Background:
The manufacturing industries ( larger and medium) nowadays stick to their core competencies and get most jobs done on job work basis from others. The alternative nomenclatures used are: sub contracting, loan licensing, processing or labour charges. At times the principal send tools needed as well as the part/ entire raw material required for the process free of cost. The material procured by principal may be sent directly to the job worker from the supplier. In certain situations, the finished goods may be sent directly from the job workers premises to the customer within or outside the State. The job worker invariably uses some consumables, machinery and tools for doing the job, which are procured by him on payment of local VAT and central excise duty. At times he may also use some own material which is transferred not consumed. He would also be using taxable input services for completing the job.
What is 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 job work undertaken maybe:
- the initial process,
- intermediate process,
- assembly,
- packing or any other completion process or complete manufacture.
The goods sent for job work may be raw material, component parts, semi-finished goods and the resultant goods could also be a variation of the same or the complete product.
The goods are returned back to the owner after such job work /processing. The property in goods remains with the person, who supplies the material. When there is no transfer of property in goods, there is no sale and no sales tax leviable on the same.
Tax Implication under Present Law:
The CST/ VAT would be applicable only where the job worker transfers any goods while doing the job work. Examples could be powder coating or electroplating where powder or chemicals are procured by the job worker.
Excise duty is applicable where the process amounts to manufacture at the job worker’s end. In M.M.Khambatwala’s case (1996 (84) ELT 161 (SC)), the Supreme Court held that the job worker is to be considered as the manufacturer of goods although the raw materials are supplied by the principal. There is a small scale exemption however of Rs.150 Lakhs which can be availed subject to eligibility. The valuation of job work in case of manufacture by the job worker could be at the ultimate sale price of the principal and would always include the value of material supplied free of cost.
Where the process amounts to manufacture, it cannot be said to be service. There are a few specific exemptions to industries such as textiles, printing where even if the value of manufacture was to exceed Rs.150 lakhs there would be no liability.
Service tax is applicable for intermediate processes not amounting to manufacture. The major exemption is for those goods which are subjected to central excise duty after further processing (intermediate processing).
Today lakhs of job workers are not registered under local VAT, service tax or central excise even though they may be at times liable under indirect taxes. The disputes presently faced could be on account of:
- Whether materials are transferred or consumed?
- Whether the material is negligible or substantial?
- Whether the charging of VAT on 75 % of value and Service tax on 70% is in order?
- Whether the cenvat credit of capital goods and inputs can be availed while working under Notification 214/86- CE?
- Whether the billing of material separately and labour separately takes the transaction outside works contract and consequently reverse charge not applicable?
- Whether the repackers/ minor processor of some fast moving consumer goods liable as deemed manufacturers are liable to pay excise duty on the entire value including material supplied? In this case the value of the goods supplied free of cost is also an issue.
- Whether the Rs. 150 lakhs exemption is available to branded products?
- What is to be done with the scrap or rejected material arising at the time of job work?
Job work under GST:
The supply of goods to a job worker would be on payment of IGST if it is interstate and on CGST and SGST when removed within the State. The levy shifting to supply would lead to all job workers whether big or small being forced to get under the GST regime. Tax would be payable on supply of materials by the principal to the job worker unless there is any exemption [like agriculture related processing]. Job workers under the Rs. 25 lakhs threshold may slowly find that they cannot afford the loss of credit on consumables, inputs of tools used.
The disputes referred to above would no longer exist for the principal or the job worker.
The features of job work under GST regime could be as under:
The job worker would avail the credit of GST charged and supply back with the applicable GST again on the value including the value add of goods and services supplied.
- The job worker would also be eligible for the credits on materials, capital goods used in his job work activity. The differentiation between the consumables and goods transferred would become irrelevant.
- There would be no need to issue any Form in case of inter-State job work.
- The capital goods such as plant and machinery, mould and dies used for processing the customer’s goods when supplied free of cost to job worker would be under payment of GST.
- The valuation of such goods could be disputed and may need a valuation certificate to accompany the order or goods.
- There is a proposal to charge 1% ( akin to CST) accruing to the originating State for a short period under GST for supply of materials. This additional tax maybe applicable only when there is a consideration and therefore may not affect the job work transaction. Further it would not be applicable for intrastate job work movement.
- The valuation of resultant goods could be based on the present central excise rules. For captive consumption of principal, the value of goods supplied along with job work charges could be reckoned. For supply to ultimate customer, the price to the customer may have to be adopted. For supply to depot of the principal the price at depot at the time of supply could be adopted.
Challenges/ Impact of GST on Job Work
- Lakhs of job workers would require to be registered under GST for the 1st time.
- They may have to learn to account and bill properly.
- Their turnover would multiply as value of material would get added.
- There could be major valuation issues at the job workers end.
- They could become cost effective due to capture of all hitherto missed credits under central excise as well as VAT.
- The working capital requirement of the manufacturer would increase as GST would be payable on all supplies towards job work.
- Job workers would also need more working capital as they would need to pay the differential GST.
Conclusion:
It may take some time for the job workers to come to terms with need to be within GST. Extensive change management and training would be needed to get acceptability to GST. The manufacturer would surely see a reduced cost of manufacture due to seamless credit at all stages of job work. The savings in logistic costs due to GST may also be an incidental advantage.