MARCH 18, 2019

By K Srinivasan

MOVEMENT of goods to job-workers is an essential business situation that happens frequently. Movement of job-workers to the goods site is not uncommon either.

In turnkey projects of erection & commissioning of plant or a heavy-machinery or both in the construction of a factory of Production, movement of the latter is a common sight.

If one looks closely, both would appear very similar as they have several resemblances in common and the following are, to name a few of those major similarities between them;

1. They are essentially works contracts, where the material portion is owned by the principal and service portion is that of the sub contractors.

2. Whether the materials go the job worker or the job worker goes to material site, to be practical, is immaterial, anyone would appreciate.

3. There comes into play a certain element of notionality for convenience of assessment & taxation, like the insertion of certain assumptions in a mathematical equation.

There is another flip side to these transactions, importantly the Input Tax Credits (ITC) and the tax position that tends to change with the said movement of Goods, requiring specific focus.

This is in view of dependence of ITC on the aspect of usage of these Goods in the manufacture of final product and the accountability of return of these goods back to the factory of production / manufacture otherwise a due incorporation of the value addition, in the final goods sold by the manufacturer.

In the existing regime, the value addition by the job-worker is either taxable as manufacture or as taxable service, and in both cases, an exemption is granted to job worker.

In case the principal manufacturer pays the tax, it is always with appropriate addition in value he pays the tax which is invariably the practice in this scenario.

The concept of taxation of Goods sent to job worker was in vogue in central laws namely Central Excise & Service Tax while it was not in VAT laws.

The old VAT concept has been adopted more or less in GST and hence to expect many troubles of litigation all over again.

Sec 2(68) of CGST Act provides that 'job work' means any treatment or process undertaken by a person on goods belonging to another registered person and the expression 'Job Worker' shall be construed accordingly.

The above definition is much wider than the one given in Notification 214/86-C.Ex dated 23.03.1986 as amended, where job work has been defined in such a manner as to ensure that the activity of job work must amount to manufacture.

Thus, this new definition of job work appears clearly to reflect a basic change in the scheme of taxation relating to job work in the new regime.

To put it straight, it is more in line with VAT than the Central Excise laws and service tax. In fact, in Service Tax, if it (job work) amounts to manufacture, it is not a service.

Having defined it in the above-said manner, the new regime also proceeds to treat it as a manufacturing service on physical inputs (goods) owned by others under service code 9988.

Provisions have been made to treat material sent for job work as 'supply'. Hence GST would be payable on material sent for job work. But, this is not practically possible.

Therefore, Sec 143 of the CGST Act makes provisions for special procedure for removal of goods for job work without payment of tax.

The general GST rate prescribed for job-work as a manufacturing service under SAC 9988 is @18%.

The restitution of ownership of goods to the Contractee, in case of breach of contract, is automatic and instant without having to seek a special remedy outside the Indian Contract Act.

In view of the informal and loose organizational structure of job-workers and the consequent difficulty in fixing the tax liability on them in case of default , it was thought fit under the old regime to relieve them of the burden of tax and the same was cast on the contractee including value addition made by the job workers.

But unfortunately, under the new regime the job-work labor excluding the materials are treated as manufacturing service and brought to books as a supply with attendant tax liability.

While the innovation to wrap around them the tax liability to connect them to the main stream of taxable supply looks noble and good, the legal problems involved in the process are endless and causing rents in the fabric of taxation.

To cite an example, the following issue comes in handy;

ITC on coal was availed by M/s JSW Steels Limited. JSW Steels Limited sent the said ITC availed Coal to M/s JSW Energy Limited on job work basis, for the production of electricity and return of the same through a common grid, to be used in the production of Steel.

The said Job work resulted in the manufacture of electricity and the same was returned after job work by JSW Energy Limited to JSW Steels Limited.

Coal having been already consumed by the job worker, has lost its identity as a direct input for production of steel by M/s JSW Steel.

Electricity is both a non-taxable and an intermediary product for the production of Steel in the hands of the Contractee under GST.

Therefore the essential direct nexus mandated by the new GST, unlike the old Central Excise Law, between Coal and the use of it in the production of steel for ratifying the ITC availed by JSW Steels, became a question.

Thus, came the first obstacle in this manner, in the JSW steels case, as to whether the job work amounting to manufacture in the hands of the job-worker would entitle the contractee to take ITC on coal by an overarching nexus theory of connecting coal to ultimate manufacture of Steel albeit its use only in the production of electricity which in turn, is used for production of steel.

It was held by both the AAR/AAAR of Maharashtra that the ITC on coal availed by JSW Steels was ineligible, in the stated circumstances above. [Please see 2018-TIOL-15-AAR-GST & 2018-TIOL-01-AAAR-GST.]

This needs some over stretching of the limits of ITC, with time, which again is likely to trigger disputes beyond our comprehension at the nascent stage of a new tax like the GST.

Instead, it would be better to shift the burden of tax to the Contractee by exempting the job worker from any tax, so that the new challenges of dealing with an unorganized trade and blocking of ITC would be avoided by due recognition of Intermediary goods in the ITC chain.

Closely linked to job work is works contract where again materials supplied by the owner and the labor of the works contractor are brought together in an attempt to integrate the final outcome into a new genre of tax on works contract.

In this attempt, works contract again is defined as a composite supply of service despite a combination of goods, in predominance.

While it should be in fact a composite supply of goods going by the interpretative rule, it is chosen to call as a composite supply of service.

This artificial classification has already spilt over the plate unable to bear the tax load of 18% on the entire consideration of the works contract.

Therefore, the Government had to find a new room through a notification route to patch up the classification by letting the contract be sub-divided into goods and services in the proportion of 70:30. [Amending notification 24/2018-CTR dated 31.12.2018, Explanation inserted against Sr. no. 234 in the entry in column (3) refers]

This resembles a hot patch on a new tyre which is built to last a life time.

Will the government do something to view these two major aspects of GST namely job-work & works contract, in the light of past experience by assigning an unequivocal role to the Contractee and as also provide for a scientific basis for bifurcation of the contract into goods and services by a proven method and for an equitable dispensation in matters of ITC surrounding both job work and Works Contract.

(The author is Assistant Commissioner, GST, Chennai and a Master Trainer, GST. The views expressed are strictly personal.)