GST Rules on Diamond Derivative Trading and Vault Conversion
Pure electronic diamond derivative trading is exempt from GST, but converting physical diamonds into electronic units attracts tax.
- Ruling
- Advance Ruling No. KAR ADRG 16 / 2018 Dated 27th July 2018
- Dated
- 27 Jul 2018
- Authority
- Authority for Advance Ruling
This page was written by Patron Accounting’s AI from the official release and reviewed before publishing. It explains the document in plain language. It is not the document itself. Where this page and the original differ, the original governs.
The short version
- Rajarathnam Jewels asked about GST on diamond vault receipts and derivative contracts
- Depositing physical diamonds into safe vaults is not subject to GST
- Trading electronic diamond derivative contracts on exchanges is GST exempt
- Converting vault receipts to electronic units and back attracts GST
In short
A retail jeweler wanted to trade diamond derivative contracts on the Indian Commodity Exchange Limited. The process involved depositing real diamonds into vaults, getting electronic receipts, converting those into electronic units for trading, and later withdrawing physical diamonds. The jeweler asked the Karnataka Authority for Advance Ruling whether Goods and Services Tax (GST) applies at each step of this process.
What has changed
How it worked before
Before order KAR ADRG 16 / 2018, traders were uncertain whether converting physical stock into electronic exchange tokens attracted GST or counted as an exempt transaction in securities.
What has changed
The authority ruled that merely putting diamonds in a vault is not taxable because ownership does not change. However, converting vault receipts into trading units, or converting units back to physical diamonds, involves transferring ownership and attracts GST. Pure trading and settlement of electronic derivative contracts on the exchange are treated as securities transactions and stay completely outside GST.
Who this affects
Jewelers, commodity traders, and businesses that convert physical goods into electronic units for trading on commodity exchanges.
An example
ABC Traders wants to trade physical gold on a commodity exchange. They deposit gold bars in an accredited vault, receive vault receipts, convert them to electronic units, trade those units, and later redeem real gold. Under this ruling, depositing the gold in the vault incurs no GST, and trading the electronic units is GST-exempt. However, ABC Traders must pay GST when converting the vault receipt into electronic units and when redeeming physical gold.
What you should do
Review your operational process for exchange deliveries to pay GST when converting physical stock to electronic units and vice versa. Note that this ruling binds only the applicant and its tax office. Other businesses should consult a tax professional or apply for their own advance ruling before relying on this decision.
If you do nothing
If you assume the tax exemption for electronic derivatives covers physical conversions, tax officers may view un-taxed conversions as hidden sales. This can lead to demands for unpaid GST, interest, and penalties on the physical stock transferred. You cannot rely on another company's advance ruling to defend yourself during an audit.
The terms explained
- supply
- Any sale, transfer, or exchange of goods or services made for payment or business benefit under GST law.
- securities
- Financial instruments like stocks, bonds, or derivatives that are explicitly excluded from being taxed as goods or services under GST.
- bailment
- Handing over physical items to someone else for safekeeping without transferring ownership of the goods.
- e-units
- Electronic representations of commodities created for standard trading on a commodity exchange.
The ruling in detail
Authority for Advance Ruling
M/s Rajarathnam‟s Jewels
Advance Ruling No. KAR ADRG 16 / 2018 Dated 27th July 2018 · Karnataka
Questions before the authority
- Whether mere deposit of diamond with safe vaults acknowledged by Electronic Vault Receipts (EVR) would be treated as supply for the purpose of levy of GST?
- Whether conversion of EVR (representing receipt for diamonds deposited) into e-Units (securities) would be treated as supply liable to GST?
- Whether e-Units would be treated as securities and thereby transaction in e-Units would remain out of scope of the levy under GST?
- Whether the derivative contracts in e-Unit and settlement thereof would be treated as transaction in securities and thereby would remain out of scope of the levy under GST?
- Whether conversion of e-Units into diamonds would be treated as supply liable to GST?
Facts
The applicant, a partnership firm in retail jewelry, proposed to trade in diamond derivative contracts on the Indian Commodity Exchange Limited (ICEX). The operational process involves depositing physical diamonds into exchange-accredited vaults to obtain Electronic Vault Receipts (EVRs), converting EVRs into electronic units (e-Units), trading derivative contracts in e-Units, and eventually converting e-Units back into physical diamonds. Advance ruling was sought to clarify GST applicability across each leg of this transactional chain.
Ruling
| Question | What the authority ruled |
|---|---|
| Mere deposit of diamond with safe vaults for EVR | Does not constitute supply of diamonds No transfer of title or consideration occurs at this stage |
| Conversion of EVR into e-Units | Constitutes a supply of diamonds liable to tax Title is transferred in exchange for consideration in the form of e-Units |
| Treatment of e-Units as securities | e-Units are securities and outside the scope of GST Covered under Section 2(101) of CGST Act read with SCRA |
| Derivative contracts in e-Units and settlement | Treated as transactions in securities, outside GST scope Applies where settlement involves only e-Units without physical delivery of diamonds |
| Conversion of e-Units into physical diamonds | Constitutes a supply of diamonds liable to tax Exchange supplies physical diamonds against surrender of e-Units |
The AAR held that depositing physical diamonds in safe vaults for EVRs is not a supply as it is merely bailment without transfer of title or consideration. However, conversion of EVRs into e-Units, as well as reconversion of e-Units back into physical diamonds, constitute taxable supplies of goods (diamonds) for consideration. Pure trading and settlement of derivative contracts in e-Units qualify as transactions in securities and remain outside the scope of GST.
Reasoning
The authority reasoned that mere vaulting creates a bailment relationship with no transfer of title or consideration under Section 7 of the CGST Act. In contrast, converting EVRs to e-Units (or vice versa) involves surrender of title to specific physical goods in exchange for fungible units, constituting non-monetary consideration under Section 2(31). Furthermore, pursuant to Section 2(101) of the CGST Act and Sections 2(h), 2(ac), and 2(bc) of the Securities Contracts (Regulation) Act, 1956 read with Notification S.O. 3068(E) dated 27.09.2016, e-Units based on notified commodities like diamonds qualify as **commodity derivatives and securities**, excluding pure derivative transactions from the definition of goods and services.
Provisions relied on
- Section 7 of the CGST Act, 2017
- Section 2(31) of the CGST Act, 2017
- Section 2(52) of the CGST Act, 2017
- Section 2(101) of the CGST Act, 2017
- Section 2(102) of the CGST Act, 2017
- Section 2(h) of the Securities Contracts (Regulation) Act, 1956
- Section 2(ac) of the Securities Contracts (Regulation) Act, 1956
- Section 2(bc) of the Securities Contracts (Regulation) Act, 1956
- Notification No. 1/2017-Central Tax (Rate) dated 27.06.2017
- Notification F.No. 17/2/2016-CD / S.O. 3068(E) dated 27.09.2016
For the practitioner
This ruling clarifies that **pure financial trading in commodity derivatives is outside GST**, but entry into and exit from the derivative platform involving physical delivery attracts GST. Practitioners advising commodity exchange traders can rely on this order to ensure GST compliance at the point of converting physical stock into electronic units and vice versa.
Source
This is a summary prepared from the published order, which is a scanned document. It is a reading aid and not the authority: where the two differ, the order governs. Verify every provision against the original before relying on it.
Original order: https://www.gstcouncil.gov.in/sites/default/files/AAR/krntk_16_2018_rj.pdf
Legibility of the scan, as read: high.
Prepared 21-10-2026.
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