In a recent Advance Ruling, an interesting issue has been addressed by the West Bengal Authority for Advance Ruling. In the said Ruling, queries related to jewellery business have been addressed. Queries includes how GST will be imposed on the transactions of purchase of Old Jewellery and sale after conversion it into new jewellery either to same customer or new customer. (Copy of Order is given in the end)
In this article, we will discuss the salient features of the Ruling. Further, detailed analysis of the surrounding issues along with our opinion will also be shared:
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Brief Facts of the Case
The applicant purchases second hand gold or diamond jewelleries from unregistered individuals and thereafter repairs or reshapes these items by melting the old jewelleries and transforming those into new pieces, such as changing a gold bangle into a bracelet or an earring into a locket.
After converting into new jewellery, he can either sale:
To the different customers
To the same customer from whom old jewellery was bought and charge either only making charges or charges consists of making charges and loss of gold.
Major Question that arise:
Whether the applicant falls under the category of a person dealing in buying and selling of second hand goods where tax is to be paid on the difference between the selling and purchase price (also known as margin scheme) as stipulated in Rule 32(5) of the CGST Rules, 2017.
Whether the transaction would be classified as supply of goods and/or services under the act? Whether it shall be classified as supply of goods and chargeable to tax @ 3% under HSN: 7108/7113 or whether it shall be classified as supply of service and chargeable to tax @ 5% under SAC: 9988?
Whether the applicant is liable to pay GST on the goods received from the buyer?
Legal Discussion about the issues
Issue:1- Eligibility for Rule-32(5):
Rule 32(5) of the CGST Rules allows the Dealers of Second hand Goods to discharge the GST on difference between Selling Price and Purchase Price (i.e. margin) subject to following conditions:
A. Supply of such Goods is a Taxable Supply.
B. Goods are sold as such or after minor processing not amounting to change in nature of goods.
C. No ITC has been availed by the Taxpayer on purchase of such goods.
Taxpayer Case
Authority has held that Taxpayer is not eligible for the benefit of Rule 32(5) and he needs to discharge GST on full Sales Value of New Jewellery due to following reasons:
Condition A & C has been satisfied by the Taxpayer as he is not claiming ITC on purchase of Old Jewellery and Supply of new jewellery is a taxable supply.
However, Authority has held that condition regarding nature of goods should not change is not satisfied as after melting of old jewellery and converting it into new jewellery, the nature of old jewellery has been changed. Further, this process of melting and converting old jewellery into new onw is tantamount to manufacturing as per Section 2(72) of CGST Act:
“manufacture” means processing of raw material or inputs in any manner that results in emergence of a new product having a distinct name, character and use and the term "manufacturer" shall be construed accordingly.
In the instant case, the purchased gold is used as a raw material or input to make a new commodity.
Further, Authority opined that rule 32(5) is available only when a registered person dealing with buying and selling of second hand goods only.
In our opinion, it appears that melting and converting jewellery into new one would tantamount to change in nature of the jewellery and accordingly, benefit of Rule 32(5) may not be allowed to the Taxpayer.
However, we respectfully disagree with the second logic of the authority where they opined that Taxpayer must be in the business of second hand goods only. In our opinion, there is no such condition in Rule 32(5). It simply says any taxpayer who deals in second hand goods can adopt Rule 32(5) subject to other conditions. In our opinion, if some taxpayer is dealing in both old and new goods, he can still adopt Rule 32(5) for old goods.
Legal Language of Rule 32(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:............
Issue:2- Whether it is supply of Goods or Service
In this case, Authority has held that
a. In case new jewellery is supplied to different customer, it will be considered as supply of Goods and GST rate will be 3%.
b. In case new jewellery is supplied to the same customer from whom old jewellery is purchased , it will considered as Supply of Service.
Our Analysis
In our opinion, in this case, GST needs to be charged only on making charges and other charges recovered from the customer not on the value of old jewellery. For instance, value of old jewellery is Rs. 1 Lakhs and Taxpayer charged Rs. 25,000 for making charges including of some additional gold. In this case, GST needs to be charged on Rs. 25,000 considering as supply of service.
Rate of GST on such Service Charges
Taxpayer determined tax rate of 5% under SAC 9988 and it seems from decision of Authority that they are either seems to be silent over the rate of GST or implicitly accepted the submission of the Taxpayer of 5%.
However, in our opinion, regarding rate of GST on such service can be debatable. As per SAC 9988, Rate of GST of 5% is for the Job work charges and Job -work is being defined as :
“Job work means any treatment or processing undertaken by a person on goods belonging to another registered person and the expression ‘job worker’ shall be construed accordingly.”
Since, in this case individual to whom such jewellery belongs may not be a Registered Persons, accordingly his service charges may not fall in the definition of Job work charges and 5% Rate of GST may not be applicable. In our opinion, where service recipient is un-registered person, Rate of GST will be 18%.
The same has also been clarified by the Circular No. 126/45/2019-GST dated 22nd November, 2019.
Issue:3- Whether RCM is applicable on purchase of Old Jewellery
Authority has decided that there would not be GST under RCM in case of purchase of old jewellery.
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Copy of the Order
Disclaimer: We did interpretation of Respected Authority Decision for purely academic purpose. In case, there is any mistake in understanding of the order, we are apologised to the Authority.
Further, We have taken due care to the best of our knowledge while explaining the provisions surrounding the issue purely for informational/academic purpose. It should not be considered as professional advice or consultancy to be relied upon. While due care has been taken by Fab Gyan in preparing this article, certain mistakes and omissions may creep in. The Fab Gyan or its Author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.
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