Tax Reduction Benefit under Rule 32 (5) of CGST, Rules not applicable When Fails to Prove Gold as Second-Hand Good: AAR [Read Order]

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The Kerala Authority for Advance Ruling (KAAR) has held that tax reduction benefits under rule 32 (5) of Central Goods and Service Tax (CGST) Rules are not applicable when fails to prove gold as second-hand goods.

Best Money Gold Jewellery Limited, the applicant is engaged in the business of buying and selling old/ used/ second-hand gold jewellery/ornament from unregistered persons.

It was clarified that the provisions of the Central Goods and Services Tax Act, 2017 (the Act) and the Kerala State Goods and Services Tax Act, 2017 (KSGST Act) are the same except for certain provisions. Accordingly, a reference hereinafter to the provisions of the CGST Act, Rules, and the notifications issued there under shall include a reference to the corresponding provisions of the KSGST Act, Rules, and the notifications issued there under. 

The applicant submits that they purchase gold from unregistered persons who are all general public and the ornaments purchased will be sold ‘as such’ to the end consumers without making any further processing, in other words, sold in the same form in which the ornaments were purchased, to another registered or person, except for some minor processing in the form of cleaning and polishing but without altering the nature of such ornament/jewellery.

It is further submitted that since the applicant had purchased the old / used / second-hand gold ornaments/jewellery predominantly from unregistered persons there is no scope for availing of the input tax credit as per Section 16 of the CGST Act. The applicant is charging GST at the rate of 3% on the entire consideration received from the customers on account of the sale of such old/used/second-hand gold ornaments/jewellery.

The applicant based on the facts discussed above-required clarification to determine the value of supply as per Sec. 15(5) of the Central Goods and Services Tax Act, 2017 (CGST Act, 2017) read with Rule 32(5) of Central Goods and Services Tax Rules, 2017 (CGST Rules, 2017).

Generally, Sec. 15 of the CGST Act deals with the value of the supply of goods or services. In the case of used / second-hand goods, the value of supply will be determined as per Sec. 15(5) of the CGST Act, in the manner prescribed by the government on the recommendation of the: Council through a Notification.

Moreover, second-hand goods when it is purchased for the first time from the primary market would suffer the levy of indirect tax i.e., VAT, GST, etc. It, therefore, means that when the tax is paid on the margin on the sale of secondhand goods, these goods have suffered full tax. The question may arise in which circumstances the phrase used in Rule 32(5) “where no input tax credit has been availed on the purchase of such goods shall apply.

The purpose of this phrase used in Rule 32(5) seems to prevent the dealer from purchasing secondhand goods or used goods from a registered person on payment of GST and availing the dual benefit of paying the tax on margin and claiming input tax credit simultaneously.

The GST is a value-added tax and each person in the value addition chain is expected to pay tax on the value addition made by him in the transaction. The intention of promulgating Rule 32(5) is to ensure that a dealer operating in an unorganized sector (buying second-hand or used goods from unregistered persons or non-business entities) is not burdened with tax liability disproportionate to value addition done by him in the supply chain.

It was viewed that the intention of Sub-rule (5) to Rule 32 of the CGST Rules, 2017 is to reduce the tax burden on such goods, which have already suffered tax on their highest value when supplied at a reduced price in the secondary market after usage. But this is not the case with goods such as gold and gold ornaments, where the value is determined primarily by the content, purity and fineness of the material contained therein.

ln order to qualify for inclusion under the valuation of supply as envisaged under sub-rule (5) of rule 32, it has to be proved that the applicant is dealing in second-hand goods. Unfortunately, gold in any form fails to pass the test of ‘second-hand goods’.

The Authority comprising of Dr.S.L. Sreeparvathy, IRS &Shri. Abraham Renn S, IRS held that “the supply made by the applicant fails to comply with all the requirements specified under Rule 32 (5) of the CGST, Rules 2017. Hence cannot avail of the benefit of provisions stated under sub-rule (5) of CGST rules 2017.”

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