CA Ashish Chaudhary
Goods and Service Tax (GST) upcoming in India is likely to result in widening the tax base substantially by covering large number of potential taxpayers who are hitherto not covered in the tax net either due to their activity not being in the nature of taxable or due to some exemption being claimed. It is talked that the present assessee base on Central side itself is expected to rise to approximately 60 lacs assessees from existing base of apprx. 15 lacs. One of major contributor in this rise would be job workers who may not be required to get registered under present taxation system. The paper writer has analysed impact on job workers in the proposed GST regime viz a viz current taxation system.
The manufacturing industries now-a-days stick to their core competencies and get most jobs done on outsourced basis. The sending of raw materials/semi-finished materials for some process as per the directions of principal manufacturer is known as job work. This is widely used method in many industries.
Meaning of job work
Job work is understood as the processing or working on goods supplied by the principal so as to complete a part or whole of the process. The work may be the initial process, intermediate process, assembly, packing or any other completion process. The goods sent for job work maybe raw material, component parts, semi finished goods and even finished goods. The resultant goods could also be a variation of the same or the complete product.Examples of common job works are slitting, machining, welding, painting, electroplating, assembly, powder coating etc.
A. Meaning of Job work under Central Excise
Job work is defined in Notification No. 214/86 dated 25.03.1986and under Rule 2(n) of the Cenvat Credit Rules, 2004
“Job work” means processing or working upon of raw materials or semi-finished goods supplied to the job worker/ so as to complete a part or whole of the process resulting in the manufacture or finishing of an article or any operation which is essential for the aforesaid process.
If one were to go by the definition of the term “job work”, it is evident the raw materials have to be supplied by another person. In Prestige Engineering India Ltd v CCE Meerut, – 1994 (9) TMI 66, the Supreme Court held that when the job worker contributed his own material to the goods supplied by the customer and engaged in manufacturing, the activity was not one of job work. However, minor additions by the job worker would not take away the fact that the activity was one of job work.
B. Job Work and Manufacture (under Central Excise)
Since excise duty is on ‘manufacture’, duty liability arises only when the goods are manufactured during job work. The test as to whether the process amounts to manufacture or not would be determined as per section 2(f) of Central Excise Act, 1944 which defines manufacture as including any process incidental or ancillary to the completion of the manufactured product….. Various decision of the Supreme Court have arrived at a conclusion that where the product undergoes a change whereby a new article having a distinctive name, character or use emerges or not from the said process in manufacture (Honorable Supreme Court in Delhi Cloth and General Mills Co. Ltd Vs UOI 1962 (10) TMI 1 – SUPREME COURT OF INDIA)
C. Liability under Central Excise and Service Tax
Prior to 2007 valuation of job work was as per the ratio of Ujagar Prints 1989 (1) TMI 124,It was held by Supreme Court that in respect of goods manufactured on job-work basis, assessable value would be the job charges (including the profit of the job-worker if not already included in the job-charges) plus the cost of the materials used in the manufacture of the item (including the cost of the materials supplied free of cost to the job-worker).
Rule 10A had been introduced in Central Excise Valuation (Determination of Price of Excisable goods) Rule 2000, in respect of the goods produced or manufactured by Job Worker which provides for valuation as follows:
Illustration: Let the value of raw materials supplied by principal be Rs. 1,00,000 and the job workers conversion cost be Rs. 15,000 and his profit margin be Rs. 5,000. If the principal sells the goods processed by the job worker at Rs. 1,50,000. Then assessable value would be Rs. 1,50,000 (that is the price charged by the principal for sale of the processed goods).
Valuation under service tax would be on gross amount charged towards labour charges. Where the nature of work undertaken is works contract, value would be arrived at as per options provided under Rule 2A of Service Tax (Determination of Value) Rules, 2006.
A. Interstate job work:The goods may be sent outside state for job work.In the absence of any sale, there would be no liability on principal manufacturer to charge CST. The material may be sent along with a declaration that the goods have been sent on job work.
The work undertaken by job worker may or may not involve use of material. Where no material is used, there is no liability to charge CST as there is no transfer of property involved.When the job worker uses materials there would be a transfer of property in goods involved and the transaction would be taxable. The taxability would depend upon the following:
a. Material Billed separately: This would be a divisible contract in which job worker would charge the applicable CST on the materials transferred by him. He would also bill pure labour charges. In such cases the work order, purchase order or contract should be clear on the values ascribed towards the material and labour. It is advisable to keep the valuation of each of the components in such bifurcated contract near to the reality.
b. Composite Billing: In this case the value of material would be included in the total amount. This is called works contract. The material portion would be liable to CST. The various State governments have specified some deemed deduction for labour where the works contract or cannot arrive at the actual value of goods. The example could be annual maintenance contracts, galvanizing, electroplating, powder coating, painting of components, re-melting of scrap zinc/ brass etc. These transactions are liable for tax deduction at source when they provide services to the specified institutions.
Similarly, there could be contracts such as painting of portrait etc. in which some consumables are used. In these cases though there is a material transfer, the activity has been understood clearly to be service by the Court’s by applying dominant motive test and consequently there is no liability to charge CST.
B. Job work within state: Where principal manufacturer and job worker are located within same state, there would be no liability on principal manufacturer to charge VAT in the absence of sales. The liability charge VAT would be same as discussed above in case of interstate job works.
Having discussed the impact under Central Excise, Service Tax and CST/VAT, now we shall discuss the taxability under proposed GST regime.
The taxable events under present laws are manufacture (Central Excise), provision of service (Service Tax) and sale (CST/VAT) respectively for applicability of different kind of taxes. Under proposed GST regime, all these concepts would lose relevance and the taxable event would only be “supply of goods” and “supply of services”. The goods supplied by principal supplier to job worker would be supply of goods chargeable to CGST/SGST in case of intra state job work and IGST, in case of inter- state job work. The job worker would be entitled to take the credit of tax charged by principal supplier. When the goods would be supplied back by job worker, he is also required to charge the tax in the same manner as charged by principal supplier. Following could be certain aspects which would be relevant under GST:
The GST law has not yet been put in public domain, there is possibilities of few of these aspects could be applicable with certain modifications. For any query/feedback, the author could be reached at firstname.lastname@example.org
“Goods & Service Tax- A Primer” Published by Wolters Kluwer Tax & Accounting (CCH India)
“Handbook on Central Sales Tax” published by Notion Press
(Author is associated with Hiregange & Associates, Chartered Accountants)