Decoding GST: Job Work vs. Manufacturing Services

In this article, we will explore the concepts of job work and manufacturing services in the context of Goods and Services Tax (GST). Although these terms may seem similar, they are distinct concepts with different classifications and tax rates. Let’s dive into the details.

Under Goods and service tax act, the terms ‘job work’ and ‘manufacture’ have been separately defined under Section 2(68) and Section 2(72) respectively of the CGST Act, 2017.

Job work

• According to Section 2(68) of the CGST Act, 2017, “Job work means any treatment or processing undertaken by a person on goods belonging to another registered person and the expression ‘job worker’ shall be construed accordingly.”

• The person performing the treatment or processing on the goods belonging to other person is called ‘job worker’ while the registered person who owns the goods (input or capital goods) is called ‘principal’.

• Importantly, the ownership of the goods does not transfer to the job-worker but it rests with the principal.

In simple terms, only a registered person can send goods for job work. As per Paragraph 3 of Schedule II of the CGST Act, 2017, any treatment or processing applied to another person’s goods is considered a supply of services. Hence, job work is classified as a supply of service.

Manufacture

• The term “manufacture” is defined in Section 2(72) of the CGST Act, 2017 as processing of raw material or inputs in any manner that results in emergence of a new product having a distinct name, character and use and the term "manufacturer" shall be construed accordingly.

• The phrase “distinct Name, character & use” means that, the newly emerged product resulting from processing inputs or raw materials must have a different name, unique characteristics and distinct uses compared to the original input or raw material.

• To illustrate: For example, Amul processes milk to produce butter. The transformation from milk to butter constitutes manufacture because butter has a distinct name, character, and use compared to milk.

The four main characteristics of manufacture are:

1. Processing of raw materials or inputs.

2. The processing results in the emergence of a new product.

3. The new product has a distinct name, character, and use compared to the original material.

Thus, on satisfactory presence of all the four characteristics, we can call an activity as “Manufacture” and the performer of such activity as “Manufacturer”.

Further, Circular No. 126/45/2019-GST dated 22.11.2019 clarifies the scope of the notification entry at item (id), related to job work under heading 9988 of Notification No. 11/2017-Central Tax (Rate) inserted with effect from 01-10-2019 to implement the recommendation of the GST Council to reduce rate of GST on all job work services, which earlier attracted 18 % rate, to 12%. It has been stated that the entry at item (id) prescribes 12% GST rate for all services by way of job work. This makes the entry at item (iv) which covers “manufacturing services on physical inputs owned by others” with GST rate of 18%, redundant.

The relevant extract of Entry 26 of Notification No. 11/2017-Central Tax (Rate) dated 28-06-2017 specifying the rates for job work and manufacturing services is reproduced here as under:

Furthermore, Para 4 of the Circular states that there is a clear demarcation between scope of the entries at item (id) and item (iv). Entry at item (id) covers only job work services as defined in section 2 (68) of CGST Act, 2017, that is, services by way of treatment or processing undertaken by a person on goods belonging to another registered person. On the other hand, the entry at item (iv) specifically excludes the services covered by entry at item (id), and therefore, covers only such services which are carried out on physical inputs (goods) which are owned by persons other than those registered under the CGST Act.

Hence, a plain reading of the circular, it is ample clear that for the services to be classified as Job work, the goods must belong to any registered person. If such person is unregistered, it would amount to manufacture. Thus, the circular itself set the difference between the above two terms on the basis of whether the person who is supplying the goods is registered or not. Thus, under the GST regime, Job work includes manufacture.

By analyzing the definitions together along with the Circular, it becomes clear that for a supply to be considered job work, the principal, or owner of the goods, must be a registered person. Therefore, if a job worker carries out any treatment or process on goods owned by an unregistered person, it will not be classified as job work according to these definitions. The job worker is required to perform the processes specified by the principal, which can include outsourced tasks that may or may not lead to manufacturing. Consequently, materials sent for job work can be meant solely for processing or for complete manufacturing.

However, if such processing or treatment results in the creation of a new and distinct commodity, it is classified as manufacturing rather than job work. In other words, if a person processes raw materials or inputs belonging to another person who is registered under GST, this activity qualifies as job work. On the other hand, if the goods owner sending the goods for processing or treatment is not registered under GST, and the processing results in a new product, this activity is categorized as manufacturing services, not job work.

Conclusion

Here is a simplified summary of how the tax classification works:

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.