GST to be paid only on difference between Selling Price and Purchase Price of Second Hand Gold Jewellery: AAR

Introduction: An advanced ruling is a mechanism whereby taxpayers can get answers or clarifications regarding supply of goods and services, directly from tax authorities and the primary objectives for such a mechanism are to reduce litigation, attract FDI due to transparent tax liability, provide certainty with respect to tax liability and disclose ruling in an inexpensive and transparent manner. The Authority for Advanced Ruling (AAR) constituted by the tax authorities interprets tax laws for the taxpayers and it was created to address any issues faced by taxpayers and assist them by providing a decision on the clarification sought. The AAR’s appallet authority is the AAAR (Appellate Authority or National Appellate Authority for Advanced Ruling). Section 95 to Section 106 in Chapter XVII of CGST Act covers the procedures and rules related to advance rulings. An application is made by the taxpayer on the clarification sought by them. The taxpayer is provided an opportunity of being heard by the AAR. If there is consensus on resolution on the clarification sought between the AAR and taxpayer, an ‘Advance Ruling’ is issued by the AAR and on the contrary, the matter is referred to the AAAR.

The question of law which is address through this AAR is as follows:

• Whether the GST value to be taken on sale of second hand goods should be based on Section 32(5) of the CGST Rules, 2017.

Facts of the application made to AAR, by taxpayer ‘M/S. Aadhya Gold Private Limited (applicant)’, dated 09-Jul-2021:

The applicant, M/S. Aadhya Gold Pvt. Ltd., is a registered person under the CGST and SGST Acts. The applicants business involves buying and selling of second-hand gold ornaments from dealers who are not registered under the GST Act. The applicant does polishing or cleaning of the gold ornaments at the time of re-sale, but there is no change in the nature or form of the ornaments sold as second-hand goods to other registered dealers. The applicant is charging GST under Rule 32(5) of CGST Rules, 2017 during sale of second-hand ornaments and has sought the advice of the AAR to provide their opinion on the same.

The applicant has acknowledged that they are charging 3% as GST to the buyers of second-hand gold ornaments. They have reiterated through their representations that they purchase from unregistered dealers and hence there is no input tax credit applicable for the applicant. The applicant contends that the value of supply should be based on Rule 32(5) of CGST Rules,2017 which will be the difference between the selling price and purchase price. In case the difference between the selling price and purchase price is negative, then GST would not be applicable in such cases on the sale of second-hand ornaments. For the benefit of the authorities, Rule 32(5) of CGST rules was reproduced as under.

“5) Where a taxable supply is provided by a person dealing in buying and selling of second hand goods i.e used goods as such or after such minor processing which does not change the nature of the goods and where no input tax credit has been availed on the purchase of such goods, the value of supply shall be the difference between the selling price and the purchase price and where the value of such supply is negative, it shall be ignored:

Provided that the purchase value of goods repossessed from a defaulting borrower, who is not registered, for the purpose of recovery of a loan or debt shall be deemed to be the purchase price of such goods by the defaulting borrower reduced by five percentage points for every quarter or part thereof, between the date or purchase and the date of disposal by the person making such repossession.”

The applicant contends that they satisfy the conditions mentioned in the rule above which are:

• Applicant is dealing in purchasing and selling of second-hand goods and on re-sale of such goods, there is no change to the nature of the goods even though minor processing such as cleaning / polishing would be involved. The goods are re-sold “as such” without alterations.
• Input tax credit is not availed by the applicant, on the purchase of goods
• The value of supply is the difference between the selling and purchase price and when such difference is negative, there is no GST to be charged.

The applicant further quoted few other advanced rulings where similar ruling with reference to second hand goods valuation was ordered.

1. Attica Gold (P) Ltd. by AAR, Karnataka
2. Safest Agencies (P) Ltd. by AAR, Maharastra

During the personal hearing held on 30-Jun-2021, the applicant was represented by Ms. Ssethalakshmi, its authorized representative and she reiterated the facts submitted by the applicant to the authorities concerned.

Observations and final ruling by AAR vide Order No. KAR ADRG35/2021 dated 09.Jul.2021:

The AAR, on verification of the representation made by the applicant through its learned representative, acknowledged the issue to be address which was regarding computation of value of supply for computation of GST on the sale of second-hand ornaments, purchased from un-registered dealers and sold to registered dealers. The authority took note of Rule 32(5) of the CGST Rules, 2017.

They further elaborated that the rule would be applicable in the following cases where the two conditions are fulfilled namely,

• The supply of goods should be taxable
• The supplier should be involved in the purchase and sale of second-hand goods i.e used goods after minor processing which does not alter the nature of the goods and where ITC is not availed on purchase of such goods.

As per AAR the applicant satisfies the 1^st condition as they have to pay GST as per entry 13 of Schedule V of Notification No. 01/2017-CT(Rate) dated 28.Jun.2017 and the tax rate would be 3%(1.5% CGST and 1.5% SGST). Further, as stated above, the applicant is involved in the purchase and sale of second-hand goods i.e used goods after minor processing which does not alter the nature of the goods and where ITC is not availed on purchase of such goods.

The AAR concluded that since the applicant satisfies the conditions as stipulated under Rule 32(5) of CGST Rules, 2017, the value of goods will be as per rule 32(%) which is the difference between the sale and purchase price of the second-hand goods exchanged.