Analysis of Karnataka AAR Ruling – Sale of Second Hand Jewellery

Karnataka Authority for Advance Rulings (AAR) has passed a ruling in the matter of Aadhya Gold Private Limited (Order No. KAR ADRG 35/2021 dated 9th July 2021) holding that in case of resale of second-hand gold jewellery, the GST can be discharged under Margin scheme prescribed under Rule 32(5) of CGST Rules 2017. We have analysed the aforesaid AAR ruling in this update.

A. FACTS OF THE CASE

• Aadhya Gold Private Limited (a Bangalore based company – “Applicant”) is engaged in the business of buying and selling of second hand/used jewellery from individuals (unregistered persons).
• That presently, the applicant is charging GST at the rate of 3% (CGST 1.5% and KGST 1.5%) on the entire sale consideration received from the buyer on sale of second hand/ used jewellery.
• Applicant wants to seek clarity on the taxability of the used/second-hand jewellery, in case, no value addition is made to such purchase, except polishing and cleaning, resulting into no alteration in the nature of the jewellery.

B. ISSUES BEFORE THE AUTHORITY                                                                                                                

• Whether GST is to be paid only on the difference between the selling price and purchase price as stipulated under Rule 32(5) of CGST Rules, 2017 if applicant purchases used/second-hand gold jewellery from individuals (unregistered persons) who are not dealers under the GST and at the time of sale there is no change in the form/nature of goods?

C. OBSERVATIONS AND RULING BY AAR

• AAR referred the following provisions of GST law (relevant extracts given below):

As per Rule 32(5) of CGST Rules 2017:

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.

• AAR observed that the applicant has duly met all the conditions stipulated in the Rule 32(5) of the CGST Rules 2017:
  • Purchase of such second hand or used jewellery is made from unregistered persons, therefore there is no question of claiming any input tax credit on purchase of such jewellery.
• Hon’ble High Court while passing the judgement made following observations:
• The Applicant is not indulged in further processing of used/second-hand gold, and it is sold “as such” without changing the nature and the form of the goods. The used ornaments once purchased, are not melted into bullion before selling the same to the buyer.
• The supply made by applicant is a taxable supply.
• AAR has ruled that the “Margin Scheme” as per Rule 32(5) would be applicable on the applicant, hence the applicant is only liable to pay GST on the difference of selling price and purchase price at the time of sale of such jewellery.

D. OUR COMMENTS

This AAR ruling has again re-affirmed the earlier rulings given by Karnataka AAR in Attica Gold Private Limited (Order No. KAR ADRG 15/2020 dated 23^rd March 2020) and Maharashtra AAR in Safset Agencies Private Limited (Order No. GST-ARA-86/2018-19/B-7 dated 15^th January 2019) in holding that the benefit of margin scheme under rule 32(5) is available subject to fulfillment of specified conditions.

Following essential conditions need to be satisfied by persons dealing in sale-purchase of second-hand goods for availing margin scheme prescribed under Rule 32(5) of CGST Rules 2017:

• The supply should be of second-hand goods only.
• The person should be dealing in both buying and selling of second-hand goods.
• Minor processing is allowed. The dealer can carry out minor processing like repairs, refurbishing, re-boxing, cleaning, polishing etc.
• Nature of goods should remain the same. If different accessories and goods are bought and assembled into a new kind of product, which alters the nature of the goods as compared to the goods purchased, benefit of rule 32(5) cannot be availed.
• ITC should not be availed on purchases.
• Where the selling price is lower than the purchase price of a particular product, then that shall be ignored. Further such negative margin cannot be set-off for tax payable on positive margins on other goods.