JOB WORK AND JOB WORKER UNDER GST REGIME (PART-2)

[Dr. Sanjiv Agarwal]

Liability under existing Taxation Regime

1. Where process amount to manufacture:

• If the process undertaken by the job worker amounts to manufacture/ deemed manufacture as per the definition, the job worker would be liable to pay a duty of excise on the goods so manufactured.
• Alternatively, the principal manufacturer who has supplied the goods for job work may furnish a declaration under Notification No. 214/86 dated 25.03.1986 (which exempts goods manufactured by a job worker from the duty of excise) based on which job worker would not be required to charge duty of excise.
• The goods must be used in the manufacturing process by the principal manufacturer which should result in a dutiable product being manufactured on which duty of excise is being charged.
• The activity undertaken by job worker would not be liable to service tax also as any process amounting to manufacture or production of goods is covered by Entry No. 30 of the Notification No. 25/2012-ST dated 20.06.2012 w.e.f. 31.03.2017.(Earlier it was specified in negative list).

2. Where  process does not amount to manufacture:

• Where the processing is undertaken by the job worker does not amount to manufacture, the said job worker could be liable to service tax. But before determining the same, one need to examine the exemption provided in Notification No. 25/2012 ST 20.06.2012.
• As per the said Notification, job work in relation to any goods on which appropriate duty is payable by the principal manufacturer is exempted.
• Appropriate duty means “duty payable on manufacture or production under a Central Act or a State Act but shall not include ‘Nil’ rate of duty or duty wholly exempt”. It means that if the duty is charged on final product by principal manufacturer, there is no liability on job worker to charge service tax.
• On the contrary, if appropriate duty is not paid by the principal manufacturer, the job worker would be liable to charge service tax.

Valuation

The value of supply of goods or services in a case where the consideration is wholly in money, transaction value shall be considered for payment of tax, with various inclusions prescribed in the valuation provisions.

Certain inclusions in the valuation are as follows:

(i)     Any taxes, duties, cesses, fees and charges levied under any statute, other than SGST/UTGST/CGST/IGST.

(ii)    Any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the services.

(iii)   Incidental expenses.

(iv)   Interest or late fee or penalty for late payment of any consideration of supply.

(v)    Subsidies directly linked to the price excluding subsidies provided by the Central and State Governments.

However, transaction value will exclude discount, if any. Post-supply discounts will not be included in the transaction value if it is established as per the agreement and is known at, or before or after the supply.

Accordingly, the value of 'supply' shall not include any discount that is given:

(i)     Before/ at the time of supply: Single condition

• Discount is duly recorded in the invoice.

(ii)    After the supply: Cumulative conditions:

• Agreement establishing discount entered into before/at the time of supply.
• Discount specifically linked to relevant invoices.
• ITC reversed by the recipient to the extent of discount.

In case of job work, it could be possible that the raw material supplier will supply goods at intrinsic value as he will be not selling the same to the job worker. He will charge the GST on the intrinsic value and in return, the job worker will charge GST on the value of goods supplied along with its charges (Processing charges plus raw materials). Therefore, valuation of supply shall be carried out after considering nature of the contract and the factors involved in the transaction.

Valuation Rules

• Value of supply of goods or services where the consideration is not wholly in money, value of supply shall-

1. be the open market value of such supply,
2. if the open market value is not available, be the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money if such amount is known at the time of supply,
3. if the value of supply is not determinable under clause (a) or clause (b), be the value of supply of goods or services or both of like kind and quality;
4. if the value is not determinable under clause (a) or clause (b) or clause (c), be the sum total of consideration in money and such further amount of money that is equivalent to consideration not in money.

• The value of the supply of goods or services or both between distinct persons or where the supplier and recipient are related, other than where the supply is made through an agent, shall,-

1. be the open market value of such supply,
2. if the open market value is not available, be the value of supply of goods or services of like kind and quality;
3. if the value is not determinable under clause (a) or (b), be the value as determined by application of rule 4 (value of supply of goods or services or both based on cost) or rule 5 (Residual method for determination of the value of supply of goods or services or both).

• The value of taxable services provided by such class of service providers as may be notified by the Government on the recommendations of the Council as referred to in Entry 2 of Schedule I (transactions between related and distinct persons) between distinct persons, other than those where input tax credit is not available shall be deemed to be NIL.

Input Tax Credit

Every registered person shall be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person. Credit will be allowed to the registered person subject to satisfaction of following conditions-

1. he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax-paying documents as may be prescribed.

2. he has received the goods or services or both. However, in the case of job work, the principal shall be entitled to take credit of input tax on inputs or capital goods even if the inputs or capital goods are directly sent to a job worker for job-work without being first brought to his place of business.

3. the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilization of input tax credit admissible in respect of the said supply, and

4. he has furnished the return under section 39, i.e., combined return of outward and inward supplies which is to be filed on 20^th of following month.

Accordingly, the principal shall be allowed input tax credit on inputs or capital goods sent to a job-worker for job-work on the satisfaction of aforesaid conditions.

It is important to note that where the inputs or capital goods sent for job work are not received back by the principal within a period of one or three year(s) of being sent out, it shall be deemed that such inputs or capital goods had been supplied by the principal to the job worker on the day when the said inputs or capital goods were sent out. Further, where the inputs or capital goods are sent directly to a job worker, the period of one or three year(s) shall be counted from the date of receipt of inputs or capital goods by the job worker.

Conditions and Restrictions in respect of Inputs and Capital Goods sent to the Job worker

Following conditions must be noted in terms of section 19 of the CGST Act, 2017 and rules there under:

1. The inputs or capital goods shall be sent to the job worker under the cover of a challan issued by the principal, including where the inputs or capital goods are sent directly to job worker.

2. The challan issued by the principal to the job worker shall contain the details specified in rule Invoice 8, as under-
   1. date and number of the delivery challan,
   2. name, address, and GSTIN of the consigner, if registered,
   3. name, address, and GSTIN or UIN of the consignee, if registered,
   4. HSN code and description of goods,
   5. quantity (provisional, where the exact quantity being supplied is not known),
   6. taxable value,
   7. tax rate and tax amount – CGST, SGST/UTGST, IGST or cess, where the transportation is for supply to the consignee,
   8. place of supply, in the case of inter-State movement, and
   9. signature.

3. The details of challans in respect of goods dispatched to a job worker or received from a job worker during a tax period shall be included in FORM GSTR-1 furnished for that period.

4. If the inputs or capital goods are not returned to the principal within the time stipulated in section 143 i.e., one or three year(s), the challan issued under sub-rule (1) [i.e., point (a)] shall be deemed to be an invoice for the purposes of GST Act.

5. ‘Capital goods’ shall include ‘plant and machinery’ as defined in the Explanation to section 17, as ‘plant and machinery’ means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes-

1. land, building or any other civil structures,
2. telecommunication towers, and
3. pipelines laid outside the factory premises.

Reconciliation of Inward and Outward Supplies (Matching Concept)

If there is a mismatch between the details of outward supplies uploaded on the GST Network (GSTN) by vendors and the inward supplies uploaded by the recipient, such mismatches will be communicated to the recipient.

If the mismatch is not rectified by the vendor in the month of communication, the recipient will be liable to pay the differential GST along with interest in the subsequent month. This provision places the liability for non-compliance on the recipient, i.e., job worker, as against their vendors.

Similar provisions have been prescribed wherein details of credit notes issued by a supplier have to match with the corresponding reduction of input tax credit claimed by the recipient. Accordingly, if the recipient does not adjust the input tax credit, the tax and interest would be recovered from the supplier. This provision places liability on tax-payers for non-compliance by vendors.

Input Service Distributor (ISD) Concept

As in the present Cenvat Credit Rules, ISD concept is proposed for transfer of credit of input services between two or more locations. ISD can transfer credit of all types of GST (CSGT, SGST/UTGST or IGST). Considering the possibility of multiple registrations State-wise, ISD could be used as a tool to ensure optimal utilization of head office-related input tax credits (of input services), resulting in an effective reduction in cost.

Transitional Credits

To transfer and carry forward the existing credits in the GST regime, a condition has been stipulated that such credit must have been admissible in the GST regime. Therefore, following points need to be borne in mind:

• Credits of Service Tax must be properly reflected in the last service tax returns filed before appointed day and documentation must be in place to establish the same.
• Credit pertaining to inputs in stock at the appointed day can also be availed.
• All due credits in the existing regime must be availed as un-availed credit can not be claimed in GST regime.
• Balance of capital goods credit can be taken in GST regime
• A manufacturer who is not availing the credit of excise duty and CVD may need to ascertain the value of the stock as on the appointed day and based on the availability of the invoice, accordingly credit can be availed.
• If a manufacturer is not availing the credit of VAT currently due to restriction in the state VAT law or due to being in the composition scheme, then the credit can be availed based on the ascertainment of stock as on appointed day.
• However, if the credit of VAT is being currently availed, the same should be properly reflected in the last VAT/Service Tax returns to transfer such credits to the GST regime.
• The principal might have sent inputs, semi-finished goods and finish goods outside before appointed date (as of now it is 1^st of July, 2017) for job work or testing. If these are received back before 6 months (i.e., 31^st December 2017), GST will not be payable.

Specific Issues

Treatment of Scrap / Waste

The waste and scrap generated during the job work can be supplied by the job worker directly from his place of business, on payment of tax, if he is registered. If he is not registered, the same would be supplied by the principal on payment of tax.

Intermediate Goods

The term inputs, for the purpose of job work, includes intermediate goods arising from any treatment or process carried out on the inputs by the principal or job worker.

Records for Job works

It is completely the responsibility of the principal to maintain proper accounts of job work related inputs and capital goods.

Applicability of Provisions

The provisions relating to job work are applicable only when registered taxable person intends to send taxable goods. In other words, these provisions are not applicable to exempted or non-taxable goods or when the sender is a person other than registered taxable person.

It is not compulsory that job work provisions should be followed by the principal. The principal can send the inputs or capital goods after payment of GST without following the special procedure. In such a case, the job-worker would take the input tax credit and supply back the processed goods (after completion of job-work) on payment of GST.

Steps to be taken by Job worker

Job workers are required to understand the provisions of GST laws in the light of what has been discussed in this Chapter. They may have to take following steps.

• Review of existing contracts as to –

(i)    Processing structures and timings of completion of work

(ii)   Valuation of processed goods

(iii)  Respective obligations

(iv)   FOC supplies

(v)    Reverse charge mechanism

(vi)   Tax implications

• Supplementary agreements/new contracts may be entered into for job work activities.
• To decide on having or not having two separate contracts for the supply of goods and services.
• To decide on having multiple supply locations/closing some of them.
• Review of procurement policy.
• Change in invoicing pattern.
• Working capital management.

• Treatment of security deposits other deductions.
• Accounting aspects.
• Training of personnel.

Concluded

The job worker should be aware of the provisions under goods and services tax as applicable to them so that they will not face any kind of problem in future from Department/principal manufacturer. Job workers may be required to restructure their contracts/agreements in view of the GST provisions as applicable to them.

Discussions to this article

[Pankaj Gupta]

Dear Sir, you have explained extremely well. but I foresee here a problem for jobworkers like me.

I am doing jobwork for a bearing company where they supply their material and we do machining and give them back. Currently we only raise a jobwork invoice and get payment without any payment of taxes.

however we have to purchase lot of items used in manufacturing like capital goods, grinding wheels, hardware, cutting tools and pay VAT, or excise or CST and in future will continue to pay GST. Currently we loose the input credit on all these taxes.

if in future we continue to invoice to jobwork provider without GST, how we will get the input credit on GST paid for our manufacturing activities as a job worker conductor,

kindly advise and help the GST council to solve it. My view is that We should be also allowed to levy the GST on the jonbwork charge invoice and let the jobwork provider take the input credit,

kindly help to advise us in this matter whether our undeersstanig is correct or not,

best regards

Pankaj Gupta

9414075879

[V Inamdar]

Dear Sir,

Although you have suggested that principal need not to follow special job work procedure, instead he should sed inputs on payment of GST to job worker and in-turn after processing of goods job worker will return the goods on payment of GST.

Though logically the above suggestion / clarification made by Government in FAQ - answer to Q-15 of Chapter 9, is correct, but it is not backed by provisions of GST.

For example, the above is not fitting into the definition of term "supply" read with Sch.1 and 2 of CGST.

Can you please through light on this?

V.Inamdar

Mobile 9769005102

[HARSH DABRIWAL]

Dear Sir

I am doing job work of embroidery for my clients which is taxable under GST @ 5% under sac code-9988.

In my working of job work the input goods (Textile Fabric) are supplied by the principal to do embroidery work on it and only a challan is issued by the principal without any value of goods. But as a job worker I too have to purchase some of the additional materials needed for doing the job work such as Threads, Imitation zari and Non woven fabrics which are taxable under GST @ 18%, 12% and 12% respectively. These materials are not supplied by the principal and I purchase it on my own paying the GST applicable on it.

Please suggest whether the Input credit of the GST paid by me against these materials purchased for doing the job work will be available to me against the GST charged @ 5% on bill of Service Charges raised by me in name of the principal.

If I obtain GST registration please suggest under which service accounting code shall I take the registration as the new SAC codes are still not available in the GST registration portal.

Kindly help us on the above two issues raised.

Best Regards

Harsh Dabriwal

9883218088