As gold prices surge to historic highs, several jewellers have come under the Income Tax Department's radar for allegedly manipulating inventory valuation methods to underreport profits and reduce tax liability.
Sources familiar with the probe told that the department has detected instances of jewellers switching from the approved FIFO (First-In-First-Out) or Weighted Average Cost methods to the prohibited LIFO (Last-In-First-Out) method for inventory valuation-particularly in valuing unsold gold stock, semi-finished goods and finished jewellery.
The tactic, in use for the past five to six years, allows businesses to inflate their cost of goods sold (COGS), thereby reducing reported profits and taxes. One jewellery company has reportedly paid over Rs 100 crore in back taxes after being caught using this method.
Under the LIFO method, businesses assume that the most recently purchased inventory is sold first. This leaves cheaper, older inventory on the books, lowering the closing stock valuation and, as a result, taxable profits. In contrast, FIFO assumes that older inventory is sold first, causing remaining inventory to reflect newer, higher costs-especially significant during periods of rising gold prices.
However, the use of LIFO has been explicitly prohibited under the Income Computation and Disclosure Standards (ICDS II), which came into effect from Assessment Year 2017-18. According to the regulation, taxpayers are only allowed to use either the FIFO or Weighted Average Cost method unless exceptional conditions apply.
A senior tax expert explained, "Although the value of closing stock does not directly generate profits, it plays a crucial role in profit calculation. Misrepresenting inventory valuations distorts trading results and leads to tax evasion."
Jewellers may have been tempted by the LIFO strategy as gold prices in India surged post-pandemic, driven by geopolitical tensions, central bank buying, and increased investor demand. Prices rose from Rs 31,000 per 10 grams in 2017 to over Rs 97,000 in 2025.
The IT department has now directed regional offices to scrutinize accounting records and flag any cases where LIFO was used in violation of the law. Experts say this could open a Pandora's box of reassessments and tax recovery actions.
Another tax consultant added, "ICDS II clearly restricts methods like LIFO, especially in sectors like jewellery where inventory items are fungible. The tax office is well within its powers to question the accuracy of profit declarations based on improper inventory methods."
As enforcement intensifies, jewellers who have used aggressive tax practices may find themselves facing audits, reassessments, penalties-and possibly prosecution.
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