All you Need to Know about Job Work under GST

Last updated on September 1st, 2017 at 09:45 am

The manufacturing sector is the second largest contributor to our GDP. Many new initiatives taken by the Government in the form of Make-in-India, Invest India, Start Up India, and e-biz Mission Mode Project under the national e-governance plan are facilitating investment and ease of doing business in the country. Indian manufacturing companies in several sectors are targeting global markets and are becoming formidable global competitors.

Job work is an integral aspect of the manufacturing industry. Manufacturers usually outsource a portion of their activities to a third person. This turns out be cost-efficient and helps them to be more productive by focusing on their core activities. This process of outsourcing the whole or a part of an activity to a third person is called ‘Job work’. This activity can be at any stage in the manufacturing cycle and the goods sent for job work can be raw materials or semi-finished goods or capital goods. The manufacturer sending the goods for job work is generally referred to as the ‘Principal’ and the person performing the activity of job work is called the ‘job worker’.

Let us understand how job work is treated in the current tax regime and how it will be different in the GST regime.

Current Regime

Meaning

Job work means the processing or working upon of raw material or semi-finished goods supplied to a job worker, to complete a part or whole of a process, resulting in the manufacture or finishing of an article or any operation which is essential for the process. This implies that:

  1. The activity by the manufacturer should result in manufacture or completion of finished goods or should be an essential operation in the manufacturing process.
  2. Registration of the Principal is irrelevant. Even if the goods sent belong to an unregistered person, the activity is considered as job work.
Input Tax Credit

The principal is eligible for input tax credit on the inputs or capital goods sent for job work if they are received back within 180 days or 1 year respectively, of their being sent for job work.

Taxes applicable

If the activity amounts to manufacture, excise duty is liable to be paid by the job worker. However, on furnishing of a declaration by the principal, the job worker is exempted from excise duty.

If the activity does not amount to manufacture, service tax is applicable. However, a job worker is entitled to exemption from service tax.

Processing charges charged by job worker – Service tax is not applicable on the processing charges charged by a job worker.

Moulds and dies, jigs and fixtures or tools sent to a job worker – No tax is applicable on moulds and dies, jigs and fixtures or tools sent to a job worker.

Waste or scrap generated during job work – Any waste or scrap generated during job work can be supplied with payment of tax by the job worker directly from his place of business if he/she is registered, or by the principal, if the job worker is unregistered.

GST Regime

Meaning

Under GST, job work means any treatment or process undertaken by a person on goods belonging to another registered person. The change in the definition implies 2 things:

  1. Job work is defined in a broader perspective to include any treatment or process done by a job worker, irrespective of whether the activity results in manufacture or is an essential operation to complete the manufacturing process.
  2. The treatment or process undertaken by a job worker amounts to job work only when it is performed on goods belonging to a registered person. Hence, even if the goods are taxable but belong to an unregistered person, the activity is not considered as job work. This is a major change from the current regime, where the registration of the principal is irrelevant.
Input Tax Credit (ITC)

The principal is eligible for ITC on the inputs and capital goods sent for job work.

Taxes applicable

When inputs or capital goods are sent for job work

When inputs or capital goods are sent for job work, no tax is applicable. At the time of removing the goods for job work, the principal can issue a delivery challan. Here’s the sample format of delivery challan to be issued.

When inputs or capital goods sent for job work are brought back within 1 year or 3 years, respectively

When inputs or capital goods sent for job work are brought back to the principal’s place of business within 1 year or 3 years respectively, of their being sent for job work, no tax is applicable.

Example: Rajesh Apparels, a registered apparel manufacturer, sends 100 kurtas to a registered job worker, Ramesh Embroiders, on 1st August, ‘17, for embroidery work on the apparel. Ramesh Embroiders returns the kurtas to Rajesh Apparels on 10th October ’17 after completion of the embroidery work.

Here, no tax is applicable as the kurtas have been brought back to Rajesh Apparels’ place of business within 1 year of being sent.

When inputs or capital goods sent for job work are supplied from the job worker’s place within 1 year or 3 years respectively

When inputs or capital goods sent for job work are supplied from the job worker’s place of business within 1 year or 3 years respectively, tax is applicable if the supply is within India. If the supply is for export, no tax is applicable.

For supplying inputs or capital goods from the job worker’s place of business, the principal has to declare the job worker’s place of business as his additional place of business, unless-

  1. The job worker is registered OR
  2. The supply is of notified goods
Example: Rajesh Apparels sends 200 kurtas to Ramesh Embroiders on 15th September, ‘17 for embroidery work on the apparel. After the embroidery work, the kurtas are supplied from Ramesh Embroiders’ place of business in Tamil Nadu to a customer in Tamil Nadu on 25th December ’17.

Here, when the kurtas are supplied from Ramesh Embroiders’ place of business, Rajesh Apparels is liable to pay tax at the applicable rate.

When goods are supplied from the job worker’s place of business, even if the job worker is registered, the supply will be treated as supply by the Principal and the value of the goods will not be included in the job worker’s aggregate turnover.

When inputs or capital goods sent for job work are NOT brought back or supplied from the job worker’s place within 1 year or 3 years respectively

Example: Rajesh Apparels sends 150 kurtas to Ramesh Embroiders on 10th October, ‘17 for embroidery work on the apparel. The kurtas are not brought back to Rajesh Apparels’ place of business till 10th October ’18.

Here, the kurtas would be considered to have been supplied by Rajesh Apparels to Ramesh Embroiders on 10th October ’17 and Rajesh Apparels is liable to pay tax on the supply, along with interest.

When inputs sent for job work are not brought back or supplied from the job worker’s place of business within 1 year of their being sent for job work, or if capital goods sent for job work are not brought back or supplied from the job worker’s place of business within 3 years, they will be considered to have been supplied by the principal to the job worker on the day they were sent out. Hence, the Principal will be liable to pay tax on the supply, along with the interest due.

Note: The inputs or capital goods can be sent to the job worker without first bringing them to the principal’s place of business. In this case, the period of 1 year and 3 years respectively, will be counted from the date when the job worker receives the inputs or capital goods.

Processing charges charged by job worker

GST is applicable on processing charges charged by the job worker.

Example: Ramesh Embroiders charges Rs.10,000 for the job work order received in August ’17 from Rajesh Apparels.

Here, Ramesh Embroiders has to charge GST @ 5% (Rate applicable to textile job work charges) on the embroidery charges.

Moulds and dies, jigs and fixtures or tools sent for job work

No tax is applicable on moulds and dies, jigs and fixtures or tools sent to a job worker for job work.

Waste or scrap generated during job work

If any waste or scrap is generated during job work, it can be supplied by the job worker directly from his place of business by paying tax, if he/she is registered. If the job worker is not registered, the principal can supply the same by paying tax.

Conclusion

The tax treatment of job work under GST remains largely similar to the current regime. An important point to note is that the period within which inputs should be brought back or supplied from the job worker’s place is now 1 year instead of 180 days earlier. Similarly, the period within which capital goods should be brought back or supplied is now 3 years instead of 1 year earlier. Also, GST will now be levied on processing charges charged by the job worker.

For the manufacturing industry, these provisions are positive and in line with the Government’s all-out support for the sector.

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Pugal T & Anisha K Jose

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