It appears that those who drafted it have lost sight of change in basis of tax. Excise is old levy on manufacture of goods. It started in 1870 with salt which became major source of revenue at that time. Excise rules were used to put iron grip over production/manufacturing and collect maximum revenue at first point. Sales tax was unheard at that time. Whether you have sold the goods or whether you have received consideration, were not relevant points. Excise is first point taxation. Therefore input credit is restricted to inputs upto removal of goods from place of manufacture.
There is sea change in the way business transactions take place today. It is very rare that all processes of manufacture are carried out under one roof. Manufacture has different meaning under different laws. Even though excise is on manufacture, since last many years, assessable value is determined with reference to sale price/MRP etc. However many inputs in the nature of expenses or assets necessary for business are after removal. In order to give cenvat credit to such expenses some provisions were made. It has resulted into too many arbitrary provisions.
Many provisions in Model draft of GST appear to be copied from excise. One such example is Job work. It has a special meaning under excise. If the manufacturer gets some processes done outside his factory at present there are stringent rules and procedure. It has relevance in excise as it is one time tax. As per model GST the similar procedure with some minor changes is provided, which will have far reaching effects. It will be worthwhile to compare the relevant provisions under Central Excise and under Model GST Act
Central Excise Tariff Act 1944 Sec. 2(f) “manufacture” includes any process, – 1) incidental or ancillary to the completion of a manufactured product.
Cenvat Credit Rules, 2004 : Rule 2(n) “job work” means processing or working upon of raw material 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 aforesaid process and the expression “job worker” shall be construed accordingly;
Model GST Act (CGST) Sec 2 (62): “Job work means undertaking any treatment or process by a person on goods belonging to another registered taxable person and expression job worker shall be construed accordingly.”
Thus the connection of process or treatment to manufacture will not be essential characteristic of Job work under GST. It will be applicable to all transactions in the nature of undertaking any treatment of process for all persons including those who are not manufacturers like traders, service providers, works contractors etc. The provisions of GST are to be understood by removing from the mind the concepts under excise such as factory premises, removal of goods, excisable goods etc.
The word process is not defined. Hence it is necessary to take it’s literal meaning or meaning commonly understood. The literal meaning is nearly the same as commonly understood. As per Black’s Law Dictionary process is mode, method or operation whereby a result is produced. If you read it in to definition of Job work under GST what will happen? There are thousands of jobs which do not amount to manufacture yet are processes or treatment of goods belonging to other person. The provisions of Sec 43A of the model draft deals with Job work. It has put many restrictions on movement of goods for job work which will play havoc.
Let us take a simple example. Almost all taxable persons will have at least one vehicle. Painting of goods is a Job work. If vehicle is to be given for painting, then as per Clause 1 of Sec 43A such taxable person will have to take permission from Commissioner to send the car for painting so that he need not have to pay tax on value of car supplied for painting. Thus by implication it is mentioned that when the goods are given for performance of job work the transaction is supply of goods. Similarly it can be said that when the goods are returned after performance of Job the goods are supplied by job worker. We must keep in mind that ownership of goods is not essential for supply of goods by a person.
The provision speaks about goods sent by registered taxable person to job worker and return of goods by job worker. What will happen if goods supplied by non taxable person are returned by registered job worker? Here the goods are sent back (supplied) in the course of business. I am afraid and also sure that GST officers will interpret it as supply of goods by job worker and consequently tax will be levied on job charges plus value of goods. In such a scenario painting charges will be less than GST amount payable. Just ponder whether as per definition of Job Work under Model draft of GST, following transactions will be job work or not?
- Cloths given for dry cleaning or pressing by hospital or hotel.
- Silver utensils given for polishing.
- Plywood, timber, paper given for cutting by carpenter
- Printed material given for binding by printer.
Think what will be the plight of job worker under GST!
There are other practical problems also. At present the principal manufacturer is responsible for duty payment on the scrap generated at the job worker’s premises. The job worker may also remove such scrap on payment of appropriate duty of excise. The principal manufacturer should therefore have a proper mechanism for the purpose of tracking the quantum of waste or scrap generated at the job worker’s premises. The traders, printers, works contractors, service providers will be subjected to same kind of record keeping. It is possible? And is it necessary under GST which is multi point taxation and no transaction escapes taxation.
It is necessary to make it amply clear that the goods given for job work and goods given back after job work is not supply of goods. GST has adopted supply as subject of tax. We must distinguish between removal of goods (point of taxation under excise) and supply of goods. In job work one does not supply goods to job worker but job worker works on goods belonging to another person. Supply is a new concept of taxation and hence needs much more clarity in the Act itself without preconceived notion of past. I would suggest that whenever necessary and wherever there is ambiguity or scope for different interpretation the legislative intention may be made clear by giving examples.
Job work is one subject which will create great difficulties and problems for small tax payer which cannot be deciphered and will cause litigation. Manufacture, job-work, reseller will be irrelevant words under GST. We must find out what is true nature of transaction, whether it is supply of goods or supply of service and then tax shall be payable on transaction value. It will make it simple and easy to understand for a common businessman in the unorganized sector.