What Council Propose – Government Disposes !!

Council at their 37th meeting took the following decision with respect to reduction in rates of tax on job-work services:

‘3. To reduce rate of GST from 5% to 1.5% on supply of job work services in relation to diamonds.

4. To reduce rate of GST from 18% to 12% on supply of machine job work such as in engineering industry, except supply of job work in relation to bus body building which would remain at 18%.’

Hence the intention is to lower the rates of tax on job-work services related to diamonds to 1.5% and related to machine job (except bus body building) to 12%. Said reduction will apply from 01.10.2019. Vide Notification No. 20/2019- Central Tax (Rate) dt. 30.09.2019 effect has been given to the said decision by making following amendments to Sr. No. 26 of Notification No. 11/2017 – CT (R) as under:

Sr. No. 26 of Notf. No. 11/2017 – CT (R) Description Rate of tax
(ib) Services by way of job work in relation to diamonds falling under chapter 71 1.5%
(ic) Services by way of job work in relation to bus body building 18%
(id) Services by way of job work other than (i), (ia), (ib) and (ic) above 12%
(iv) Manufacturing services on physical inputs (goods) owned by others, other than (i), (ia), (ib), (ic), (id), (ii), (iia), and (iii) above 18%

The above amendments have been made with an intention to draw a difference between “job-work” and “manufacturing services”. Manufacturing services are intended to be taxed at normal rate of 18% whereas job-work services (not resulting in the manufacture of goods e.g. machine job-work) are intended to be taxed at the lower rate of 12%. But what has been overlooked is the definition of “job-work” u/s 2(68) of the CGST Act, 2017 while drafting the above amendments. Why so ?

This is because item (id) covers all the services by way of job-work other than (i), (ia), (ib) and (ic) whereas item (iv) covers manufacturing services on physical inputs (goods) owned by others, other than (i), (ia), (ii), (iia), (ib), (ic), (id) and (iii). In other words the job-work services falling under (id) (residual job-work services) would not be considered under item (iv) as it expressly excludes services covered under (id).

Thus take a case where a job-worker actually carries out manufacturing activity for a registered person. Now the definition of job-work u/s 2(68) of the CGST Act, 2017 means any treatment or process undertaken by a person on goods belonging to another registered person. Hence the said definition even includes manufacturing activity as that is also a treatment or process undertaken on goods belonging to another registered person. Now item (id) would thus cover the said job-work. Once covered under (id) it would automatically get excluded from item (iv) since it provides that it would not cover job-work services covered under (id). Thus applicable rate of tax on such manufacturing job-work services would also be 12%.

Perhaps the above conclusion was never intended by the GST Council. It has cropped up only because of the faulty drafting. Description under item (id) will have to provide that it would not cover manufacturing services covered under item (iv). Similarly exclusion of item (id) under item (iv) should also be omitted.

It is hoped that the same is corrected soon to avoid unwarranted litigation. Once corrected, the job-workers would be required to determine whether the activity undertaken by them would amount to manufacturing or not. If yes, rate would be 18%. Otherwise 12%.

(views are strictly personal)

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5 Comments

  1. Mrudul says:

    Sir, your article is very useful. One query on the same. XYZ carrying out ‘Repairs and Maintenance of Moulds’ for its customers and charging repairing charges for the same. W.e.f. 01.10.2019, he is required to charge 18% or 12%

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