO: How Inventory Method Affects Profit
FIFO (First-In, First-Out)
-
Assumes older (and usually cheaper) inventory is sold first
-
Closing stock reflects newer, higher-cost inventory
-
Leads to higher closing stock value and higher profit
LIFO (Last-In, First-Out)
-
Assumes newer (costlier) inventory is sold first
-
Closing stock consists of older, cheaper inventory
-
Leads to lower closing stock value and reduced profit
In a rising market like gold, using LIFO deflates profit. However, LIFO is not a permitted method for tax reporting under Indian law.
What the Law Says: ICDS-II and the Ban on LIFO
The Income Computation and Disclosure Standards (ICDS) were notified in 2015 and are applicable from Assessment Year 2017–18 onwards. ICDS-II deals with inventory valuation.
For items that are ordinarily interchangeable, including gold, silver, diamonds, and jewellery, businesses are allowed to use only:
-
FIFO (First-In, First-Out), or
-
Weighted Average Cost
LIFO is specifically prohibited, regardless of whether it matches operational flow. Courts have upheld the validity of ICDS-II, rejecting petitions by jewellers who argued that LIFO better reflected market behaviour.
The objective of the rule is to ensure comparability, transparency, and uniformity in profit computation.
Jewellers' Justification and the Practical Business Logic
Many jewellers argue that LIFO reflects real customer behavior:
-
Newer designs tend to sell faster due to changing fashion trends
-
Lightweight, ethnic-looking jewellery with lower gold content but high appeal is often sold first
-
Older designs may remain unsold or be recast
While these observations are commercially valid, they do not override the requirement to use permitted valuation methods under tax law. Business operations may follow LIFO principles, but tax filings must comply with ICDS-II.
Income Tax Department’s Action and Penalty Risk
The I-T Department has begun sector-wide investigations. Officers are looking for:
-
Unexplained changes in inventory methods
-
Low profits despite high turnover and rising gold prices
-
Use of LIFO without proper disclosures
-
Inconsistencies between financials and tax audit reports
In such cases, the Department may:
-
Reject books of accounts under Section 145(3)
-
Recompute income using acceptable methods
-
Impose penalties for under-reporting under Section 270A
-
Initiate reassessment proceedings with interest and penalty
In one case, a jeweller reportedly paid nearly ₹100 crore after the tax authorities recomputed profits.
What Jewellers Should Do: Compliance Roadmap
Jewellers can avoid legal and financial risk by following these essential steps:
1. Follow Only Permitted Valuation Methods
Use only FIFO or Weighted Average Cost methods for inventory valuation in tax returns. Ensure that your financials and tax records reflect the same basis consistently.
2. Disclose Method Clearly in Form 3CD and Financials
Any change in method must be fully disclosed in the tax audit report and explained with valid commercial reasons.
3. Maintain Consistency Across Years
Changing valuation method frequently or arbitrarily is a red flag. Maintain the same method year-over-year unless there is genuine business restructuring.
4. Segregate Project-Specific or Custom Inventory
Non-interchangeable items, such as customised jewellery or project-based stock, may be treated differently. Clearly document and separate such items from regular stock.
5. Identify and Document Non-Saleable or Specimen Items
Jewellers should carefully identify:
-
Specimen pieces meant for display or exhibitions only
-
Design prototypes or catalogue samples not held for sale
-
High-value flagship pieces reserved for showcasing or branding
These items should be tagged in inventory records as non-saleable, and appropriate valuation adjustments made. This ensures only genuine saleable stock is included in closing stock for tax computation and avoids inflated profits.
6. Reconcile Internal MIS with Tax Filings
Ensure that internal inventory systems and management reports are aligned with the method used in the audited books and tax filings. Inconsistencies can trigger scrutiny.
7. Review Past Filings and Rectify If Necessary
If LIFO or non-permissible methods were used in prior years, consult your tax advisor on how to correct the position or make voluntary disclosures, if warranted.
8. Train Internal Teams and Stay Updated
Ensure that finance teams, accountants, and auditors are aware of ICDS-II requirements and their application to inventory held in various forms.
Role of Auditors and Consultants
Chartered Accountants and tax advisors play a critical role in ensuring:
-
ICDS-II compliant inventory methods are used
-
Any deviations or changes are clearly disclosed in audit reports
-
Saleable and non-saleable items are properly categorised
-
Stock records and accounting entries match tax disclosures
Auditors should advise clients proactively, as non-compliance may lead to serious consequences under reassessment and penalty provisions.
Future Outlook: Industry Dialogue and Scope for Representation
Industry bodies like GJEPC, IBJA, and trade associations may consider making representations to tax authorities for:
-
Special treatment or carve-outs for fast-moving, fashion-driven inventory
-
Safe-harbour rules for micro and small-scale jewellers
-
Segmentation relief for design-led or project-specific inventory
However, unless and until notified, strict compliance with current ICDS-II norms remains mandatory.
Conclusion
In a rising gold market, jewellers must not just focus on design innovation and market expansion but also on regulatory discipline. The use of LIFO is expressly prohibited and is being actively targeted by tax authorities. Businesses must ensure that their inventory valuation reflects both commercial substance and legal form.
A proactive, transparent, and documented approach to inventory management—especially in identifying specimen items and non-saleable inventory—can go a long way in avoiding disputes and protecting business credibility.
With increased scrutiny, tighter enforcement, and significant financial exposure, compliance is no longer a back-office concern—it is a boardroom priority.
