Movement of goods to job workers is an essential business situation which occurs frequently. Many times a manufacturer send goods to a job worker for getting further work done on them, and receive the goods back from job worker or sell the goods directly from the place of job worker. The tax position along with this movement of goods needs specific attention because the availability of input tax credit depends on usage of goods in the manufacture of final product, and once goods are removed from the factory, it is significant to ensure that these goods either come back to the factory of manufacturer or otherwise are incorporated in the final goods sold by the manufacturer. In the existing regime, the value addition by the job worker is either taxable as manufacture or as taxable service, and in both cases, an exemption is granted to job worker in case, the principal manufacturer pays duty on the goods received after job work including the value addition. In GST regime, the same concept has been adopted more or less.

1. Concept of Job Work

Section 2(61) of the Model CGST/SGST  law provides that

job work” means undertaking any treatment or process by a person on goods belonging to another registered taxable person and the expression “job worker” shall be construed accordingly.

1. It is to be noted that if the Job work is not carried on the goods belonging to a registered taxable person i.e. unregistered person, it cannot be termed as “Job Work” and such activity will get covered by normal supply provisions.

2. It may be noted that any treatment or process which is being applied to another person’s goods is regarded as a ‘supply of service’.

This definition is much wider than the one given in Notification No. 214/86 – CE dated 23rd March, 1986 as amended, wherein job work has been defined in such a manner so as to ensure that the activity of job work must amount to manufacture. Thus the definition of job work itself reflects the change in basic scheme of taxation relating to job work in the proposed regime.

2. Concept of Supply

As the incidence of supply attracts GST, the first question is whether the goods sent by the principal to a job-worker is a supply of goods or not.

Position under Earlier Version of Model GST Law released in June 2016

Under the earlier version Model GST Law released in June 2016, concept of supply is explained in Section 3. It includes all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal. Ordinarily, ‘supply’ shall become subject matter of levy only when (i) such supply is of goods and/ or services and (ii) is made or agreed to be made in the course of or furtherance of business and (iii) is made for a consideration. However, as per section 3 read with Sr.No.5 of Schedule I, any supply of goods and/or services by a taxable person to another taxable or non-taxable person in the course of or furtherance of business would be regarded as ‘supply’ even if such supply is without any consideration. Hence, the sending of goods to job worker for job work was covered under this clause.

Further, the supply of goods by a registered taxable person to a job-worker in terms of Section 43A of the earlier Model GST Law is carved out as an exception from Sr.No.5. Section 43A, inter alia, provides a special procedure for removal of goods involved in job-work transactions, without payment of GST.

Position under Revised Model GST Law released in November 2016

Now, under revised Model GST Law the Sr.No.5 of Schedule I as  detailed above has been deleted. It creates the ambiguity whether at the time of sending of goods to job worker for job work, will it still be treated as supply.

However, section 55 which deals with special procedure for removal of goods for job work (explained below) states that if the inputs/ capital goods are not received back within specified period then it shall be deemed that such inputs/ capital goods had been supplied by the principal to the job-worker on the day when the said inputs/ capital goods were sent out. Hence, it may be interpreted that the person sending the goods would need to comply with special procedure of section 55 if he wants to receive back the goods without payment of GST else the law has created a deeming fiction and treats the transaction of sending goods by Principal manufacturer to job worker as supply

3. Special procedure for Removal of goods for Job Work [Section 55]

As per section 55(1), a registered taxable person (hereinafter referred to in this section as the “principal”) may, under intimation and subject to such conditions as may be prescribed, send any inputs and/or capital goods, without payment of tax, to a job worker for job-work and from there subsequently send to another job worker and likewise, and shall –

(a) bring back inputs, after completion of job-work or otherwise, and/or capital goods, other than moulds and dies, jigs and fixtures, or tools, within one year and three years, respectively, of their being sent out, to any of his place of business, without payment of tax;

1. It may be noted that under the present regime, as per rule 4(5)(a)(iii) of Cenvat Credit Rules, inputs or capital goods, as the case may be, are required to be brought back by the manufacturer or provider of output service within 180 days or 2 years respectively. If not received back within this specified period, the manufacturer or provider of output service shall pay an amount equivalent to the Cenvat credit attributable to the inputs or capital goods, as the case may be, by debiting the Cenvat credit or otherwise.

2. In the earlier regime; the Cenvat credit (which had been reversed) can be claimed once the goods are received back from job worker. However no such provision exists in the Model GST law.  In GST regime, if the inputs /capital goods are not received back within one year/ three years respectively, it will deemed as supply and GST will be charged on the same. In case the goods are returned after the said period, it will be treated as Inward supply and be treated accordingly.

3. Further, it is pertinent to noted that capital goods other than moulds and dies, jigs and fixtures, or toolsare required to be received back within three years. Hence, moulds and dies, jigs and fixtures, or tools are not required to be received back during this specified period.

(b) supply such inputs, after completion of job-work or otherwise, and/or capital goods, other than moulds and dies, jigs and fixtures, or tools, within one year and three years, respectively, of their being sent out from the place of business of a job-worker

  • on payment of tax within India, or
  • with or without payment of tax for export, as the case may be

PROVIDED that the “principal” shall not supply the goods from the place of business of a job worker unless the said “principal” declares the place of business of the job-worker as his additional place of business except in a case-

(i) where the job worker is registered under section 23 ; or

(ii) where the “principal” is engaged in the supply of such goods as may be notified by the Commissioner in this behalf.

Responsibility lies with the Principal

As per section 55(2), the responsibility for accountability of the inputs and/or capital goods shall lie with the “principal”.

Inputs Sent to Job Worker not received back with one year

As per section 55(3), where the inputs sent for job-work are not received back by the “principal” after completion of job-work/ otherwise or are not supplied from the place of business of the job worker as aforesaid within a period of one year of their being sent out, it shall be deemed that such inputs had been supplied by the principal to the job-worker on the day when the said inputs were sent out.

It may be noted that under the GST regime,  where the inputs sent for job-work are not received back by the “principal” from job worker within a period of one year of their being sent out, it shall be deemed to be supplied by the principal to the job-worker on the day when the said inputs were sent out.

While under the present regime, the manufacturer or output service provider is required to reverse the Cenvat credit attributable to the inputs.

Capital Goods Sent to Job Worker not received back with three year

As per section 55(4), where the capital goods, other than moulds and dies, jigs and fixtures, or tools, sent for job-work are not received back by the “principal” or are not supplied from the place of business of the job worker as aforesaid within a period of three years of their being sent out, it shall be deemed that such capital goods had been supplied by the principal to the job-worker on the day when the said capital goods were sent out.

It may be noted that under the GST regime, where the capital goods, other than moulds and dies, jigs and fixtures, or tools, sent for job-work are not received back within a period of three years, it shall be deemed to be supplied by the principal to the job-worker on the day when the said capital goods were sent out.

While under the present regime, the manufacturer or output service provider is required to reverse the Cenvat credit attributable to the capital goods.

Waste and Scrap generated at Job worker

As per section 55(5), 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 such job worker is registered, or by the principal, if the job worker is not registered.

Credit on inputs which got consumed during job work: There may be a situation, where principal sent consumables along with the goods on which job work is to be done to the job worker. In such a case, the consumable got consumed during the job work process and not separately identifiable. Hence, the consumables cannot be received back by the principal along with the supply of job work and condition of receiving back the goods after job work cannot be satisfied.

4. Position of Input Credit in respect of the goods sent to job worker

In the Model CGST/SGST law, aspects relating to taking input tax credit in respect of inputs/capital goods sent for job-work have been specifically dealt in Section 20, which provides that the credit of taxes paid on inputs or capital goods can be taken in the following manner:

ITC on inputs sent to Job worker by principal [Section 20(1)]

As per section 20(1), the “principal” referred to in section 55 shall, subject to such conditions and restrictions as may be prescribed, be allowed input tax credit on inputs sent to a job-worker for job-work.

ITC allowed even if goods directly sent to the Job worker [Section 20(2)]

As per section 20(2), notwithstanding anything contained in section 16(2)(b) [ i.e. section 16(2)(b) prescribes the condition of receipt of goods or services for the allowance of ITC] , the “principal” shall be entitled to take credit of input tax on inputs even if the inputs are directly sent to a job worker for job-work without their being first brought to his place of business.

Treated as deemed ‘supply’ if inputs are not received back with one year

As per section 20(3), where the inputs sent for job-work are not received back by the “principal” :

  • after completion of job-work or otherwise or
  • are not supplied from the place of business of the job worker

within a period of one year of their being sent out, it shall be deemed that such inputs had been supplied by the principal to the job-worker on the day when the said inputs were sent out.

PROVIDED that where the inputs are sent directly to a job worker, the period of one year shall be counted from the date of receipt of inputs by the job worker.

ITC on Capital goods sent to Job worker by principal [Section 20(4)]

As per section 20(4), the “principal” shall, subject to such conditions and restrictions as may be prescribed, be allowed input tax credit on capital goods sent to a job-worker for job-work.

ITC allowed even if capital goods directly sent to the Job worker [Section 20(5)]

As per section 20(5), notwithstanding anything contained in section 16(2)(b) [ i.e. section 16(2)(b) prescribes the condition of receipt of goods or services for the allowance of ITC], the “principal” shall be entitled to take credit of input tax on capital goods even if the capital goods are directly sent to a job worker for job-work without their being first brought to his place of business.

Treated as deemed ‘supply’ if capital goods are not received back with three years

As per section 20(6), where the capital goods sent for job-work are not received back by the “principal” within a period of three years of their being sent out, it shall be deemed that such capital goods had been supplied by the principal to the job worker on the day when the said capital goods were sent out.

PROVIDED that where the capital goods are sent directly to a job worker, the period of three years shall be counted from the date of receipt of capital goods by the job worker.

Moulds and dies, jigs and fixtures, or tools sent out to a job-worker are not required to be received back by the Principal

As per section 20(7), moulds and dies, jigs and fixtures, or tools sent out to a job-worker for job-work are not required to brought back by the principal.

It is pertinent to note that under the present regime, all the capital goods are required to be brought back with two years. This is a very welcome step as moulds , dies , jigs, fixtures are usually consumed at the job worker location only. Thus there was no point of bringing them back to manufacturer’s location.

Provisions relating to Job Work are not applicable to exempted or non-taxable goods

It may be noted that the provisions relating to ‘job work’ are applicable only to taxable goods. In other words, these provisions are not applicable to exempted or non-taxable goods. The principal, if intends to send exempt / non-taxable goods for job work, can devise his own procedure for the same.

5. Transitional provisions

One of the critical aspects while transition into GST would be the goods already sent on job-work prior to the appointed date i.e. date on which Act shall come into effect. In this regard, transitional provisions have been specified for inputs/semi-finished goods/finished goods sent to job-worker prior to appointed date but received on or after the appointed date.

However, no transitional provision has been provided for the capital goods removed prior to appointed day and received back thereafter.

As per the provisions contained in Section 175 to 177 of the Model CGST/SGST Law , where inputs/semi- finished goods/ finished goods are sent for job work, etc. prior to the appointed day and are received back after that day, there could be following situations –

1. When goods are received back within 6 months of the appointed day, no tax shall be payable under GST regime – the manufacturer would have already taken credit on such inputs.

2. When goods are not received back within 6 months of the appointed day, the time may be extended by a maximum period of 2 monthsby the appropriate authority on showing a reasonable cause, no tax shall be payable under GST regime – the manufacturer would have already taken credit on such inputs.

3. When goods are not received back within 6 months of the appointed day or the extended period, immediately after the expiry of such period, the input tax credit shall be liable to be recovered in terms of section 184 [since the manufacturer would have already taken credit on such inputs earlier].

The above provisions would be applicable only when both principal and job worker declare the details of stock of inputs, semi-finished goods or finished goods, as the case may be, on the appointed day.

6. Transaction Walk Through

As can be noted from above that in job work transaction, there will be following transactions involved :

S.No. Transaction Treatment under GST
1 Supply of goods by Principal to job worker for Job work

 

It will not be treated as Supply. Hence, not liable to GST subject to compliance of provisions of section 55.
2 Supply of job work services by the job worker

 

Job Work charges will attract GST.
3 Supply of processed goods by Job worker to Principal for which there will be no consideration (since this would be only return of goods back to the principal) It will not be treated as Supply. Hence, not liable to GST subject to compliance of provisions of section 55.

For example:

When gold is sent to a karigar for making jewellery then the sending of gold to karigar and receiving back will not treated as supply provided provisions of section 55 are complied with. However, Karigar would be liable to pay GST on the job work charges (i.e. the making charges).

CONCLUSION

The analysis of implications under GST law on the aspects related to job-work transactions is very crucial having regard to various issues raised above and wherever there is a scope for ambiguous situation, necessary clarification is required to be provided in the GST Law, in order to avoid the possible litigation in future.


CA Chitresh Gupta

B. Com(H), FCA, IFRS (Certified), IDT (Certified)

Author of Book “An Insight into Goods & Service Tax”

Member of IDT Committee of PHD Chamber of Commerce

Member of IDT Committee of NIRC of ICAI (2015-16)

M/s Chitresh Gupta & Associates, Chartered Accountants, Delhi

M – 9910367918,  e-mail: gupta_chitresh@yahoo.in, www.gstexperts.net

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Category : Goods and Services Tax (2793)
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