India’s gold jewellery manufacturing sector is facing mounting financial pressure as gold prices continue to rise sharply. Industry stakeholders argue that current inventory valuation methods result in taxation of unrealised gains, creating significant working capital challenges and threatening the sustainability of micro and small jewellery manufacturing enterprises. The Coimbatore Jewellery Manufacturers Association has presented detailed representations highlighting these concerns and proposing reforms to taxation and inventory valuation practices.
Quick Summary
- Gold prices have increased by more than 146% in the last three years.
- WAC-based inventory valuation is creating unrealised profits in closing stock.
- Jewellery manufacturers are being taxed on notional gains rather than realised income.
- Advance tax payments are causing severe working capital stress.
- Manufacturers struggle to replenish inventory at higher gold prices.
- MSE jewellery manufacturers face long-term sustainability risks.
- The industry seeks replacement/replenishment accounting mechanisms.
- Proposals include price fluctuation reserves, presumptive taxation, and LIFO inventory valuation.
- Industry representatives cite judicial precedents supporting taxation of real income only.
- The Coimbatore Jewellery Manufacturers Association has requested immediate government intervention.
Unprecedented Rise in Gold Prices
Huge Gold price increase especially during FY 2023-24, 2024-25, 2025-26 and till date ( 24 Ct. Gold Rate as on 31-03-23 was Rs. 5,951, on 31-03-24 was Rs. 6,698 & on 31-03-25 was Rs. 8,881 & as on 31-03-26 was Rs. 14,615 / gram resulting in 12.55%, 32.58% & 64.56% precisely more than 146% increase in just 3 years ).
Closing Stock Valuation and WAC Method
Mostly in Gold Jewellery Industry Weighted Average Cost ( WAC ) Method is followed for valuation of closing stock as on 31st March Year on Year.
Impact of Gold Price Surge on Inventory Valuation
Steep increase in gold prices also increases closing stock values and results in unrealised / notional profits in WAC method of closing stock valuation which is not Real business profits.
Taxation of Unrealised Gains
Unrealised inventory appreciation gets taxed.
Advance Tax Burden and Working Capital Erosion
This further results in huge Advance Income Tax Payments; and also crunch & erosion of Working Capital.
Reduction in Stock Quantities and Business Stability
Also, the quantity of stock decreases YOY which affects the business stability.
Value Addition Versus Notional Profit
Jewellery Manufacturers Profits is merely value addition only & not unrealised profits embedded in closing stock.
Difficulty in Replenishing Inventory
Jewellery Manufacturers are unable to replace / replenish the sold quantity; even though their objective is to maintain at least the same stock level YOY which ends to impossibility due to following WAC method of stock valuation.
Tax Liability Without Cash Realisation
Tax becomes payable without actual sale / cash in flows. A Huge Stress on MSE sector & at one point of time M&S enterprises may vanish within the next 10 years if the future gold rates continuously rises.
Need to Tax Only Realised Profits
Holding stock in hand should not result in taxable profits; only goods sold should result in taxable profits.
Precious Metals Require Special Consideration
Gold is not like ordinary goods. So, applying general rules of stock valuation makes more tax pay out without realisation of real income.
HISTORICAL GOLD BULLION RATES AS AT 31st MARCH 2016 TO 2026
| As At | Gold Bullion Rate for 10 Gms. | Gold Bullion Rate Per Gram | % Increase YOY |
|---|---|---|---|
| 31-03-2016 | 28,340 | 2,834 | NIL |
| 31-03-2017 | 28,950 | 2,895 | 2.15% |
| 31-03-2018 | 30,680 | 3,068 | 5.98% |
| 31-03-2019 | 31,640 | 3,164 | 3.13% |
| 31-03-2020 | 43,000 | 4,300 | 35.90% |
| 31-03-2021 | 44,013 | 4,401 | 2.36% |
| 31-03-2022 | 51,278 | 5,128 | 16.51% |
| 31-03-2023 | 59,512 | 5,951 | 16.06% |
| 31-03-2024 | 66,983 | 6,698 | 12.55% |
| 31-03-2025 | 88,807 | 8,881 | 32.58% |
| 31-03-2026 | 1,46,145 | 14,615 | 64.56% |
Gold Jewellery Manufacturing Profitability & Taxation Workings
| Particulars | Amount (in Rs.) | Rate per Gram (in Rs.) |
|---|---|---|
| A. 91.6% Gold Jewellery Opening Stock (as on 01-04-2025): 2.50 Kgs @ Rs. 5,852/gm | 14,630,357 | 5,852 |
| B. Actual Purchases: 30 Kgs. of Gold Bullion @ 99.5% purity @ Rs 11,777/gm | 353,310,000 | 11,777 |
| C. Copper (Alloy) Purchases : 2,587 Grams @ Re. 1.50/gm | 3,881 | 1.50 |
| D. Jewellery Manufacturing Charges @ 4% on gold value purchased | 14,132,400 | 471 |
| E. Sales: 32,587 gms. of 91.6% Gold Ornaments @ Rs.11,409/gm ( Cost =91.60% + M.C. = 4.00% + H.M. Chgs = 0.04% + Gross Profit 0.75% = Sale Price 96.39% ) | 371,781,654 | 11,409 |
| F. Closing Stock: 2.50 Kgs. of 91.6% Gold Ornaments @ WAC (Rs. 10,889/gm approx.) | 27,223,519 | 10,889 |
| G. GROSS PROFIT AS PER BOOKS ( E + F ) – ( A + B + C + D ) | 16,928,535 | 519 |
| H. Administrative & Indirect Expenses for the year | 240,000 | 7 |
| I. NET PROFIT FOR THE YEAR AS PER BOOKS | 16,688,535 | 512 |
| J. REAL PROFIT @ 0.75% | 2,892,792 | 89 |
| K. ADDITIONAL NET PROFIT EMBEDED IN CLOSING STOCK DUE TO STEEP INCREASE IN GOLD RATES | 13,795,743 | 423 |
| L. INCOME TAX ON BOOK PROFITS @ 25% + 4% CESS ( On I ) | 4,339,019 | 133 |
| M. INCOME TAX ON REAL PROFITS @ 25% + 4% CESS ( On J ) | 752,126 | 23 |
| N. ADDITIONAL INCOME TAX PAY OUT AS ADVANCE TAX DURING THE FINANCIAL YEAR ITSELF BY FOLLOWING WAC IN THE YEAR OF STEEP INCREASE IN GOLD PRICES | 3,586,893 | 110 |
Key Suggestions from Jewellery Manufacturers
Replacement / Replenishment System
Request to Introduce Replacement / Replenishment system : Whatever quantity is sold will be Replaced / Replenished by purchase of equivalent weight of gold and maintaining a common gold metal ledger for buying & selling quantities; at the year end aggregate of such quantities are compared for arriving at the taxation.
Domestic Sales Invoicing on Value Addition Basis
Export Invoicing as per EXIM Policy taxes only the value addition component; same method can be introduced for domestic sales invoicing also. Gold value in sales invoice will be automatically set off with equivalent weight of replaced / replenished gold. However, GST will be paid in domestic Tax Invoice.
Price Fluctuation Reserve Mechanism
Introduce a price fluctuation reserve mechanism whereby abnormal increases in gross profit arising solely from appreciation in gold prices between opening and closing stock values are neutralized by debiting the Manufacturing and Trading Account and crediting a dedicated reserve in the balance sheet thereby only real, realized profits are taxed.
Deduction of Unrealised Profits from Taxable Income
Unrealised Profits embedded in Closing Stock due to steep increase in gold prices can be deducted from Net Profit in Computation of Taxable Income. The calculation of such Unrealised Profit shall be checked, verified and certified as True and Correct by a Chartered Accountant and such calculation sheet can also be attached as Annexure to Tax Audit Report. This procedure will nullify the effect of taxing Notional Profits. All existing compliances like WAC, ICDS-II, etc., can be retained and followed without any change.
Judicial Support for Taxing Real Income
According to several Supreme Court judgements, only real income has to be taxed instead of taxing notional / artificial / appreciation / gains due to steep increase in gold, silver, platinum etc., prices.
• CIT v. Shoorji Vallabhdas & Co., (1962) 46 ITR 144 (SC)
• Godhra Electricity Co. Ltd. (1983) 140 ITR 657 (Guj) (HC)
• CIT v. Excel Industries Ltd. (2013) 358 ITR 295 (SC)
Similar Relief Extended to Other Industries
In earlier periods, the government has considered the requests positively from other industries like Banks, NBFCs, Construction, Real Estate, Forex etc., where a suitable clause in ICDS was introduced. A similar clause can be introduced in ICDS for precious metal industry since ours is a badly affected industry due to steep increase in gold prices recently.
Presumptive Taxation for Jewellery Manufacturers
Providing tax relief to Jewellery manufacturers through presumptive taxation as already exist under the Income-tax laws similar to Section 44AD. We propose that that the CBDT introduce a presumptive taxation scheme for micro and small Jewellery manufacturers at 1% to 1.5% of turnover for taxing MSE Jewellery manufacturers.
Permitting LIFO Method of Inventory Valuation
`Permitting LIFO method of inventory valuation for Jewellery manufacturers to enable MSE jewellery manufactures better align the current cost of closing costs with the current price tends and revenue, it is proposed to permit the use of the LIFO method for inventory valuation, which is also been adopted by the US GAAP.
Appeal to the Media and Government
We kindly request press to consider and highlight the genuine difficulties faced by our gold jewellery manufacturers and seek your timely help to reach this to the Finance & Revenue Ministry’s attention for immediate relief to the grieved sector.
FAQs
Why are jewellery manufacturers concerned about rising gold prices?
Rising gold prices increase closing stock values, resulting in unrealised profits that become taxable under current inventory valuation methods.
What is the Weighted Average Cost (WAC) method?
WAC is a commonly used inventory valuation method where stock is valued based on the average cost of inventory held during the year.
Why do manufacturers consider these profits unrealised?
The gains arise from appreciation in inventory value and not from actual sales or realised cash inflows.
How does this affect working capital?
Higher tax liabilities and advance tax payments reduce available working capital needed for inventory replacement and business operations.
What relief measures have been proposed?
Suggestions include a replacement/replenishment system, presumptive taxation, a price fluctuation reserve mechanism, deduction of unrealised profits from taxable income, and permitting the LIFO method of inventory valuation.
What is the industry’s main taxation concern?
The industry argues that only real, realised income should be taxed and not notional gains resulting from inventory appreciation due to gold price increases.
Source: SVAR Media Network
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