GST rate change on job-work services
With effect from October 1, 2019, the rate of GST on job-work services have been amended vide Notification No.20/2019-Central Tax (Rate) dated September 30, 2019 (‘Amendment Notification’). Through this update, we would like to apprise you the implications of this Amendment Notification.
After the last GST Council meeting, the Press Release dated September 20, 2019 mentioned that machine job-work (other than bus body building) will attract GST of 12 percent. There was an ambiguity on coverage of the expression ‘machine job-work’.
The Amendment Notification seems to have removed the ambiguity and has clarified that all job-work will attract GST of 12 percent other than the following:
– Bus-body building
– Printing of newspapers, books, journals etc.
– Job-work on textile products
– Tailoring services
– Manufacture of umbrella
– Manufacture of handicraft goods
– Job-work on precious stones
– Manufacture of leather goods or footwear
– Manufacture of food and food products
– Manufacture of clay bricks
Here, it is important to note that the Amendment Notification has kept clause (iv) of S. No. 26 of Notification No. 11/2017-Central Tax (Rate), dated June 28, 2017 (‘Service Rate Notification’) intact. The said clause covers manufacturing services on physical inputs (goods) owned by others (other than mentioned above) and attracts GST of 18 percent.
The definition of ‘job work’ under Section 2(68) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) covers treatment or process on other person’s goods and does not include or exclude manufacture. Moreover, ‘manufacture’ is defined, under Section 2(72) of the CGST Act, as processing of raw materials or inputs in any manner that results in emergence of new products having a distinct name, character and use.
In our view, the activity of manufacture also qualify as job work as the same involves treatment or process undertaken on other person’s goods. Hence, all job-work (except specified activities) will attract GST of 12 percent and S.No.26(iv) which is a residuary entry will not be relevant for such activities.
Here, it is important to note that the Authority for Advance Ruling (‘AAR’) in the case of JSW Energy Limited 2018-VIL-15-AAR (MAH) (affirmed vide 2018-VIL-01-AAAR), observed that the legislature has defined job-work and manufacture separately. Basis above, the legislature does not intend to cover a treatment or process resulting into a distinct commodity under the scope of job work. Basis this, the department may contend that the residuary entry should not become redundant, and the same will apply in case a new commodity comes into existence. Hence, the department may contend that the taxpayers should pay GST of 18 percent in such cases. In our view, such a contention is refutable for the reasons given above.
All job-work activities (whether resulting in manufacture or not) attract GST of 12 percent. However, if levy of higher GST rate is revenue neutral for supplier and recipient, taxpayers undertaking manufacturing activity (where a new commodity comes into existence) can opt to pay GST of 18 percent to avoid any dispute in future.
Post this amendment, the Service Rate Notification inter-alia provides the following GST rates:
– GST rate on job-work services – 12 percent;
– GST rate on manufacturing services on physical inputs (goods) owned by others, other than job-work – 18 percent (residuary entry)
Taxpayers were confused by the overlap between scope of the above entries and the coverage of the residuary entry. The CBIC has now clarified the scope of the entries vide Circular No. 126/45/2019-GST dated November 22, 2019 (‘Circular’).
The Circular clarifies that concessional rate of 12 percent is applicable to ‘job-work’, which as per Section 2(68) of the CGST Act requires the recipient of services to be a registered person. Therefore, the concessional GST of 12 percent is applicable where process or treatment is undertaken for a registered person and the residuary rate of 18 percent GST applies where such process or treatment is undertaken for an unregistered person.
The Circular distinguishes the two entries only based on the registration status of the service recipient. Therefore, any process or treatment (whether amounting to manufacture or not) on an unregistered person’s goods will be taxed at 18 percent GST whereas the same activity undertaken on a registered person’s goods will attract 12 percent GST.
The Circular has correctly interpreted the scope of the entries. Both entries fall under Heading 9988 which deals with ‘Manufacturing services on physical inputs owned by others’. The scope of this Heading as given under the Explanatory Notes, include outsourcing a portion of manufacturing process or the entire manufacturing process. Therefore, the scope of expression ‘job-work’ is synonymous with ‘manufacturing services’ irrespective of whether such activities amount to manufacture or not.
This interpretation runs contrary to the ruling of Authority for Advance Ruling (‘Authority’) in the case of JSW Energy Limited 2018-VIL-15-AAR (MAH) (affirmed vide 2018-VIL-01-AAAR) where the Authority considered the definition of the term ‘manufacture’ under the CGST Act (and not manufacturing services) and incorrectly created a distinction between job-work and manufacturing services. (Refer earlier update dated October 17, 2018).
Now, job-workers can charge GST at the rate of 12 percent for a registered recipient. For the period October 1, 2019 till date, if a job-worker has charged GST at the rate of 18 percent, the following options are available with the job-worker:
– If the principal manufacturer has availed full credit, no action needs to be taken for past; else
– Issuance of GST Credit Note to reduce liability and reversal of credit by the principal manufacturer