Introduction
Though the job work is defined and job work procedure has been elaborated under GST Act and Rules, still there are transactions or activities between the Principal and Job Worker, which are under question as to whether in such cases GST can be charged as job work service or as supply of goods. Jewelers in the course of their business are extensively resorting to job work services such as for purification of old jewelry purchased from customers, for new jewelry manufacturing (complete or finishing), for coloring/polishing, for hallmarking etc. In most of such cases the principal and job worker face practical difficulty in strict compliance with the procedures prescribed under section 143 of CGST Act, 2017 and applicable in job work services activity. In this article I have tried to include various legal provisions under the GST Act, 2017, relating to job work service and also discussed few case studies.
What is the importance of job work activity under GST Act?
As per section 9(1) of the CGST Act, there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both. Under the CGST Act, the term ‘supply’ has got a wide meaning and includes, sale, transfer, barter, exchange, license, rental, lease, disposal etc. made or agreed to be made for a consideration by a person in the course or furtherance of business. Thus, all transactions or activities will be chargeable to GST if fall within the four walls of the Act and not specifically exempted. But in various business situations, there are transactions or activities involving goods, which will come under the definition of ‘supply’ but there will not be a transfer or intended transfer of ownership in such goods. In such cases, only supply of service is involved and on the other hand if treated as supply of goods, avoidable complication and clerical work will arise. To avoid such complication, such activities are specifically treated as supply of service by including as item 3 in Schedule II of the CGST Act, 2017. Such activities are termed as ‘job work’ and exemption from tax is granted under section 143 and 19 of CGST Act, subject to Rule 45 and 55 of CGST Rules. For this purpose, job work is defined under section 2(68) and job work procedures are prescribed under section 143 of the Act.
Before discussing GST liability on job work, a discussion on the terminology “supply” and “deemed supply” under GST is absolutely necessary.
Supply and deemed supply have been used in the Act, interchangeably. Hereunder I am trying to explain how the terms supply and deemed supply are defined under CGST Act.
What is Supply:
According to Section 7 of CGST Act:-
(1) The expression “supply” includes:-
(a) All forms of supply of goods or service or both such as sales, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for consideration by a person in the course or furtherance of business.
(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration
(b) Import of service for consideration whether or not in the course or furtherance of business.
(c) Activities made or agreed to be made without consideration, specified in Schedule I.
(1A) The activities to be treated as supply of goods or supply of service as referred to in Schedule II.
(2) Notwithstanding anything contained in sub-section (1):-
(a) Activities or transactions specified in Schedule III; or
(b) Such activities or transactions undertaken by Central Govt./State Govt./any Local authority in which they are engaged as public authorities, as may be notified by Govt. on recommendation of the Council.
Shall be treated neither as supply of goods nor as supply of services.
(3) Subject to provisions of sub-section (1), (1A) and (2), the Govt. may on the recommendation of the Council specify, by notification, the transaction that are to be treated as:-
(a) A supply of goods and not as a supply of service, or
(b) A supply of service and not as a supply of goods.
Is there a concept of ‘deemed supply’ in GST Act?
If you look at the definition of supply as stated under the CGST Act, in can be seen that it is an inclusive definition and hence the activities and transactions shown are not exclusive. Hence additional activities and transactions can be brought within the definition of ‘supply’ in the CGST Act. Therefore, the definition of ‘supply’ can be stretched to any extent. Hence in my view, what all activities included specifically in the list is supply only and not deemed supply.
Then what is the requirement for the concept of ‘deemed supply’ under GST Act and what is a deemed supply? The term ‘deemed supply’ has been used at least in four occasions in CGST Act which are as follows.
I. Deemed Supply – Section 19(3) and 19(6)
Section 19 deals with ITC in respect of Inputs and Capital Goods sent for Job Work
ITC on goods sent for job work and conditions to be fulfilled for eligibility[Sub section 1 to 7 of section 19 is reproduced hereunder]
“(1) The principal 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.
(2) Notwithstanding anything contained in clause (b) of sub-section (2) of section 16, 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 being first brought to his place of business.
(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 in accordance with clause (a) or clause (b) of sub-section (1) of section 143 within one year of 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.
(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.
(5) Notwithstanding anything contained in clause (b) of sub-section (2) of section 16, 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 being first brought to his place of business.
(6) Where the capital goods sent for job work are not received back by the principal within a period of three years of 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.
(7) Nothing contained in sub-section (3) or sub-section (6) shall apply to moulds and dies, jigs and fixtures, or tools sent out to a job worker for job work.”
The time limit for the return of inputs or capital goods sent for job work/supply the input or capital goods from the place of job worker [Sub section 3 and 6 of section 19 read with rule 45 (conditions and restrictions in respect of inputs and capital goods sent to the job worker) and section 143 (job work procedure)]shall be 1 or 3 years respectively, from the date of sending out the goods for job work.
- If the above time-lines are not met, the said input and capital goods will be deemed to be supply [Section 19(3) & (6)]
II. Deemed Supply – Section 142(1) and 142(2) – Transitional Provision
[Sub section 1 and 2 of section 142 are reproduced hereunder]
“(1) Where any goods on which duty, if any, had been paid under the existing law at the time of removal thereof, not being earlier than six months prior to the appointed day, are returned to any place of business on or after the appointed day, the registered person shall be eligible for refund of the duty paid under the existing law where such goods are returned by a person, other than a registered person, to the said place of business within a period of six months from the appointed day and such goods are identifiable to the satisfaction of the proper officer:
Provided that if the said goods are returned by a registered person, the return of such goods shall be deemed to be a supply.
(2) (a) where, in pursuance of a contract entered into prior to the appointed day, the price of any goods or services or both is revised upwards on or after the appointed day, the registered person who had removed or provided such goods or services or both shall issue to the recipient a supplementary invoice or debit note, containing such particulars as may be prescribed, within thirty days of such price revision and for the purposes of this Act such supplementary invoice or debit note shall be deemed to have been issued in respect of an outward supply made under this Act;
(b) where, in pursuance of a contract entered into prior to the appointed day, the price of any goods or services or both is revised downwards on or after the appointed day, the registered person who had removed or provided such goods or services or both may issue to the recipient a credit note, containing such particulars as may be prescribed, within thirty days of such price revision and for the purposes of this Act such credit note shall be deemed to have been issued in respect of an outward supply made under this Act:
Provided that the registered person shall be allowed to reduce his tax liability on account of issue of the credit note only if the recipient of the credit note has reduced his input tax credit corresponding to such reduction of tax liability.”
III. Deemed Supply – Sub-section (3) and (4) of Section 143 – Job work procedure
[Sub section 3 and 4 of section 143 are reproduced hereunder]
“(3)Where the inputs sent for job work are not received back by the principal after completion of job work or otherwise in accordance with the provisions of clause (a) of sub-section (1) or are not supplied from the place of business of the job worker in accordance with the provisions of clause (b) of sub-section (1) 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.
(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 in accordance with the provisions of clause (a) of sub-section (1) or are not supplied from the place of business of the job worker in accordance with the provisions of clause (b) of sub-section (1) 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.”
IV. Schedule II 4 (c)
[Sub clause (c) of Clause 4 of Schedule II is reproduced hereunder]
“(c) Where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless:-
i. The business is transferred as going concern to another person or
ii. The business is carried on by personal representative who is deemed to be a taxable person.
The activity or transaction will be deemed to be within the preview of that Act, if and only if specifically provided in that Act. Thus, even if the taxing provision is inclusive, deeming provision cannot be inclusive or open ended. Therefore, if and only if the activity or transaction falls under the definition of job work, it cannot be a deemed supply in a situation other than that provided under sub section (3) and (4) of Section 143 of the CGST Act, 2017.
Let’s understand what a Job Work is;
Job work is defined under section 2(68) of CGST Act as “job work means any treatment or process undertaken by a person on goods belonging to another registered person and the expression “job worker” shall be construed accordingly”. From the definition itself it is clear that only a principal registered under the GST Act alone can send the goods for job work.
What section 143 talks about job work procedure?
The relevant part of the section is reproduced hereunder:
“143(1)A registered person (hereafter in this section referred to as the “principal”) may under intimation and subject to such conditions as may be prescribed, send any inputs 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, 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;
(b) supply such inputs, after completion of job work or otherwise, 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 in accordance with the provisions of this clause 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 25; or
(ii) where the principal is engaged in the supply of such goods as may be notified by the Commissioner.
1[Provided further that the period of one year and three years may, on sufficient cause being shown, be extended by the Commissioner for a further period not exceeding one year and two years respectively.]
(2) The responsibility for keeping proper accounts for the inputs or capital goods shall lie with the principal.
(3) Where the inputs sent for job work are not received back by the principal after completion of job work or otherwise in accordance with the provisions of clause (a) of sub-section (1) or are not supplied from the place of business of the job worker in accordance with the provisions of clause (b) of sub-section (1) 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.
(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 in accordance with the provisions of clause (a) of sub-section (1) or are not supplied from the place of business of the job worker in accordance with the provisions of clause (b) of sub-section (1) 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.
(5) Notwithstanding anything contained in sub-sections (1) and (2), 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.
Explanation. – For the purposes of job work, input includes intermediate goods arising from any treatment or process carried out on the inputs by the principal or the job worker.”
From the above section of the Act, one point is very clear that if the principal is not getting back the inputs sent for job work, after completion of the job worker or otherwise, within the prescribed time limit, then the transaction shall be treated as ‘deemed supply’.
After analysing the various provision in the Act, impacting the tax liability on job work, let’s go to various case studies.
Case study 1
Q. Whether due to the jewelry job worker putting the inputs received from various principals’ in to a common pool and manufacturing jewelry for each principal out of material from that common pool, any change will happen in the procedure of job work prescribed under section 143 of the CGST Act, 2017? (identity of the inputs, which is the pre-requisite in job work, is lost?)
As per the definition of “job work” given under section 2(68) of the CGST Act and noted in the beginning of this article, the basic characteristic of job work should be, any treatment or process undertaken by a person on goods belonging to another registered person. As the inputs are belonging to the principal, the common understanding is that the job worker can do job work only on material supplied by the principal and excess material if any should be returned to the principal. As such there is no scope even for exchange of material of exactly of the same nature and value. The intention of the Act might be the same, as a different view will create a loophole and many of the supply of goods can be shown as supply of service.
This point has been made clear by issue of a clarifications on scope/ambit of job work, by the Government of India, Ministry of Finance, Department of Revenue, Central Board of Excise and Customs, GST Policy Wing, New Delhi, as per Circular No. 38/12/2018 dated the 26th March, 2018, that in a job work, the work is to be done on the inputs delivered by the principal. In this Circular, it is clarified that “It may be noted that the definition of job work, as contained in clause (68) of section 2 of the CGST Act, entails that the job work is a treatment or process undertaken by a person on goods belonging to another registered person. Thus, the job worker is expected to work on the goods sent by the principal and whether the activity is covered within the scope of job work or not, would have to be determined on the basis of facts and circumstances of each case”.
In jewelry manufacturing activity, job work arrangement is most common and each job worker specializes in the manufacture of a limited type of jewelry items. So, they do job work for different principals. In all cases, the major input, both quantity wise and cost wise, is gold which is a universal item, except in the matter of purity. But the purity of jewelry is standardized in India and hence even if the principal issues input of a lesser or more purity, the quantity of jewelry returned will be adjusted according to its standard purity. Hence it is not absolutely necessary to use the input issued by a principal alone, for manufacture of jewelry to be returned to him. That means the input can be interchangeably used in jewelry manufacturing process.
Case study 2
Q. The job worker receives standard gold, old gold, copper etc. from different parties (Principals) and does the job work and return the finished goods to the parties from whom the job worker receives the material. The job worker does not keep the material of each party separately in many practical situations, rather the whole material will be melted for job work. Thus, job worker in fact exchanges the material of one party (principal) to another (principal), while making the finished ornaments out of the melted mix. Will it make a taxable supply to the job worker / principal on the ground that material “exchange” is happening in the process?
Sending goods for job work in accordance with section 143 does not make a supply if the principal receives back the input after completion of job work or otherwise within the time and manner specified under sections 143 (1)(a). Neither the ownership in the material issued is transferred to job worker upon sending inputs for job work, nor the job worker acts as an agent on behalf of the principal as specified in Schedule I para 3. (Refer Circular No. 57/31/2018 dated 04-09-2018). In this situation the input issued by the principal cannot be returned in accordance with section 143 of the Act, it will become a deemed supply.
Does it make a supply from the perspective of Job worker?
If the job worker accepts inputs only from single principal and returns the completed goods to that principal in accordance with section 143 (1) with the support of delivery challan as specified in Rule 55 and 45, no question arises about supply from the part of Job worker. The question arises when the job worker mixes or exchanges the inputs of one principal with that of another and does the job work, will that make a supply?
What is the word “exchange” means?
The word exchange has not been defined anywhere in the Act. Transfer of Property Act 1882, section 118 defines the word exchange as “when two persons mutually transfer the ownership of one thing for the ownership of another neither thing or both things being money only, the transaction is called an exchange”.
Whether the meaning of the word “exchange” is considered from common English parlance or as per the Transfer of Property Act, the word ‘exchange’ explicitly constitutes two key points that are “two persons” and “mutually agreed transfer of ownership”. At the time of sending inputs for job work service, the principal does not transfer the ownership to job worker and the service of job work is specifically defined under section 2(68) that “any treatment or process undertaken by a person on goods belonging to another registered person” is a job work process. Being the custodian of goods of another person the job worker cannot exchange the goods belongs to another person and no supply is happening here as defined under section 7 with or without consideration as an agent. It is true that the principal has not permitted the job worker to exchange the goods. But there is delivery of movable goods in exchange and this activity is not objected by either of the principals, by conduct. Thus, according to me there is an exchange which can be brought with in the wide definition of the term “supply”.
Conclusion.
Job work is a method of providing service in the form of manufacture of moveable goods or in a process of manufacture of such goods. In this method of labour contract, the principal issues inputs to the job worker required for the production of the intended goods, after purchasing the same. Thus, the ownership of the inputs will be with the principal only and the job worker do manufacture activity or process on the inputs so received and return the finished goods along with the balance inputs, if any. In the manufacture of the same goods, inputs of different kind and varying quality are possible. Hence it is absolutely necessary to use the inputs sent by the principal in the manufacture of goods for that principal. Therefore, the definition of the term “job work” given under section 2(68) reflects the idea of one-to-one usage of input of each principal separately. Further procedure to be followed in a job work is stated in section 143 of the CGST Act, which also is in line with the definition given under section 2(68) of the Act. If such procedures are not followed, the principal and the job worker will become ineligible for relaxation in the taxing provisions.
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Author: Treesa Antony | Co-author : Dr. R. Latha | Verified by CA Titus Antony
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