GST India: Impact on Job Work:

Prevailing Indirect Tax Regime:

Job work refers to working on a good supplied by manufacturer/principal so as to complete a part of the manufacturing activity. The principal usually sends the raw material or semi-finished goods or components which is processed by job worker resulting in a further processed or finished product. Manufacturer may also send finished product to a job worker for assembly/packing. Ex: Welding, painting, electroplating, slitting, melting, galvanizing, powder coating, painting etc. Job worker may add minor materials to the goods supplied by principal to complete the job. If job worker buys the entire goods himself it amounts to manufacturing.

1.      Applicability of Central Excise:

Since excise is applicable on ‘manufacturing’ activity, job work does not attract Excise unless there is manufacturing of some parts or components as part of job work. The job worker does not charge excise and the goods are taken back by principal and used in the manufacture of excisable products. The principal is required to furnish declaration exempting the job work from excise applicability.

2.      Applicability of Service Tax:

Manufacture or production of goods is covered under the negative list of Service Tax and hence service tax is not applicable on job work. However, job worker is liable to charge and collect service tax from principal if the finished product is not dutiable (i.e ‘Nil rated’ or ‘Exempt’). The assessable value in this case would be cost of inputs supplied by principal + cost of inputs added by job worker + profit and labour charges of job worker.

3.      Applicability of CST/VAT:

For job works within state, VAT will not be applicable as there is no ‘sale’ but mere transfer of goods from principal against a declaration. In case of interstate job work the principal will send goods against a declaration and no CST is charged as it is not a sale. However, the job worker may charge CST on components if any added by him in the process. Job worker may bill separately for services (labour) with service tax and for components with CST. In case of a composite contract (works contract) both service tax and CST/VAT may be applied with appropriate rate of abatement as applicable.

Job work under GST:

Under GST, taxable event would be ‘supply of goods/service’ and not based on activities like ‘manufacture’, ‘sale’ or ‘provision of service’. Hence it requires redesigning of job work contracts so as to avoid the burden of GST on the job worker. When goods are supplied locally by principal to the job worker both CGST and SGST would be applicable and in case of interstate supply, IGST would be applicable. Job worker would be eligible to take credit of input GST and set-off against output GST resulting from him supplying the goods back to principal after applying tax.

The assessable value for charging output GST by Principal could be arrived at two methods. First method is by considering the cost of all the goods he is supplying to the job worker. The second method would be based on arriving of intrinsic value of goods supplied by comparing with price of similar goods in the market. The job worker may arrive at his assessable value by adding the job work charges (labour + material) to the price at which, principal has supplied the goods. In case of capital goods of high value job work may result in accumulation of credits with job worker (since value additional is low compared to cost of the capital good). Job worker will thus be compelled to obtain GST registration. Most of the declaration forms, Annexures prevalent currently for supply of goods not amounting to sale may be done away with. However, there could be a unique requirement with respect to recording of supply to job worker not amounting to sale or revenue. Only supply to end customer has to be recorded as sale or revenue to avoid artificial inflation of turnover and revenue. Even in the books of job worker this may lead to recording of high turnover and revenue which is not accurate.

(Views expressed are strictly personal)