Goods and Service Tax (GST) upcoming in India is likely to result in widening the tax base substantially by covering large number of potential taxpayers who are not covered in the tax net. It is estimated that the present assessee base on Central side itself is expected to rise to approximately 60 lacs assessees from existing base of approx. 15 lacs. One of major contributor in this rise would be job workers as it is very rare that all processes of manufacture are carried out under one roof. There is an increasing trend in businesses to focus on their core activity and outsource other activities to specialised service providers
Job work is the processing or working on goods supplied by the principal so as to complete a part or whole of the process. The work may be the initial process, intermediate process, assembly, packing or any other completion process. The goods sent for job work maybe raw material, component parts, semi finished goods and even finished goods. The resultant goods could also be a variation of the same or the complete product.
It is important to note that concepts of ‘service’, ‘manufacture’ and ‘sale’ have their own characteristics, similarities and distinctions. From constitutional and taxation aspects, concepts of ‘manufacture’, ‘sale’ and ‘service’ have deeming characteristics under the respective tax laws.
The impact of GST on Job work transactions can be better understood, only if the existing taxation aspects qua such transactions are first noted. This will enable to understand whether there is any deviation in GST vis-a-vis past laws.
Job work is defined in Notification No. 214/86 dated 25.03.1986 and under Rule 2(n) of the Cenvat Credit Rules, 2004 – “Job work” means processing or working upon of raw materials 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 the aforesaid process.
*Definition of the term “job work”, makes it evident the raw materials have to be supplied by another person. In Prestige Engineering India Ltd v CCE Meerut, – 1994 (9) TMI 66, the Supreme Court held that when the job worker contributed his own material to the goods supplied by the customer and engaged in manufacturing, the activity was not one of job work.
Since excise duty is on ‘manufacture’, duty liability arises only when the goods are manufactured during job work. The job work operations not amounting to manufacture would be regarded as service.
It was held by Supreme Court that in respect of goods manufactured on job-work basis, assessable value would be the job charges (including the profit of the job-worker if not already included in the job-charges) plus the cost of the materials used in the manufacture of the item (including the cost of the materials supplied free of cost to the job-worker).
Rule 10A had been introduced in Central Excise Valuation (Determination of Price of Excisable goods) Rule 2000, in respect of the goods produced or manufactured by Job Worker which provides for valuation as follows:
Illustration: Let the value of raw materials supplied by principal be Rs. 1,00,000 and the job workers conversion cost be Rs. 15,000 and his profit margin be Rs. 5,000. If the principal sells the goods processed by the job worker at Rs. 1,50,000. Then assessable value would be Rs. 1,50,000 (that is the price charged by the principal for sale of the processed goods).
Service tax would be on gross amount charged towards labour charges. Where the nature of work undertaken is works contract, value would be arrived at as per options provided under Rule 2A of Service Tax (Determination of Value) Rules, 2006.
The levy of Sales Tax/VAT is on ‘sale’ of goods. Hence job work transactions involving pure labour would not attract levy of sales tax/VAT. When materials are supplied by principal manufacturer to job worker for the purposes of job-work, there is no sale of such goods and consequently, levy of sales tax is not attracted. In case of inter-state transfers, principal manufacturer is required to follow certain procedures for the purpose of declaring such transfers as “otherwise than for sale”. Similarly, when job-worker returns the goods to principal manufacturer, after the job work is complete, he is not liable for payment of VAT/sales tax, since such transfers would not be regarded as sale. However, if the job-work results in transfer of material from job-worker to principal manufacturer, value of material so transferred attracts VAT. Every State has its own valuation rules for determining the value of material so transferred in the course of job-work processing.
When the job worker uses materials there would be a transfer of property in goods involved and the transaction would be taxable. The taxability would depend upon the following:
Similarly, there could be contracts such as painting of portrait etc. in which some consumables are used. In these cases though there is a material transfer, the activity has been understood clearly to be service by the Court’s by applying dominant motive test and consequently there is no liability to charge CST.
The taxable events under present laws are manufacture (Central Excise), provision of service (Service Tax) and sale (CST/VAT) respectively for applicability of different kind of taxes. Under proposed GST regime, all these concepts would lose relevance and the taxable event would only be “supply of goods” and “supply of services”.
Under the model GST Law, concept of supply is explained in Section 3. It includes all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal. Ordinarily, ‘supply’ shall become subject matter of levy only when (i) such supply is of goods and/ or services and (ii) is made or agreed to be made in the course of or furtherance of business and (iii) is made for a consideration. However, as per section 3 read with Sr.No.5 of Schedule I, any supply of goods and/or services by a taxable person to another taxable or non-taxable person in the course of or furtherance of business would be regarded as ‘supply’ even if such supply is without any consideration. The supply of goods by a registered taxable person to a job-worker in terms of Section 43A of the Model GST Act is carved out as an exception from Sr.No.5. Section 43A, inter alia, provides a special procedure for removal of goods involved in job-work transactions, without payment of duty. The benefit of section 43A can be granted by the Commissioner only by a special order. Hence, it would be interesting to see whether such special order would be a blanket permission, specifying certain conditions and procedure, upon fulfillment of which all the taxable person are automatically entitled to benefit of section 43A, or this order shall be issued qua every taxable person separately.
There are no specific valuation provisions governing the valuation of Job-work under model GST law. “Job-work” is defined in section 2(62) to mean undertaking any treatment or process by a person on goods belonging to another registered person. Under Schedule–II, any treatment or process which is being applied to another person’s goods is regarded as a supply of service. Further, ‘works contract’ including transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract is also regarded as service. Therefore, it appears that, under GST, for taxation purposes, job-work operations will be regarded as ‘supply of service’, even if they involve transfer of property in goods.
Another significant aspect that may be relevant in determining the valuation is that, in Job work transaction, there will be minimum two supplies from Job-worker to the principal namely (i) supply of services for consideration which will be in the nature of job-work charges and (ii) supply of processed goods for which there will be no consideration (since this would be only return of goods back to the principal).
This can be explained by way of an example:
Party ‘A’ – Principal sent goods of Rs.1,00,000 to party ‘B’ – Job Worker for Job-work. ‘B’ did the Job-work operation on the goods received from ‘A’ and charged Rs.20,000 as his job-work charges. In the said amount of Rs.20,000 there is also included use of material amounting to Rs.5,000 procured by the job-worker and used in the job-work operation. Thereafter he transported goods back to ‘A’ at another place of business.
In this example, there are various supplies as under:
Assuming that transaction is covered within section 43A, there will be no liability to pay taxes for supply of raw material from ‘A’ to ‘B’ and supply of processed goods from ‘B’ to ‘A’. However, supply of service i.e. job-work would attract tax. This appears to be a diversion from current service tax and excise provisions, where job-workers are exempted from Central excise duty as well as Service tax on their job-work charges, if the principal manufacturer pays duty on final product.
The next question is – what would be the value of service for the purpose of levy of tax? As per section 15, the value of supply of goods and/or services shall be the transaction value. “Transaction value” would mean the price actually paid or payable for the said supply services where the supplier and the recipient of supply are not related and the price is the sole consideration for the supply. Hence, in the present case Rs.20,000 would be treated as the value of service although, it includes materials worth Rs.5,000, still the entire supply including value of material would be treated as services.
|Transaction no.||Is Supply ?||GST Payable|
|Transaction 1||No – if approved u/s 43A||No|
|Transaction 2||Yes (irrespective of 43 A)||Yes|
|Transaction 3||No – if approved u/s 43A||No|
The other provisions contained in Rule 15 which are also to be taken into account for the purpose of Valuation of Job-work Transactions are as under:
To conclude, the study of implications under GST law on the aspects related to valuation of job-work transactions is very crucial having regard to various issues raised above and wherever there is a scope for ambiguous situation, necessary clarification is required in the GST Act, in order to save the job work industry from possibility of litigation in future.
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