How jewellers quietly dodged over Rs 100 crores in taxes using FIFO-LIFO method

Time of India

a day ago

Indian jewellers are under scrutiny for potentially using the prohibited LIFO accounting method to underreport profits and evade taxes amidst soaring gold prices. The Income Tax department is cracking down, enforcing FIFO and weighted average cost methods, as mandated by ICDS II.
Tired of too many ads?
Remove Ads
Why is this a big deal?
Tired of too many ads?
Remove Ads
The gold price connection
What experts say
In the glittering world of gold, some jewellers have reportedly been playing a clever game, not with the jewellery, but with the accounting books.ET had earlier reported that the Income Tax (I-T) department found several jewellers may have switched their inventory method from FIFO (First In, First Out) to LIFO (Last In, First Out) to reduce their profits on paper and avoid paying higher taxes, especially as gold prices soared in recent years.Under FIFO, the older gold (bought at cheaper rates) is sold first. So, the remaining gold stock, now more expensive, gets recorded at a higher value. That makes the profits look bigger, and the tax bill bigger too.But under LIFO, jewellers claim they sold the most recently bought gold first, which was more expensive. This leaves the older, cheaper stock behind in the books, lowering the value of the unsold inventory. Less value in stock means less profit on paper. Less profit means less tax.India's Income Tax Act doesn't allow the LIFO method anymore. Since 2016-17, jewellers are only allowed to use FIFO or the 'weighted average cost' method under ICDS II (Income Computation and Disclosure Standards).One jewellery house, caught using LIFO, reportedly had to cough up nearly Rs 100 crore in taxes after the I-T department caught the difference in earnings.And now the tax department is tightening its lens. Officials have been instructed to actively check inventory valuation methods wherever profits seem suspiciously low.With gold prices jumping from Rs 31,000 in 2018 to nearly Rs 98,000 now, the temptation to fudge numbers seems to have grown stronger. And with central banks buying gold, global tensions, and post-COVID uncertainty driving up prices, jewellers may have seen this as an easy window to tweak their taxes.But experts say this 'adjustment' doesn't create real profits, it only changes how and when profits are shown. And that's exactly what the taxmen are now investigating.Chartered Accountant Ashish Karundia told ET that while LIFO might seem like a clever workaround in a rising market, it clearly violates accounting norms under current rules. Courts too have upheld ICDS II, rejecting jewellers' pleas to allow LIFO again.Paras Savla of KPB & Associates added that unless goods are unique or non-interchangeable, LIFO has no place in the jewellery business.Jewellers trying to save a few crores may now find themselves explaining their books to tax officers. And with the I-T department now actively scanning records, the era of 'golden accounting loopholes' may soon come to an end.Inputs from ET Bureau