OCTOBER 10, 2019

By Brijesh Kothary

IN the 37th GST Council meeting held on 20.09.2019,certain significant decisions were taken with regard to relaxation in annual return filing, deferment of new returns, ab-initio rescission of post-sale discount circular, change in the rate of tax on supply of various goods and services, etc. One such recommendation of the Council that the author intends to discuss in this article is the change in the rate of tax on supply of manufacturing service falling under Heading 9988, commercially referred to as the job work services under GST.

One of the Press Releases dated 20.09.2019 provided the following clarification regarding the change in the rate of tax on supply of job work services with effect from 01.10.2019, as recommended by the Council:

Job work service:

3.To reduce rate of GST from 5% to 1.5% on supply of job work services in relation to diamonds.

4.To reduce rate of GST from18%to 12% on supply of machine job work such as in engineering industry , except supply of job work in relation to bus body building which would remain at 18%.

A superficial reading of the above press release gave an impression that the Government intends to reduce the rate of tax on job work services relating to machine work in engineering industry to boost manufacturing sector, in line with the Taxation Laws (Amendment) Ordinance, 2019. What took everyone by surprise was the wordings of the Notification released on 30.09.2019, providing concessional rate of tax on supply of job work services. As a result, the industry is now curious and intends to know if all job work services are now taxable @ 12%?

Notification No. 20/2019-Central Tax (Rate) dated 30.09.2019 has brought about changes in the rate of tax on supply of certain services. Manufacturing services falling under Heading 9988 is one of such categories of service.By virtue of this amendment, a new entry 26 (id) has inter alia been inserted, providing concessional tax rate of 12% for supply of 'services by way of job work other than (i), (ia), (ib) and (ic) above'.

The principal notification (Notification No. 11/2017- Central Tax (Rate) dated 28.06.2019) already had a residual entry [no. 26(iv)] prescribing tax rate of 18% on supply of manufacturing services on physical inputs (goods) owned by others, other than those covered in the previous entries. This entry has also been amended to exclude the newly inserted entries (ib), (ic) and (id) from its ambit. The above entries, as amended, read as under:

It is pertinent to note that entry 26 (iv) excludes entry 26 (id) from its ambit; however, entry 26 (id) does not exclude entry 26 (iv) from its ambit. This leads to an inference that there are two residual entries under Heading 9988, prescribing different tax rates, making entry 26 (iv) redundant. It is therefore important to identify the difference between the two categories of service based on their description.

The scope of term 'manufacturing services' is provided in the Explanatory Notes to the Scheme of Classification of Services, under Heading 9988 as under:

9988 - Manufacturing services on physical inputs owned by others:

The services included under Heading 9988 are performed on physical inputs owned by units other than the units providing the service . As such, they are characterized as outsourced portions of a manufacturing process or a complete outsourced manufacturing process. Since this Heading covers manufacturing services, the output is not owned by the unit providing this service . Therefore, the value of the services in this Heading is based on the service fee paid, not the value of the goods manufactured.

The definition of "job work" under Section 2(68) of the CGST Act means any treatment or process undertaken by a person on goods belonging to another REGISTERED person . Also, Section 143(1) allows a REGISTERED person ( principal ) to send inputs or capital goods to a job worker without payment of tax. It is therefore clear that concept of job work under GST regime can be undertaken only when the principal is registered.

What therefore follows is that if the owner of goods is not registered, then the transaction would not fall under the purview of job work under GST laws. Nonetheless, the transaction qualifies to be in the nature of manufacturing services as discussed supra . This is a possible interpretation and intention of the GST Council, though the same is not imminent from the Press Release issued after the GST Council meeting.

Resultantly, the following scenarios can be drawn to determine the rate of tax on manufacturing services falling under entries 26 (id) and (iv) of the rate notification:

Based on the above table, it can be concluded that all the job work/manufacturing services provided by a job worker to a principal (registered person) would be taxable at the rate of 12% with effect from 01.10.2019. On the other hand, if the owner of goods is not registered under GST, then the services of the job worker would continue to be taxable at the rate of 18%.

In the alternative, if the intention of the GST Council was to amend the Notification as per the Press Release, then a Corrigendum needs to be issued at the earliest since the amendment has already come into effect from 01.10.2019.A clarification from the Board in this regard would be welcome.

(The author is Principal Associate, Lakshmikumaran & Sridharan, Bangalore and the views expressed are strictly personal.)