GST Updates

Reduction in Tax Rate on services by way of “Job Work” from 18% to 12%-37th GST Council Meeting-Scope of the Amendment and Interpreting “Look alike” Entry 26(id) and 26(iv) of Notification No. 11/2017-Central Tax Rate

Reduction in Tax Rate on services by way of “Job Work” from 18% to 12%-37th GST Council Meeting-Scope of the Amendment and Interpreting “Look alike” Entry 26(id) and 26(iv) of Notification No. 11/2017-Central Tax Rate

 

CA Arpit Haldia

 

There has been lot of confusion since the amendment and what is scope of entry 26(id) and 26(iv) and how they need to be interpreted. The article tries to decipher the controversy in view of the intention of the legislature dating back 28th June 2017 and subsequent amendments to Entry 26. Let’s try to take a deeper look to the entry and make sense through the intention of the legislature.

 

  1. Overview to Entry No. 26-9988- Manufacturing services on physical inputs (goods) owned by others

Entry No. 26 of Notification no. 11/2017-Central Tax Rate Dated 28th June 2017 (as amended from time to time) provides tax rate on HSN-9988-Manufacturing services on physical inputs (goods) owned by others. GST Council in its 37th Meeting held on 20th September, 2019 recommended reduction of rate of GST from 18% to 12% on supply of machine job work such as in engineering industry, except supply of job work in relation to bus body building which would remain at 18%.

 

  1. Insertion of New Entry 26(id) vide Notification No. 20/2019-Central Tax Rate Dated 30th September 2019

Notification No. 20/2019-Central Tax (Rate) Dated 30th September 2019, amended Entry No. 26 and inserted following entries in relation to the above proposed amendment.

 

ParticularsRate
“(ib) Services by way of job work in relation to diamonds falling under chapter 71 in the First Schedule to the Customs Tariff Act, 1975 (51of 1975);0.75
(ic) Services by way of job work in relation to bus body building;9
(id) Services by way of job work other than (i), (ia), (ib) and (ic) above;6

 

  1. Competing Entry to the newly inserted Entry 26(id)

No. 26 (iv) of Notification No. 11/2017-Central Tax Rate Dated 28th June 2017 (as amended from time to time) contains following entry:

ParticularsRate
[(iv) Manufacturing services on physical inputs (goods) owned by others, other than (i), (ia), (ib), (ic), (id), (ii), (iia) and (iii) above9

 

There has been much confusion since the amendment has been made on two counts i.e. firstly press release to 37th GST Council Meeting only provided for reduction in tax rate on “machine job work such as in engineering industry” from 18 to 12% and Secondly how would both entries 26(id) and 26(iv) would operate and coexist. On the first count, the amendment made in the tax schedule is a more broad-based amendment and furthermore press release to the GST Council Meeting are only broad indication of the amendment to be made. Therefore, as such there might not be a major issue therein but the who drafts the press release.

 

  1. Entry 26 to Notification 11/2017-Cnetral Tax Rate covers Four “Look alike” but “Separate Activities”

For getting hold of the entire issue, we need to revisit Entry No. 26 of Notification No. 11/2017-Dated 28th June 2017 in its entirety. Broadly Entry No. 26 contains entries relating to four separate activities:

a) Services by way of job work in relation to-…

b) Services by way of any treatment or process on goods belonging to another person, in relation to-…

c) Tailoring

d) Manufacturing services on physical inputs (goods) owned by others, other than above

Since inception, Notification No. 11/2017-Central Tax Rate contained separate entry with separate nomenclature for “Services by way of Job Work” and “Manufacturing Services on physical inputs (goods) owned by others” which highlights the fact that since inception legislature had intended to mark a difference between what is covered by “services by way of job work in relation to” and what is covered by “Manufacturing services on physical (inputs) owned by others otherwise they could have used similar terms in both the entries.

The two other entries “Services by way of any treatment or process on goods belonging to another person, in relation to” and “Tailoring” were inserted subsequently and provide a sneak-peek to the intention of the legislature and discussed herein below in detail.

 

  1. Making Sense of why Legislature has inserted Four “Look alike” but “Separate Activities”

The intention of the legislature and what they had in mind while inserting separate entry for “Services by way of Job Work” and “Manufacturing Services on physical inputs (goods) owned by others” got highlighted when Entry 26(ii) was inserted vide Notification No. 20/2017-Central Tax Rate dated 20th August 2017, which provided as follows:

 

Particulars 
Services by way of any treatment or process on goods belonging to another person, in relation to-

(a) printing of newspapers;

(b) printing of books (including Braille books), journals and periodicals

2.5

 

The question was Firstly, why new entry was inserted with a new terminology “Services by way of any treatment or process on goods belonging to another person, in relation to” without using the existing terminology i.e. “Services by way of Job Work” or “Manufacturing Services on physical inputs(goods) belonging to others.

Secondly, Entry 26(i) already provided for “Services by way of job work in relation to- (a) Printing of newspapers” to be taxed at 5%. The new entry also covered newspaper by providing “Services by way of any treatment or process on goods belonging to another person, in relation to- (a) printing of newspapers” to be taxed at 5%.

The question arose that both entries were relating to Tax Rate on newspaper and both provided for levy of tax at the rate of 5% but why they were containing different nomenclature i.e. “Services by way of Job Work” and “Services by way of any treatment or process on goods belonging to another person”. So, what was the need for inserting a new entry when there was already an entry which provided for levy of tax @ 5% on service by way of job work in relation to printing of new paper.

The answer is given by the Agenda to 20th GST Council Meeting pursuant to which Notification No. 20/2017-Central Tax Rate was issued. The Agenda provided as follows:

 

S.No. Proposal Justification for Proposal Recommendations of Fitment Committee
7.Services by way of job work in relation to –  Printing of books (including Braille books), journals and periodicals falling under heading 9988 which attracts GST at 5%. However, printing services where paper is supplied by an un-registered person, shall attract GST @ 18% in view of definition of job work in section 2(68) of GST Act, according to which “job work” means any treatment or process undertaken by a person on goods belonging to another registered person and the expression “job worker” shall be construed accordinglySupply of printed books, newspapers, journals and periodicals attracts GST at NIL rate.  Therefore, suppliers of these goods, that is publishers, are not required to take registration.  Job work services by way of printing of books (heading 9988) attract GST@ 5%. However, in view of definition of job work in section 2(68) of CGST Act according to which “job work” means any treatment or process undertaken by a person on goods belonging to another registered person, printing services provided by a printer to an unregistered publisher, where paper or other physical inputs are supplied by the publisher, will not be eligible for the 5% GST rate prescribed for job work services in relation to printing of newspapers, books, journals and periodicals.GST rate on services by way of printing of newspapers, books (including Braille books), journals and periodicals using physical inputs owned by others [Sl. No. 26 (heading 9988) of CGST notification No. 11/2017-CT] may be prescribed at 5%.

 

 

                                                                                                                                                Emphasis Supplied

 

Therefore, the entries might seem a “Look a like” but a clear distinction has sought to be made for Entry 26(i) which starts with words “Services by way of Job Work”. Since the entry contains the term “Job Work” and term has been defined under Section 2(68) of the CGST Act, 2017, therefore it is restricted only in cases where in any treatment or process is undertaken by a person on goods belonging to another registered person and any treatment or process carried out on goods belonging to an unregistered person, same would not fall in 26(i) but would fall in other entries. Had Entry 26(ii) not been inserted then services of printing of news paper on paper supplied by a registered person would have been taxed at 5% under 26(i) but on paper supplied by an unregistered person would have been taxed under the residual heading 18%.

Since 26(i), 26(ia), 26(ib), 26(ic) and 26(id) only covered treatment or process on goods belonging to registered persons, therefore there was a need to insert entries 26(ii) and 26(iia) with the nomenclature “Services by way of any treatment or process on goods belonging to another person” which is similar to the definition of “Job Work” but does not have the restriction of “Goods belonging to Registered person”.

 

  1. Insertion of the new entry for Tailoring Services vide Notification No. 1/2018-Dated 25th January 2018

 The intention of the legislature is again clarified on why there was a need to insert a separate entry for tailoring service when services by way of job work in relation to textiles was already being taxed at 5%. The relevant agenda to the meeting is specified hereinbelow:

S. No. Represented by ProposalJustification Comments of Fitment Committee
7Darzi (India) LLP Jade Blue, AhmedabadTo exempt tailoring services from GST.

 

To reduce the GST rate on tailoring services to 5%

There is difference between the rate on the fabric and the tailoring service, and this often leads to misclassifying the service as supply of goods(fabric). Tailors are competing against suppliers of readymade garments who pay tax @5%/12%.The service by way of tailoring, stitching carried out on fabric belonging to a registered person, being a service by way of job work in relation to textiles, attracts GST @ 5%. [“Job work” means any treatment or process undertaken by a person on goods belonging to another registered person and the expression “job worker” shall be construed accordingly.]

 

Tailoring services provided to an individual un-registered customer is not a service by way of job work and attracts tax @18%. Mis-classification or mis-declaration of supply of service as supply of goods to evade taxes is an enforcement issue.

 

However, there is merit in the argument that tailors have to compete against suppliers of ready- made garments who pay tax @5%/12%.

 

There is no doubt that demand for tailoring services has reduced since advent of readymade garments manufactured by organized players in India during the last 2 decades.

 

All fabrics falling under chapters 51 to 55 attract GST of 5%.

 

In order to remove the arbitrage between the supply of goods (RMG) and service, reduction in GST rate on tailoring service to 5% may be considered.

Fitment Decision

Agreed

 

                                                                                                                                       Emphasis Supplied

Therefore it is very clearly evident that the scope of Entry 26(i), 26(ia), 26(ib), 26(ic) and 26(id) is only restricted to any treatment or process on goods belonging to registered persons. However, scope of entry 26(ii), 26(iia), 26(iiii) and 26(iv) extends to treatment or process on goods belonging to unregistered persons as well.

 

  1. Making Sense of two residual entries Entry 26(id) and 26(iv) post amendment dated 30th September 2019

The two entries 26(id) and 26(iv) are being reproduced hereinbelow:

 

ParticularsRate
(id) Services by way of job work other than (i), (ia), (ib) and (ic) above;6
[(iv) Manufacturing services on physical inputs (goods) owned by others, other than (i), (ia), (ib), (ic), (id), (ii), (iia) and (iii) above9

 

Entry (id) contains the words “Job Work”, therefore would cover the treatment or process on the goods belonging to registered persons which are not falling under the entry 26(i), 26(ia), 26(ib) and 26(ic). Any treatment or process on goods belonging to unregistered persons would not fall under 26(i), 26(ia), 26(ib), 26(ic) and 26(id) but would fall in other entries 26(ii), 26(iia), 26(iii) or 26(iv).

Post Amendment dated 30th September 2019, Entry 26(id) would act as the residual entry for any treatment or process on goods belonging to registered persons not falling under 26(i), 26(ia), 26(ib) and 26(ic). Entry 26(iv) would work more or less work as a residual entry for any treatment or process on goods belonging to unregistered persons not falling under 26(ii), 26(iia), 26(iii).

 

  1. Sometimes making sense of “look alike” entries might be difficult-Would require clarification soon

Entry 26(id) covers “Job Work” which is any treatment or process on goods belonging to others but 26(iv) covers “Manufacturing Services” on goods belonging to others. Therefore, Entry 26(id) through the term “Job Work” might cover both activities which may or may not be manufacture but entry 26(iv) is only restricted to “Manufacturing Activity”. So what happens to treatment on goods belonging to unregistered persons which dos not happens to be a manufacturing activity. Whether the same falls in 9997 (residual entry to Notification No. 11/2017-Central Tax Rate).

Last but not the least, heading of 9988 covers “Manufacturing services on physical inputs (goods) owned by others”  however entry 26(i) pertains to job work which also covers activities which do not amount to “manufacturing”. So what role does “heading plays while interpreting the “Entry” or can heading restrict the meaning of the entry provided. Interesting times ahead…

Concluding: Therefore it is very clearly evident the scope of Entry 26(i), 26(ia), 26(ib), 26(ic) and 26(id) is only restricted to any treatment or process on goods belonging to registered persons. However, scope of entry 26(ii), 26(iia), 26(iiii) and 26(iv) extends to treatment or process on goods belonging to unregistered persons as well.

Post Amendment dated 30th September 2019, Entry 26(id) would act as the residual entry for any treatment or process on goods belonging to registered persons not falling under 26(i), 26(ia), 26(ib) and 26(ic). Entry 26(iv) would work more or less work as a residual entry for any treatment or process on goods belonging to unregistered persons not falling under 26(ii), 26(iia), 26(iii).

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