JOB WORK UNDER CGST ACT 2017 | CA. Ganesh V. Shandage, Belagavi.

JOB WORK UNDER CGST ACT 2017

By CA. Ganesh V. Shandage, Belagavi.

Prelude:

Job work is very common in the industry. A large number of manufacturing industries like automotive industries are dependent on outside support for completing their manufacturing activities.  These large manufacturing companies these days stick to their core competencies and get most of other jobs outsourced to job workers who are mostly small scale industries enjoying exemption from registration under Central Excise Act. The alternate terms used interchangeably to describe job work are sub-contracting, loan licensing, labor charges, etc.

Currently the entire chain of job work activities right from sending the material to job worker until the receipt of processed materials from the job worker, is exempt from both Central excise and Service tax under notifications 214/86 of Central Excise and 25/12 of Service tax mega exemption respectively.

The term ‘Supply’ as defined u/s 7 (1) CGST Act 2017 inter-alia includes literally all forms of supplies made for a consideration by a person in the course or furtherance of business.  It is pertinent to note that, goods sent for job work generally do not involve any consideration to be received from the job worker and therefore it would fail to satisfy the definition of Supply and thus not liable to pay GST. However, section 143 provides for procedures to be followed and only on contravention of those procedures, sending of such goods to job worker could be deemed as Supply liable to pay GST. Otherwise sending of goods to Job worker is not a supply. Section 19 provides for conditions for availing input tax credit in respect of goods sent for job work.

 

Definition:

Job work means any treatment or process undertaken by a person on the goods belonging to another registered person and the expression Job worker shall be construed accordingly – u/s 2 (68).

In terms of paragraph 3 of schedule II to CGST Act 2017, any treatment or process is deemed as ‘Supply of Service’. Hence any treatment or process carried out by a job worker ( whether registered or unregistered) is deemed as supply of Service liable for payment of GST on the job work charges or labour charges subject to fulfilment of minimum gross turnover criteria of Rs. 20 Lakhs (Rs. 10 Lakhs for eastern states). It would be deemed as the supply of Service notwithstanding some materials, consumables, etc. are being used and deployed by the job worker on his own account while performing such treatment or process on the principal inputs and/or capital goods received from the Principal.

The person sending goods for job work is termed as ‘Principal’ who is registered. The term ‘Principal’ used with reference to job work is different from the term ‘Principal’ as defined u/s 2 (88).

It is also imperative to note that such goods sent to job worker are belonging to a registered Principal. Hence any unregistered person sending goods for job work would be outside the ambit of GST provisions.

 

Job work procedures – u/s 143:

  • A registered person, who is termed as Principal, may by giving an intimation to the department and subject to such conditions as may be prescribed, send any inputs and/or capital goods without payment of tax to a job worker for job work and from there subsequently, send to another job worker and likewise.
  • Such inputs and/or capital goods are to be sent to the job worker under the cover of a challan issued by the Principal including where the inputs and/or capital goods are sent directly from the supplier to job worker. The challan should contain all the details specified in GST rules related to Invoice.

As per Model GST law of June 2016, taking prior permission from the department was a requirement before sending the inputs and/or capital goods to a job worker for job work. This requirement was against the spirit of ease of doing business and the Government after realizing the same has replaced this with the new requirement of mere intimating  by e-mail mode now.. This is really a welcome change in the final law.

Inputs sent to job worker for job work would also include intermediate goods arising from any treatment or process carried out on the inputs by the Principal or the job worker.

The inputs and/or capital goods can be sent to job worker either from the place of business of the Principal or can be sent directly from the place of the supplier of those inputs and/or capital goods without the necessity of first bringing them to the place of business of principal.

The Principal may also send the inputs and/or capital goods as an inter-unit transfer to a different registered person within the same legal entity and PAN. As per section 7(1)(c) read with the schedule I, the act of sending such inputs and/or capital goods to a related party is deemed as Supply even without any consideration. However, section 143 allows sending of inputs and/or capital goods to job worker for job work without payment of tax. This  specific provision relating to job work activities should prevail over general provisions contained in section 7 (1)(c) read with the schedule I as referred above and therefore such inter-unit transfers should not be liable for tax if sent for job work.

  • The inputs and/or capital goods sent to job worker for job work shall:
    • In the case of inputs, bring back such inputs after completion of job work or otherwise, within one year from their being sent out, to any of the places of business of Principal without payment of tax, or
    • In the case of inputs, supply such inputs after completion of job work or otherwise, within one year from their being sent out, from the place of business of job worker on payment of tax within India, or with or without payment of taxes for exports, or
    • In the case of capital goods other than moulds & dies, jigs & fixtures or tools, bring back such capital goods within 3 years from their being sent out, to any of place of business of Principal without payment tax, or
    • In the case of capital goods other than moulds & dies, jigs & fixtures or tools, supply such capital goods within 3 years from their being sent out, from the place of business of job worker on payment of tax within India, or with or without payment of tax for exports.

In case the inputs are to be brought back, it is not necessary that such inputs have successfully gone through the job work process. Even unprocessed or partially processed inputs could also be brought back.

Further, the inputs and /or capital goods could be brought back to any of the places of business of the Principal. It is not a requirement that the inputs and/or capital goods are returned to the source of the place from where those were originally sent to job worker for job work. Also, there is absolute no time restriction applicable for bringing back the moulds & dies, jigs & fixtures or tools.

  • In order to supply the inputs and/or capital goods from the place of business of job worker, such job worker should be a registered person, or such Principal is engaged in the supply of notified goods. Otherwise, the Principal should declare the place of business of the job worker as his additional place of business and the same is to be mentioned in his registration certificate.
  • In case such inputs and/or capital goods were not brought back or not supplied within 1 year or 3 years of their being sent out respectively, it shall be deemed that such inputs and/or capital goods had been supplied by the Principal to the job worker on the day when the said inputs and/or capital goods were sent out and challan issued at the time despatch shall be deemed to be an Invoice. The Principal will be required to discharge the tax liability on this supply along with interest u/s 50 (1).
  • The responsibility of accountability of inputs and/or capital goods sent to the job worker for job work shall lie with the Principal. The details of the challan in respect of inputs and/or capital goods despatched to, or received from, the job worker during the tax period shall be included in FORM GSTR1 return.
  • Any scrap or waste generated at the place of business of job worker, in case the job worker is a registered person, he should supply those directly from his place of business on payment of tax. In case the job worker is not registered, the Principal shall supply such scrap or waste on payment of tax. 

Input tax credit – u/s 19 & 17 (5)(h):

  • The Principal shall be entitled to take input tax credit on the inputs and/or capital goods which are either sent by him or sent directly by the supplier without first being brought to his place of business.
  • In case such inputs and/or capital goods are either not brought back or supplied from the place of business of job worker in accordance with provision of section 143 within 1 year or 3 years as the case may be, it shall be deemed that such inputs had been supplied by the principal to the job worker on the day when they were sent out.
  • In case such inputs and/or capital goods are directly sent by the supplier, then the period of 1 year or 3 years as the case may be counted from the date of receipt of such inputs and/or capital goods by the job worker.
  • In case the inputs and/or capital goods sent at the job worker’s place of business are either lost, stolen, destroyed, written off or disposed of by way gift or free samples, the corresponding input tax credit availed shall be reversed by the Principal ( u/s 17(5)(h) ).

Job work charges – u/s 7 (1):

  • As per section 7(1)(a), 7(1)(d) read with paragraph 3 of schedule II, any treatment or process undertaken is deemed as ‘Supply of Service’. Hence the job worker is liable to pay tax on the labour charges applicable in relation to the supply of such services. It is ‘Supply of Service’ despite the fact that some part of the labour charges could also be attributable towards minor inputs or components or consumables used by the job worker on own account while performing job work process.

Transition provisions – Section 141:

  • Inputs: The inputs received at the place of business were removed as such or removed after being partially processed to a job worker for further processing, testing, repair, reconditioning or any other purpose in accordance with the provisions of existing law prior to the appointed day.
  • Semi-finished goods: The semi-finished goods were removed from the place of business for carrying out certain manufacturing processes in accordance with provisions of existing law prior to the appointed day.
  • Finished goods: The excisable goods manufactured at a place of business had been removed without payment of duty for carrying out tests or any other process not amounting to manufacture in accordance with existing law prior to the appointed day.

In all the above 3 cases, no tax shall be payable if such inputs, semi-finished goods, and finished goods, after completion of job work or otherwise, are returned to the place of business of Principal within 6 months from the appointed day with further 2 months possible extension. To illustrate, the Principal might have sent inputs, semi-finished goods and finished goods outside before 1-7-2017 (Assuming this is appointed day) for job work, testing, etc. If these are received back before 31-12-2017, GST will not be payable. Else GST is payable.

The semi-finished goods and finished goods may also be supplied within 6 months with the further possible extension of 2 months from the place of job worker on payment of tax in India, or with or without payment of tax for exports.

In the event that such inputs, semi-finished goods, and finished goods are not returned within 6 months with further possible extension of 2 months from the appointed day, the input tax credit availed at the time of migration to GST shall be recovered as arrears of tax under clause (a) of section 142 (8).

The manufacturer and the job worker shall provide a declaration containing details of the goods held in stock by the job worker on behalf of the manufacturer on the appointed day in such form and time frame as may be prescribed by rules.

  • Capital goods: Surprisingly, no transition provisions have been made in relation to capital goods which have been sent to job worker prior to the appointed day. Hence it seems that no input tax credit on capital goods sent to job workers place of business would be allowed to be migrated to GST regime.

 Returns:

  • The Principal to furnish details of challans in respect inputs and/or capital goods despatched to, or received from, the job worker during the tax period in FORM GSTR1 return being filed by the 10th day of succeeding month.
  • Similarly, Job worker to furnish details of supply of services provided in the FORM GSTR1 return being filed by the 10th day of succeeding month.

Advantages:

  • Reduced working capital blockage as input tax credit is availed on the inputs and/or capital goods sent for job work. Also, such inputs and/or capital goods are sent for job work without payment of tax.
  • Reduction in input tax related compliances and disputes. Input tax credit calls for stringent compliance procedures and therefore one should brace for disputes in relation to input tax credit with the department. As no taxes are payable in the flow of inputs and/or capital goods in job work process, to that extent there will be a reduced burden of compliances and documentations as required in the normal case.
  • Direct supply to the customer. The job work provisions provide for the supply of inputs and/or capital goods to the customers directly from job workers place of business. This saves the operational and logistical costs involved in bringing those inputs and/or capital goods back to the place of business of Principal before supplying to the customers.

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