[vc_row][vc_column][vc_column_text]If you are outsourcing some of your manufacturing work, here’s how GST will bring significant changes for you.
Every manufacturer in the country – big or small, tends to do some part of their manufacturing in-house and the rest outsourced to others. This allows manufacturers to focus on their core competencies and also cut down on their capital expenditure. With GST expected to be implemented by July 1, 2017, here’s an expert view on the key changes and impact on such job-work process post-GST.
Impact of change in definition of job work: Generally, job work refers to outsourcing whole or a part of an activity to a
third person. It involves sending of raw material/semi-finished goods by a principal manufacturer to job worker with specific instructions to complete the required process.
The tax implications under current regime: Under Central Excise, job work means processing or working upon of raw material or semi-finished goods supplied to the worker, so as to complete a part or whole of the process resulting in the manufacture or finishing of an article or any operation which is essential for the process. This implies that goods should be sent to job-worker and activity done by job-worker should result in completion of finished goods or it should be an essential operation required for completion of finished goods.
Tax implications under GST: Job work refers to any treatment or process undertaken by a person on goods belonging to another registered person. It is defined in broader perspective to include all activities or process done by the worker irrespective of whether the activities results in manufacturing of finished goods or an essential operation to complete the process.
Secondly, under GST, the goods on which any treatment or process is undertaken by worker should belong to registered taxable person. It implies, even if the goods are taxable, but belongs to unregistered person; this activity cannot be considered as job work. This is a major change as compared to the definition of existing central excise in which the status of principal manufacturer was irrelevant.
The simpler definition under GST aims at removing the age old ambiguities involved in determining job work.
Applicability of taxes under current regime: Excise duty is applicable on job work since the activity amounts to manufacturing. However, on furnishing of certain declaration by the principal, job worker is exempted from excise duty. If job work does not amount to manufacturing, then the worker would be liable for service tax – again, under certain provisions of service tax.
Under GST: In GST, supply being the taxable event, the concept of manufacturing becomes irrelevant and it becomes very important to know whether the supply of goods for job work is taxable. The goods can be supplied to job worker without payment tax provided if the goods are brought back to any of principal’s place of business from the place of job worker within one year from the date of being sent to job worker. In case of capital goods, the time period is three years.
The principal also has an option to supply the goods from the place of job worker on payment of tax, if supply is in India and without payment of tax, in case of exports. However, this is permitted only if the principal has declared job workers place of business as principal’s additional place of business. This declaration is not required, if job worker is registered and for certain goods as notified by the commissioner.
Secondly, the process of job work is classified as Supply of Service and GST will be applicable to the extent of processing charges charged by the job worker. This is good news for workers, since it removes the complexity to distinguish between the labour and material cost, especially in case of composite billing.
Transition to GST: In order to return the inputs or goods without payment of tax within six months, both the principal and worker has to declare the details of stock held by worker on the date of implementation of GST. Thus, the worker needs to maintain the details of stock according to the principal manufacturer-wise, such that details, as required, can be declared and avoid tax burden on principal manufacturer.
Conclusion: For worker, the introduction of GST in India will provide an extra cushion on which the business can ride smoothly. With simpler and wider definition of GST, the litigation on the determination of job work process will be eliminated to a large extent. Secondly, the exclusive classification of job work as Supply of Service will remove the burden imposed by the existing the indirect tax structure.[/vc_column_text][/vc_column][/vc_row]
