Clarification required whether Adhesive coating is job work or not, Goods and Services Tax - GST

[RAMKUMAR DURAI]

sir, one of my client is engaged in Adhesive coating business. He receive the various types of bolts from automobile industry for adhesive coating on them, he purchase the adhesives from other sate and do the coating process on the bolts received from the principal. The cost of adhesive comes around 50% of his invoice value.

His cutomers argue with him that this process ( coating process) comes under Job work with 12% GST only.

But we have doubt whether it should be taxed @18 % GST based on the following,

1.The adhesive is not supplied by the principal it is purchased by us.

2.The coating enhance the product torque quality

kindly confirm whether we should charge GST @18% , if yes what should be the HSN/SAC

Posts / Replies

[KASTURI SETHI]

It is very disputed and burning issue. However, I express myself as under:-

Section 2(72) of the CGST Act defines ‘Manufacture’ as - “manufacture” means 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;”

In view of the above, in my view, adhesive coating does not amount to manufacture as no new product has emerged and hence covered under, 'Manufacturing Services' attracting GST @18%. under HSN 9988. Had it been manufacturing process, it would have been covered under residuary entry attracting GST @ 12%. (other than specific)

It is pertinent to mention that in Service Tax regime, any process which amounted to manufacture (except Liquor ) was kept out of Service Tax net i.e. Negative List and which process did not amount to manufacture was included in Service Tax net. The same analogy is applicable now.

The concept of 'Manufacturing service' has not been defined so far. Manufacturing service may or may not culminate into 'manufacturing process'. If culminated into manufacturing process GST @12% and if does not, rate applicable is 18%.

This is my interpretation in the absence of definition of ,'Manufacturing Service'.

[KASTURI SETHI]

In continuation of my reply dated 25.10.19, as per definition of 'Job-work' under Section 2 (68) of CGST Act, the job-worker cannot use its own material for job work whereas as per Board's circular No.38/12/2018 dated 31.12.18-GST (Para No.5), the job worker can use its own goods for job-work but tax payer is to follow the Act and not circular. Circular has no statutory force and hence cannot override the Act. There is also recent one AAR decision or case law to this effect. In this case, the job-worker has used his own material which works out to 50 % as per invoice value. This aspect also brings your client out of the scope of job-worker. Hence the classification is tilted towards 'Supply of service' and 'Not amounting to manufacture'.

[RAMKUMAR DURAI]

Sir thanks for your reply but i have the following doubts kindly help in understanding it.

you have mentioned that, Manufacturing service may or may not culminate into 'manufacturing process'. If culminated into manufacturing process GST @12% and if does not, rate applicable is 18%.

Please clarify whether the above you stated is correct or any typing error is there because i got the below from our website only,

if job-work process amounts to manufacture, rate of tax is 18% and if job-work process does not amount to manufacture, rate of GST is 12% both are contradict.

and you have also mentioned in your continuation reply that, since the own material consumption is nearly 50% of his invoice value he is out of the scope of job-worker but how the classification is tilted towards 'Supply of service' and 'Not amounting to manufacture' you are suggesting it should be 'Supply of service' and 'amounting to manufacture' only know sir kindly correct if my understanding is wrong.

[KASTURI SETHI]

Sh.Ramkumar Durai Ji,

Confusion will persist until the term, 'Manufacturing Services' is defined by Govt. What is the difference between the terms, 'Job-work Service' and 'Manufacturing Service' ? It is a moot point. It is not clear. It cannot be clear without the definition of 'Manufacturing Service' which has not been provided in the GST Acts. There are many services which are categorized as 'Manufacturing Services' under HSN 9988. I am of the view that it is a flaw in the law. Recently there was statement of our Finance Minister wherein she has stated that there are flaws in GST laws but these are laws and are to be followed. Every expert has his own views. There has already been lengthy discussions on this issue.

In GST, job-work is a service irrespective of the fact whether it amounts to manufacture or not. Your activity/process is a job-work service but It does not amount to manufacture as it does not result in new product. It does not change the character of the goods..There is no doubt about it. So your process may fall under 26(1)(id) above attracting GST @ 12% if the same is not covered under manufacturing service. Why job-work has been differentiated from manufacturing service ? Answer is possible only by way of defining 'manufacturing service'. Both words, 'manufacture' and 'service' convey different meaning, sense, essence and message. As per Section 2 (72) of CGST Act, 'manufacture' means any, 'service' process which results in emergence of a new product, distinct name, changes the character and as per Section 2(108), 'service' means anything other than goods -----. Both cannot be integrated.

Manufacturing services are required to be defined.

The Trade and Industry should approach GST Council for the solution.

[Alkesh Jani]

Sir,

I agree with the views expressed by our experts. Further, I wish to add that HSN Code, is not approved/ recognized/ notified. In the provisions of law "specified categories of goods or services or both" is used, therefore, on should rely more on description of supply of goods/services rather than HSN /SAC code. This is my point of view.

Thanks,

With Regards

[KASTURI SETHI]

I agree with Sh.Alkesh Jani Ji.

[RAMKUMAR DURAI]

Sir

Thanks a lot for giving your valuable time in giving the timely reply for all query.

Once again thanks a lot