Ahmedabad: After PM Narendra Modi’s clarion call to not buy gold in wake of Middle East geo-political tensions, exchange of old gold for fresh jewellery has got a major impetus both from jewellers and customers. In such a scenario, tax experts have flagged that a standard gold jewellery exchange can trigger long-term capital gains tax (LTCG) as it is treated as a ‘transfer’ of a capital asset under the Income-tax Act.Gold exchange has surged significantly to up to 70% in recent times due to record price rise and jewellers offering lucrative exchange deals. Jewellers say LTCG is a contentious subject and they along with customers are opting for options to side-step the same. “We stay away from talking about LTCG applicability as it may deter consumers. We take deposits of old gold brought by consumers and give a separate bill of only making charges of the new jewellery with 18% GST. When we take old gold as an advance deposit, the customer does not have to pay LTCG,” said Jigar Patel, treasurer, Jewellers’ Association Ahmedabad.Tax consultants say that consumers can lawfully avoid this tax burden by opting for ‘melt and remake’ option instead. Experts said that there is not much awareness among customers and even jewellers about the `melt and remake’ option that can help avoid a sizable tax liability.International tax expert Mukesh Patel said ‘gold ornaments exchange’ could be a potential tax trap for many families who bought jewellery years ago at much lower prices. “Gold prices have increased sharply in the last two decades and a large number of people now opt to acquire new ornaments by exchanging their old gold jewellery. After the PM appealed people to stop buying new gold, a large number of jewellers have come out with gold exchange offers. But people should understand that exchange of gold jewellery attracts LTCG tax where the asset has been held for 24 months or more, and short-term capital gains tax where the holding period is less than that.”Patel explained that gold was around Rs 8,000 per 10 grams in 2006 and is now nearing Rs 1.50 lakh per 10 grams. “If someone had acquired gold ornaments weighing 100 grams in 2006, the cost would have been Rs 80,000. The current exchange value of the same would work out to around Rs 15 lakh. In this case, the gain would be calculated at Rs 14.20 lakh and, at 12.5% LTCG plus 4% cess thereon, the effective tax liability would work out to around Rs 1.85 lakh,” he said.Chartered accountant Karim Lakhani said there is little awareness amongst masses and even jewellers about the `melt and remake’ option. “In a gold exchange or buy-back scheme, there is transfer of gold and therefore it is taxable. Under the gold ‘melt and remake’ arrangement, one continues to own the gold and there is no transfer. The customer only pays making charges to the jeweller and any additional cost of materials used in the new jewellery,” Lakhani added.Tax advisers recommend that to avail benefit of zero tax, customers should clarify with jewellers that the correct nature of the transaction is “melt and remake”. They should also retain documentation relating to additional material costs and labour charges in support of their contention that, since no transfer has taken place, no tax liability arises.
