‘Manufacture’ was previously associated with the laws of Excise, however, since the subsuming of Central Excise Laws into the GST Laws, the relevance of the word ‘Manufacture’ shifted to the new GST Laws.
Relevant Provisions of the Law:
Section 2(72) of the CGST Act, 2017 defines “Manufacture” as:
(72) ―manufacture means processing of raw material or inputs in any manner that results in emergence of a new product having a distinct name, character and use and the term ―manufacturer shall be construed accordingly;
Section 2(59) of the CGST Act, 2017 defines “input” as:
(59) ―input means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business;
Section 2(19) of the CGST Act, 2017 defines “capital goods” as:
(19) ―capital goods means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business;
Analysis of the Provisions of Law:
Based on the above definitions, a checklist of questions need to be followed so as to determine two things namely:
1. Whether an act/action/process amounts to “Manufacture”, as per GST?
2. Whether a Person is a “Manufacturer”?
Checklist for determining an activity as “Manufacture” and person doing such activity as “Manufacturer”
|Q. No.||Questions||Suggested Answer||Answer|
|1.||Can the actions/activities conducted by a person be considered as “Processing”?||Yes|
|2.||If the above answer (for Q1.) is “Yes”, then you may go ahead with this question.
Is the processing done on raw material or inputs2(59)?
|3.||If the above answer (for Q2.) is “Yes”, then you may go ahead with this question.
Is the processing done in a manner that RESULTS in emergence of a NEW product?
|4.||If the above answer (for Q3.) is “Yes”, then you may go ahead with this question.
Does the newly emerged product, produced after processing of raw materials or inputs, have a DISTINCT NAME, DISTINCT CHARACTER AND DISTINCT USE?
Follow up questions to clear one’s doubts:
Q 1. Does Re-packaging from bulk wholesale unit to small retail units, amounts to “Manufacture”?
Ans. No, since there is no processing
Q 2. Mr. L has a business of trading confectionery goods. Mr. L had purchased a Wooden Sofa for his office cabin and capitalized it as office furniture. Mr. L, broke the Wooden Sofa and made a Bed out of it. He sold this bed to Mr. P for Rs. 5000. Is Mr. L, a “Manufacturer”?
Ans. No, since the processing was there but it was not done on “raw materials” or “inputs”, instead, the processing was done on capital goods, thus, since Mr. L does not satisfy all the criteria as defined in the definition of “Manufacture”, his action of converting his Wooden Sofa into a Bed will not be considered as “Manufacture” and thus, he will not be considered as a “Manufacturer”.
Q 3. What is the meaning of DISTINCT NAME, DISTINCT CHARACTER AND DISTINCT USE?
Ans. Distinct Name, Character & Use means that, the newly emerged product, that came into existence, because of the activity of processing on inputs or raw materials, has a different Name, different Character and different Use, when compared to the original input or raw material.
Eg. Mr. Amul runs a dairy and manufactures milk derivatives and milk products. Now, for Mr. Amul, Milk is the raw material or input. When Mr. Amul makes Butter after processing Milk, the process amounts to manufacture because, Butter emerged as a new product with distinct Name (It’s called Butter and not Milk), distinct Character (It freezes at a different temperature than milk, it’s not in liquid form at normal refrigeration temperature, it contains much higher fat % than in milk.) & distinct Use (its uses are different than that of Milk, It cannot be used as a substitute of milk, which gives it a distinct use.)
Conclusion & Recapitulation:
Thus we conclude that, “Manufacture” as defined under section 2(72) of the GST Law, consists of following 4 major characteristics:
1. There must be PROCESSING
2. The processing must be done on RAW MATERIALS or INPUTS.
3. The processing must be done is such a manner that it RESULTS in emergence of a NEW PRODUCT.
4. New Product should be such that it should have a DISTINCT NAME, CHARACTER AND USE.
We also conclude that on satisfactory presence of all the four characteristics, we can call an activity as “Manufacture” and the performer of such activity as “Manufacturer”.
We also conclude that, any non-satisfaction of any of the above four characteristics would result in non-concurring with the definition of “Manufacture”, thereby not being able to call such activity as “Manufacture” and thus the performer of such activity not being a “Manufacturer”.
Disclaimer: This article is intended to be referred for academic purposes only and shall not be used as a definitive opinion on the subject. Laws and Legal standings are subject to frequent changes. One should consult an expert on the subject to arrive at the current standing of the law and its applicability to any person.