Melting old jewellery into lumps? You lose the margin scheme.

When a gold necklace becomes a lump, the tax changes

M/s. White Gold Bullion Private Limited, a Bengaluru-based company, had a straightforward business model. It bought old gold jewellery from individuals who were not registered under GST. Some pieces it cleaned, polished, and resold as jewellery. Others, too damaged or outdated, it melted into gold lumps or irregular shapes and sold those. The company wanted to pay GST only on its profit margin — the difference between the selling price and the purchase price — under a special valuation rule meant for second-hand goods dealers. The stakes were simple: pay tax on the full sale value, or pay tax only on the margin.

The Authority for Advance Ruling, Karnataka, ruled against the company on the margin scheme question. Melting jewellery into lumps, the Authority held, changes the nature of the goods. Jewellery (HSN 7113) becomes unwrought gold (HSN 7108). The special margin valuation rule does not apply. GST must be paid on the full transaction value.

What the company actually did

White Gold Bullion Private Limited filed an application for advance ruling under Section 97 of the Central Goods and Services Tax Act, 2017. The application raised two questions. First, whether the company could pay GST on the margin difference under Rule 32(5) of the CGST Rules, 2017, when it sold gold lumps obtained by melting purchased old jewellery. Second, what HSN code applied to those gold lumps.

The Authority admitted the application under Section 97(2)(a) (classification of goods) and Section 97(2)(e) (determination of liability to pay tax) of the CGST Act. A personal hearing was conducted on 21st February 2023. The final order was pronounced on 15th May 2023.

What each side argued

The applicant argued that melting gold jewellery into lumps was merely a change in form, not a change in nature. It relied on a string of precedents: Hiralal Ji v. The State of Madhya Bharat (AIR 1966 SC 1546), where the Supreme Court held that converting scrapped iron into bars was a change in form, not nature, and VAT was not applicable; State of Gujarat v. Shah Veljibhai Motichand (AIR 1969 23 STC 288 Guj.); Pyarelal Malhotra v. Joint Commercial Tax Officer ((1971) IIMLJ 176, 1970 26 STC 416 Mad); State of Tamil Nadu v. Annai Industries ((1994) 94 STC 393 (Mad)); and P.J.A. Manoj v. State of Kerala ((2007) 10 VST 432 Ker). All these cases, the applicant said, supported the proposition that a change in form does not amount to a change in nature.

The Authority was not persuaded. It examined the text of Rule 32(5) of the CGST Rules, 2017. The rule reads: "Where a taxable supply is provided by a person dealing in buying and selling of second hand goods i.e., used good 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."

The Authority focused on the phrase "minor processing which does not change the nature of the goods". It asked: does melting jewellery into lumps change the nature of the goods?

What the post-melting product actually was

The Authority looked at the HSN classification. Old gold jewellery, it noted, is classified under tariff heading 7113 — "Articles of Jewellery and Parts Thereof". After melting, the product — gold lumps or irregular shapes — falls under tariff heading 7108 — "Gold Unwrought or In Semi-Manufactured Forms".

The Authority observed that the characteristics of the articles and the classification change. Jewellery is an article of adornment. A gold lump is a raw material. The processing — melting — is not minor. It fundamentally alters the identity of the goods. The Authority held that this constitutes more than "minor processing which does not change the nature of the goods" under Rule 32(5).

The Authority implicitly acknowledged, without deciding, that cleaning and polishing of old jewellery (without melting) would constitute minor processing not changing the nature of goods. That scenario, the Authority suggested, might satisfy Rule 32(5) conditions. But melting was a different matter entirely.

The witness rule the Authority applied

The Authority applied a simple test: does the processing change the HSN classification? If yes, the nature of the goods has changed. Jewellery (HSN 7113) and unwrought gold (HSN 7108) are different classes of goods under the Customs Tariff Act, 1975, as applicable to GST. The change in classification was decisive.

The Authority did not overrule the precedents cited by the applicant. It distinguished them. Those cases dealt with VAT and sales tax regimes, where the concept of "change in nature" might have been interpreted differently. Under the GST regime, with its detailed HSN classification system, the change in tariff heading was a clear indicator that the nature of the goods had changed.

THE PLAY: If you melt second-hand gold jewellery into lumps or irregular shapes, you cannot use the margin scheme under Rule 32(5) CGST Rules, 2017. You must pay GST on the full transaction value, classified under HSN 7108.

Why this matters in practice

For dealers in second-hand gold jewellery, this ruling draws a bright line. If you clean, polish, and resell jewellery as jewellery, you may be able to use the margin scheme. The Authority's obiter dicta suggests that such processing is minor and does not change the nature of the goods. But if you melt the jewellery — even if it's damaged or outdated — you cross the line. The product becomes unwrought gold, and the margin scheme is unavailable.

This has significant cash flow implications. A dealer buying old jewellery and selling melted gold would, under the margin scheme, pay GST only on the profit margin. Under the full value rule, GST is payable on the entire sale value. The difference in tax liability can be substantial.

For CFOs and founders in the gold recycling business, this ruling means that business models involving melting will have higher GST costs. The ruling also means that HSN classification must be tracked carefully. Selling jewellery as jewellery (HSN 7113) and selling melted gold as lumps (HSN 7108) are different supplies for GST purposes.

The Authority's reasoning also has implications beyond gold. Any dealer in second-hand goods who processes those goods to the point where the HSN classification changes will likely lose access to the margin scheme. The test is not whether the processing is "minor" in a physical sense, but whether it changes the nature of the goods as reflected in the tariff classification.

The bottom line

If you melt second-hand gold jewellery into lumps, you cannot use the margin scheme under Rule 32(5) CGST Rules, 2017 — GST must be paid on the full transaction value, and the product is classified under HSN 7108, not HSN 7113.