India’s Income Tax Department has launched a crackdown on jewelers who have switched from first-in-first-out (FIFO) to last-in-first-out (LIFO) inventory valuation methods over the past five to six years. This has led to a significant increase in tax payments on undisclosed profits. The tax department has discovered units that switched from FIFO to LIFO over the past five to six years, with one jewelry house paying nearly ₹100 crore in tax on previously undisclosed profits. The tax department has manipulated closing stock valuations by using gold purchased most recently, which is costlier, thus lowering profits. FIFO assumes older, cheaper gold is sold first, leaving a higher value balance and elevating profit figures. LIFO is explicitly prohibited, except for specific non-interchangeable or project-specific inventory items. 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. 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. Legal standards require inventory accounting methods to reflect true income fairly, and consistent use of LIFO for long periods with little-to-no turnover cannot be justified in high-inflation contexts such as gold jewelry.
