GST implications on waste and scrap retained by Job-Worker generated during job-work activity

by | Dec 17, 2021 | Outlook

We wish to apprise you about GST implications on waste and scrap retained by Job-Worker generated during job-work activity specifically valuation of job-worker’s services in such cases.

In a job-work arrangement, Principal sends inputs to Job-Worker for treatment or processing. Job-Worker returns processed inputs to Principal and raises invoice for job-work service. Sometimes, waste and scrap get generated during such job-work activity which may be returned back to Principal or retained by Job-Worker. GST law allows Job-Worker to sell retained waste and scrap on payment of applicable GST. In such cases, value of waste and scrap is generally factored in (reduced from total job-work charges).

Validity of supply of waste and scrap by Job-Worker on payment of GST

 Section 143(1) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) obligates Principal to bring back inputs or supplied from Job-Worker’s premises both within 1 year. Section 143(5) specifically permits Job-Worker to supply waste and scrap generated during job-work activity. Basis above, Principal need not bring back waste and scrap and Job-worker may supply such goods directly from its premises on payment of applicable GST.

NITYA Comments: Since GST authorities may question Principal regarding payment of GST on waste and scrap, Principal should consider obtaining declaration from Job-Worker that it has paid and will pay GST on waste and scrap.

Valuation of job-work service

Where value of job-work service is computed after considering (reducing) sale price of waste and scrap, job-work charges are not sole consideration for job-work service. Therefore, taxable value for job-work service shall be total of job-work charges and amount equivalent to non-monetary consideration i.e., value of waste and scrap (Refer Rule 27 of the Central Goods and Services Tax Rules, 2017). This can be explained with the help of following illustration:

Amount receivable by Job-Worker from Principal

Rs. 10,000

Value of waste and scrap generated at Job-Worker’s end and adjusted from job-work charges

Rs. 2,000

Taxable value of job-work service for payment of GST

Rs. 12,000

Accordingly, Job-Worker needs to charge GST on full value of job-work services provided by it i.e., Rs. 12,000 and Principal shall be eligible to avail Input Tax Credit thereof.

NITYA Comments: This view on valuation of job-work service was also affirmed by the Appellate Authority for Advance Ruling in case of Sri Kanakadurga Rice and Flour Mill, 2020-VIL-16-GSTAA (AP). On other hand, the Andhra Pradesh High Court in case of Shiridi Sainadh Industries v. Deputy Commissioner, 2020-VIL-591-AP held that value of by-products retained by Job-Worker will not be included in job-work charges for payment of GST. In our view, ruling of High Court is incorrect for aforesaid reasons.

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