The Indian Taxation system is spreading its wings so wide that it is hard to find a trading or service activity not falling under the ambit of indirect taxation. However the Government has encouraged small enterprises like job workers, to operate on behalf of manufacturers. Job workers operating on a small scale who support big manufacturers are benefited lot by the encouragement given by the Indian Government.
We intend to bring out the impact of indirect tax in the process of job work in the context of Service Tax Law and the Karnataka Value Added Tax Act, 2003.
Levy of Service Tax
Job work in simple words, means processing of raw materials, semi-finished goods supplied by a manufacturer to complete a part or whole of the process of manufacture.
The process of job work is liable for service tax under the head “business auxiliary services”\
If the service provider is undertaking any activity in relation to production and the following tests are satisfied, then it will qualify to be taxed under the head “Business Auxiliary Services”:
1. The activity should not amount to manufacture.
2. The Job worker shall be engaged in any process of the production.
3. The job worker should have taken the activity on behalf of the manufacturer.
The job worker will be exempted from payment of Service tax if the conditions below are fulfilled:
1. The raw-materials or semi finished goods is received from the manufacturer
2. The goods produced are returned back after processing to the manufacturer. If job worker clears the product from his premises to the buyer and not to manufacturer, then exemption is not available.
3. The manufacturer uses the goods so processed by the job worker for manufacturing the final goods, which is excisable.
4. Excise duty is payable by the manufacturer on the final product.
Thus exemption will be available only if the manufacturer pays the duty.
The conditions discussed above will decide the taxability or non-taxability of service tax to the assessee.
Example: A manufacturer of cars sends cars to the job worker for fixing certain accessories/parts as supplied by the manufacturer. The job worker fixes the wiper, mirrors etc to the car. Here the product after such process does not amount to manufacture. Hence there will be levy of Service tax on job charges.
In addition, if the gross service charges received by the job worker does not exceed rupees eight Lakhs during the previous financial year then he is exempt from payment of Service Tax
Levy of Karnataka Value Added Tax Act (KVAT), 2003
Under the KVAT Act, the charging section contemplate levy of tax on every ‘sale of goods’ within the state. The sale of goods include ‘deemed sale’ which means transfer of property in goods in the execution of contract.
So if a job worker is employing only labour in the contract and there is no transfer of material, then there is no levy of KVAT for such labour contract.
In case if the material is entirely supplied by the manufacturer, there is no levy of KVAT as the job worker has not used any material of his own.
On the contrary if the job worker uses his own goods in addition to the inputs supplied by the manufacturer, the job worker will be liable to KVAT on the cost of material used and margin of gross profit.
The tax impact is minimal in the process of job worker, which unquestionably reduce the working capital requirement and cost of manufacturer. In this backdrop, a job worker should be able to appreciate the provisions of various enactments and laws affecting him directly or indirectly.