NEW DELHI: Facing soaring gold prices, several jewellers in India have adopted the last-in-first-out (LIFO) inventory valuation method, violating Income Tax rules to suppress profits and reduce tax payments. The Income Tax Department has launched a crackdown, uncovering units that switched from permitted methods, first-in-first-out (FIFO) or weighted average, to LIFO over the past five to six years. One jewellery house reportedly paid nearly ₹100 crore in tax on previously undisclosed profits.
Unauthorised Shift to LIFO Lowers Closing Stock and Taxes
Jewellers have manipulated closing stock valuations by using gold purchased most recently, which is costlier, thus lowering profits. Under FIFO, older, cheaper gold is assumed to be sold first, leaving a higher value balance and elevating profit figures. In contrast, LIFO assumes newer, higher-cost stock is sold first, resulting in lower closing stock and reduced taxable profits.
Since the financial year 2016–17, regulations under ICDS II mandate that businesses use either FIFO or weighted average cost for inventory valuation, including precious metals like gold and silver. LIFO is explicitly prohibited, except for specific non-interchangeable or project-specific inventory items. Authorities have spotted several cases where jewellers flouted these rules, prompting a full-scale investigation.
Legal Precedents and the RBI Standard
Earlier rulings, including a 2018 ITAT case involving AJ Jewellers, emphasised that LIFO distort profits and obscures true income. The tribunal rejected LIFO valuation and upheld that FIFO more accurately reflects trading results. Industry experts confirm that the tax department can reassess profits under Section 69A of the Income Tax Act if profit reporting is manipulated via valuation methods.
CA professionals note that gold prices have surged from ₹31,000 per 10 gms to ₹97,681 between 2019 and 2025. Those increases make LIFO especially tempting, but illegal, for reducing declared profits. The tax department is now reviewing accounts where inventory valuation methods were altered without clear justification to ensure consistency and accuracy across reporting periods.
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Broader Implications for the Jewellery Sector
The crackdown comes in the wake of new luxury tax collection at source (TCS) rules for goods over ₹10 lakh, increasing scrutiny on high-value jewel transactions. As smaller towns’ affluent buyers fuel demand, authorities aim to curb tax avoidance practices and ensure transparent compliance in wealthier strata markets.
While jewellers argue LIFO practices reflect genuine cost structures, legal standards require inventory accounting methods to reflect true income fairly. Experts emphasise that even if a method was used consistently, it must represent a realistic approximation of costs and profits. Consistent use of LIFO for long periods with little-to-no turnover cannot be justified in high-inflation contexts such as gold jewellery.