Job-work transactions under model GST law

In today's scenario, where the demand for goods and services is increasing at a rapid pace, a large number of industries as a part of their survival strategy are dependent on outside support for completing their manufacturing activities. Such activities are being undertaken by many small and medium scale industries to complete the process on raw material/semi-finished goods as desired by principal manufacturer and is known as "Job-Work". Job-work is otherwise also understood as the processing or working on goods supplied by the principal (i.e. the manufacturer) so as to complete a part or whole of the process. The principal usually sends the raw material or semi-finished goods or components which are processed by the job worker resulting in a further processed or finished product. The manufacturer may also send finished product to a job worker for assembling/packing. The term job-work has various synonyms in various industries – "job-work" or "sub-contracting" in engineering industry, "processing" in chemical or textile industry and "a loan licensee" in pharmaceutical industry, "contract manufacturing" in FMGC industry.

This being the commercial aspects of the entire transaction, the Indirect tax aspects broadly revolves around Central Excise Duty, Service tax and Value Added Tax/Central Sales Tax. The taxable events for all three taxes are different i.e. for Central Excise duty it is upon manufacture of goods, for Service tax it is rendition of service and for Value Added Tax/Central Sales Tax it is sale of goods.

Central Excise duty, being a duty leviable on manufacture of goods, the liability shall arise only in case of 'manufacture', in terms of the provisions of Central Excise Act, 1944, is taking place out of the activities undertaken by the job-worker. However, in case the principal files a declaration in terms Notification 214/86-CE (NT) dated March 25, 1986, exemption shall be available to the job-worker from payment of duty. Where the process undertaken by the job-worker does not amount to manufacture, service tax would be applicable on the said transaction. The payment of service tax by job-worker is exempted in terms of Notification No. 25/2012-ST dated June 20, 2012, provided the principal manufacturer makes payment of appropriate duty. Therefore, in order to determine the applicability of Central Excise duty and Service tax on the goods sent to job worker, various factors have to be kept in mind which includes the event of manufacture and payment of taxes by the principal manufacturer. There shall also arise applicability of Value Added Tax/Central Sales Tax on the sale of any goods by the principal manufacturer of goods to job-worker. Generally, the goods sent within/outside the State for job-work are not sold by the principal to the job worker. In the absence of any sale element, the goods are sent along with a declaration stating that the goods are sent on job-work. Therefore, where the goods are sold and not just transferred for job-work, Value Added Tax/Central Sales Tax liability shall be applicable.

With so many taxable events and various checks as regards applicability of Central Excise duty, Service tax and Value Added Tax/Central Sales Tax on the same transaction, Goods and Services Tax (GST) aims align the yardstick for determining the taxable event and thereby, levy single tax on such transaction. The amendments brought in the Constitution of India vide 122^ndConstitution Amendment Bill which proposes to introduce GST as a uniform levy on supply of all goods and services across the country. Under GST, taxable event would be 'supply of goods/service' and not activities like 'manufacture', 'sale' or 'provision of service'. The question in this regard that was being apprehended by the industry is that how would the job-work industry be impacted inasmuch as the applicability of GST is concerned. There was hue and cry among the industry on the applicability of GST on job-work transactions till the time model GST law was made online for public comments.