Gold Excluded from 'Second-Hand Goods' Definition: Kerala AAR Ruling

Gold Excluded from 'Second-Hand Goods' Definition: Kerala AAR Ruling

The Kerala bench of the Authority for Advance Ruling (AAR) has delivered a verdict stating that Best Money Gold Jewellery Ltd. (applicant), which is involved in the buying and selling of old/used/second-hand gold jewellery from unregistered individuals, is ineligible to avail the benefits outlined in sub-rule (5) of Rule 32 of the Central Goods and Services Tax Rules (CGST Rules).

The AAR's ruling was based on the determination that gold, being a commodity with universal utility and its value remaining unaffected by the duration of use or change in ownership, does not fall under the classification of 'second-hand goods'.

The ruling was issued in response to the applicant's inquiry concerning the valuation of supply and the GST liability involved in the sale of second-hand gold jewellery.

The AAR's ruling hinged on a crucial factor: whether the value of gold is affected by the transfer of ownership. During their analysis, they recognised that gold holds a unique status as a commodity with universal utility, prominently featured in the foreign reserves of nearly all central banks. The historical significance of gold was also evident in its dominant role in the international monetary system, where currency rates were once linked to its price.

Moreover, the AAR acknowledged that, under Indian Income Tax laws, profits derived from the sale of gold and gold products are treated as capital gains and are subject to taxation.

The AAR's insightful analysis of consumer behaviour concerning the gold purchase and holding in India led them to a significant inference: the marginal utility derived from acquiring and owning gold and gold products does not diminish over time. Instead, it either remains constant or increases. Given that the value of gold remains unaffected by the duration of use, the traditional concept of depreciation, which is commonly associated with tangible assets, does not apply to gold and gold jewellery.

Based on this critical observation, the AAR concluded that the exchange of gold cannot be classified as dealing in second-hand goods. As a result, Rule 32(5) of the CGST Rules, which pertains to second-hand goods, was deemed inapplicable in this context.

The AAR's ruling highlighted a fundamental point: certain items like gold, land, and currency do not fit the definition of 'second-hand' due to their unique characteristics and universal acceptance. For a supply to fall under the valuation of supply as outlined in sub-rule (5) of Rule 32, it was crucial to demonstrate that the applicant was dealing in second-hand goods. However, gold, in any form, failed to meet the criteria to be classified as 'second-hand goods' according to the AAR's assessment.

Consequently, the supply made by the applicant did not fulfil the specific requirements specified under Rule 32(5) of the CGST Rules, the AAR held.