MARCH 07, 2017

By G Mani

Job work is an important activity prevailing for decades. In order to concentrate on core manufacturing technique most of the business houses outsource certain operations.

In this article I would like to discuss job work provisions under Draft Model GST Law and wherever required existing law has been compared for better clarity.

Meaning of Job work

Sec. 2(61) of Model GST Law defines job work as "undertaking any treatment or process by a person on goods belonging to another registered taxable person and the expression job worker shall be construed accordingly". This definition is wider than the definition given in present Central Excise Notification No.214/86–C.E. dated 23.03.1986

Here the important point to be noted is the principal must be a registered taxable person and there is no such condition for a job worker. Also the present concept of process not amounting to manufacture alone is a service is no more relevant. As per Para 3 of Schedule II to MGL "any treatment or process which is being applied to another person's goods" is a supply of service. In short there will be two supplies i) tax liability on principal as supply of goods (of course exempted) while sending goods &ii) tax liability on job workers as a service for doing processing on goods sent by principal.

Present and proposed GST Law

At present Rule 4(5)(a) of Cenvat Credit Rules permits sending of inputs & capital goods for job work without reversal of credit. Correspondingly, there is a provision in Central Excise Rules also viz. Rule 16A - sending inputs on job work basis after getting permission from the Principal Commissioner of Central Excise or Commissioner of Central Excise. Why there are two provisions for inputs? – Answer is Rule 4(5) (a) of Cenvat Credit Rules is for manufacturers/service providers covered under CENVAT credit chain and Rule 16A of Central Excise Rule is for manufactures not covered under CENVAT credit chain. This distinction has been clearly spelt in Para 1 of Part IV-Chapter 18 of CBEC's Central Excise Manual. The same distinction has been maintained in Sec.20 and Sec.55 of MGL with more relaxation.

While Sec.20 is for suppliers sending goods and/or services covered under ITC net, Sec.55 is for suppliers or goods/services not covered under ITC net. The present Rule 16A of Central Excise Rules mandates permission from Commissioner and such permission is not required as provided under Sec.55 of MGL and simple intimation suffices. Rule 16A permitted only inputs and the proposed Sec.55 permits inputs as well as capital goods. A welcome relaxation. Further Sec.20 does not mandate any intimation procedure for goods/services or supplies covered under ITC. Existing facility has been maintained.

A pertinent question that arises here is that the present Rule 16B and Rule 16C of CER which deal with sending semi-finished goods and finished goods for job work respectively are absent in Sec.55 of MGL. Also there is no provision for sending partially processed inputs under Sec.20 of MGL. Answer is that there is no requirement of such separate provisions as the term input as defined under Sec. 2(52) of MGL itself includes any goods other than capital goods used or intended to be used by a supplier in the course of furtherance of business. Processed inputs, semi-finished goods and finished goods are all covered under the term ‘input'. On this line, partially processed inputs, semi- finished goods can also be sent for job work under GST Regime.

Declaration of place of job work

With regard to incorporation of job work premises in registration certificate it is not required under Sec.20 whereas it is required under Sec.55. As per proviso to Sec. 55(1) the principal has to declare job worker's premises as place of business in his registration certificate and the same is not required if the job worker is already registered under Sec.23 or where the principal is engaged in certain specified supplies as may be notified by the Commissioner.

Sending all goods by principal

Is it required to send all the inputs and capital goods by the principal for job work? At present all main raw materials are to be sent by the principal and the job worker can use tools, machinery and consumable. In CST/VAT laws it is a well settled legal position that in consumable & machinery there is no transfer of property involved in goods. As GST being a new law, in the absence of judicial test on use of tools, machineries and consumable whether would result into transfer of property in goods or not is a question mark? Sec.20 specifically includes capital goods and consumables also which fall as inputs. Hence there is a need of clarity. Otherwise, there will be a clash between works contract service and activity carried out by a job worker.

Return of jobbed item

In GST, time limit for returning back the jobbed goods has been increased from 6 months to one year for inputs and 2 yrs. to 3 yrs. for capital goods. Non-return will be treated as a deemed supply as if it happened on the day of sending materials for job work. GST or IGST law, as the case may be, applies for payment of tax from the date of sending the material. Also interest is payable for the same. In the absence of GST Valuation Rules, we cannot conclude the transaction value now for this. On this front, there is a paradigm shift from the present procedure. At present, CENVAT credit has to be reversed for non-return without any payment of interest and the reversed credit can be taken as re-credit when jobbed goods are received subsequently. In GST scenario one has to pay tax and interest for goods not returned and in case job worker wants to return after the prescribed date, again he has to pay GST treating it as separate supply.

Transitional provision

In terms of Sec.175, 176 & 177, inputs, semi-finished goods & final products sent for job work under the earlier law if returned within six months or further period of two months as may be permitted from the date of GST implementation, there is no need of tax payment. For this,both principal and job worker have to make a declaration for the stock held as on the appointed day of GST. In case of non-return within six months, tax would be collected as arrears of tax under GST Law and the same cannot be taken as ITC- Ref. Sec.184.

Waste and Scrap

According to Sec. 55(5),waste and scrap generated may be supplied by the job worker directly on payment of tax if such job worker is registered. If job worker is not registered the principal is liable. More clarity than present provisions where it is not clearly spelt who is liable to pay tax. There is no similar provision in Sec.20 because in ITC taken cases return of processed item with waste/scrap is a must.

Direct clearance after jobbing

Jobbed items can be cleared directly from the place of job work premises on payment of tax within India or with or without payment of tax for export as provided under Sec.55 (1) (b) and Sec.20(3) subject to the condition of within one year. There is no permission is required for such direct clearance.

Accountability

For supplies made under Sec.55 the responsibility for accountability of the inputs and capital goods shall lie with the principal as provided under Clause (2) of said section.

Commercial Job work

There is a concept of commercial job work prevailing in business operation where principal and job worker follow payment of excise duty for the movements. This is on the point that for doing jobbing the job worker uses machineries, tools and consumables on which if they don't take tax credit it will be a big cost to them. To avail tax credit they go for registration and avail tax credit. Whether this can be done in GST? To my mind, it is yes because of changes made from First MGL to Revised MGL.

Proviso to Schedule I of First MGL provided that the supply of goods by a registered taxable person to a job worker in terms of Sec.43A shall not be treated as supply of goods. This has been deleted in Revised MGL making such movement as supply . As the movement has become supply, both the principal and the job worker can opt to pay GST for the movement, if they desire to do so.

Simplification in valuation

As explained most of the job work compliances have been simplified in the Model GST Law. However the major simplification lies in valuation of job work supply. We had experience of Supreme Court Judgment in Ujagar Prints v UOI – 2002-TIOL-03-SC-CX where in it has been clarified that the value has to be arrived on the cost of raw materials and job charges collected. Before this decision, there were a lot of interpretations/confusions around job work valuation.

Also to set right the issue Rule 10A had been specifically brought under Valuation Rules effective 01.04.2007. Still there are disputes on following Rule 10A or Rule 8 or Rule 11 of CEVR, 2000 in respect of direct clearance from job work premises. Taking clue of all these experiences, it is requested that the Government comes forward with a simplified and transparent provision in GST Valuation Rules.