JULY 04, 2017

By CA Vinay Bhushan, Taxpert Professionals

THE manufacturing sector is second in rank on the listing of the core contributors to the GDP of the country. Manufacturers usually outsource certain activities through job work to efficiently and effectively complete the process. The job work sector is considered to be an indispensable extended arm of the manufacturing industry, contributing significantly to the Indian economy.

Job workis the out sourcing of activities which helps complete the entire process of manufacturing and production. Manufacturers assign non-core activities or certain standard processes like intermediate processes on raw material, testing or repairs, reconditioning, etc. to third persons to optimize the time and cost of the process.

The concept of job work, which already existed in the present indirect tax regime, has been taken forward in the Goods and Service Tax (“ GST ”) regime too. Herein, a principal manufacturer sends inputs or semi-finished goods to a job worker for further processing.

Under the Central GST Act (hereinafter referred as the “ Act ”), job work has been defined under Section 2(68) to mean, “any treatment or process undertaken by a person on goods belonging to another registered person and the expression ‘job worker' shall be construed accordingly.”

The definition under the Act has been worded in a manner that it can be construed broadly. The three essential characteristics of job work as per the provision are -

In other words, job work refers to any activity undertaken upon the goods belonging to another registered person. The person to whom such goods belong is referred to as the principal and the person carrying on the process or treatment as the job worker.

The principal may send out the goods to a job worker at any stage of the manufacturing process, from working on the raw materials to packing of the goods produced. Raw material, component parts, semi-finished goods or even finished goods could be sent for job work. The resultant goods could retain the same attributes and characteristics or come with variation of the product sent for job work.

For instance, when a manufacturer of garments sends his raw materials to a tailor for stitching, such activity would be termed as a process undertaken by job-worker. A carpenter undertaking the task of polishing for a furniture manufacturer constitutes job work. Even the packaging of finished goods amounts to a process carried on by a job worker.

The job work segment is mostly an unorganised sector and more often than not job workers are unregistered. A job worker having an aggregate turnover of above Rs.20 lakhs is required to be registered under the Act. For ascertaining the aggregate turnover, the value of services provided by the job worker has to be calculated. Hence, it is pertinent to note that such value of supply does not include the value of goods provided by the principal but includes the value of goods or services used by the job worker for carrying out the task assigned .

With compliance being an essential element of GST, it is imperative for the principal and job worker to follow the procedure under the GST law while undertaking such transactions. Section 143 of the Act read with the Input Tax Credit Rules (“ Rules ”) states that goods sent out for job work must be accompanied with a challan and also stipulates the time period of return of such goods. Inputs, semi-finished or finished goods shall be returned by the job worker within 1 year, and capital goods within 3 years from the date of being sent to it by the principal.

Section 19 of Act provides for claiming input tax credit (“ITC”) for the job work availed by the principal. The principal shall be entitled to credit of the input tax paid on the inputs sent to the job worker. Such claim shall be eligible even if the inputs are directly sent to a job worker for the treatment or process, without being first brought to his place of business. The ITC should also be available in the situation where the goods were directly supplied to the customer from the place of business of the job worker.

Where the goods sent have not been received back within the specified time period, such goods will be treated as supplied to the job worker by the principal, and subsequently, tax will be levied on such deemed supply payable by the principal.

The above described is the treatment of job work under the GST regime. But it also important to know the functionality of the same during the transitional period.

Where any inputs or semi-finished goods were removed from the place of the manufacturer and sent to a job worker before 1 st July 2017 and the same is received on or after the said date, no tax shall be levied if the following conditions are satisfied:

• In a situation where the underlying inputs, semi-finished goods or finished goods are not returned within 6 months or extended period, the ITC availed earlier under existing laws will be recovered.

A new provision has been introduced to bring clarity with reference to tax liability for waste and scrap generated during the course of job work in the GST regime. Often, litigation is seen in this area in present regime because the authorities require the principal to pay tax but the waste and scrap is usually retained by the job worker. The Act provides that any waste and scrap generated during the job work may be supplied by the job worker directly from his place of business on payment of tax if he is registered, or by the principal, if the he is not registered person.

The provisions laid down by the Government with reference to job work are clear and unambiguous. Apart from the time period for return of inputs, the tax treatment of job work under the new regime largely remains similar to the existing regime. Though the regulations have been welcomed by the industry, issues would arise in dealing with unregistered job workers.The tax liability when the supplier is an unregistered person shifts on the recipient on reverse charge mechanism. This shall increase the compliance costs and requirements of manufacturers, although, they will be entitled to claim credit. A special cause of concern arises for persons registered as composition dealers. A composition dealer unlike other regular taxpayers is not entitled to claim credit of its inputs. Such a provision places composition dealers in a disadvantageous position by substantially increasing their costs. Clarity in dealing with unregistered dealers shall be welcome but it can be said that GST would help to bring transparency in the working of job workers to a great extent.