The famous Benjamin Franklin once said “The only things certain in life are death and taxes”. The only way one can avoid death is by not taking birth. But in case manufacturing or processing of any goods or products, the Service tax on the same can be avoided if Central Excise is paid or payable on such goods or products, after its manufacture or processing.
The Section 66 D introduced in the Service Tax provisions w.e.f. 01.07.2012 (popularly known as Negative List of Services) states that any process amounting to manufacture or production of goods would not be taxable. Section 65 B further clarifies the term “processes amounting to manufacture or production of goods” means a process on which duties of excise are leviable under the Central Excise Act or any process amounting to manufacture of alcoholic liquors for human consumption, opium, Indian hemp and other narcotic drugs and narcotics on which duties of excise are leviable under any State Act.
Manufacturing activity carried out on contract or job work basis, by one person for another person, are not taxable by virtue of this entry in the Negative List, but subject to the provisions that Central Excise duties are leviable on such processes under the Central Excise Act, 1944 or any of the State Acts. Even if Central Excise duty is leviable on a particular process, as the same amounts to manufacture, then such process would be non-taxable even if such process enjoys exemption under the Central Excise provisions. But processes carried out by a job worker for his principal on job work basis if not amounting to manufacture or production of goods would not be non-taxable.
The CENVAT Credit Rules states that job work means processing or working upon of raw material or semi-finished goods supplied to the job 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 aforesaid process and the expression “job worker” shall be construed accordingly. In common parlance “Job worker” is a person who is engaged in the production or manufacture of excisable goods on account of other person.
The provisions of Central Excise Act, 1944 states that manufacture includes any process incidental or ancillary to the completion of a manufactured product, which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff as amounting to manufacture; or which, in relation to the goods specified in the Third Schedule to the Central Excise Tariff, involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer. The word “manufacturer” shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account.
Certain exemptions were even available to manufacture or production of goods on behalf of client, subject to certain conditions, before introduction of the Negative list based taxation system in the Service Tax provisions. The reason for granting such exemptions in the pre and post negative list based system to such processes are not with an intention to encourage manufacturing or processing of goods on job work or contract basis, but only with a view to avoid double taxation in the form of Service Tax as well as Central Excise levy on the same goods. Central Excise duty is a levy on the manufacturing of certain goods or products and if there is a simultaneous levy of even Service Tax on such manufacturing process, it would amount to double taxation, which is not desirable in any democratic country having progressive system of taxation.
Most of the big industrial houses in India engage job workers for manufacture or production of their products. Such job workers produce or manufacture the goods using their own facility and labour. Industrial houses also engages job workers to operate in-house, in which cases the manufacturing or production is carried out by the job workers using his own labour within the premises of the principal by utilising the infrastructure and manufacturing facilities of the principal. There are multiple advantages in this system, such as, increase in the production or manufacturing capacity of such industrial houses without undertaking expansion of such existing facilities, avoidance of the hassles associated with having a large work force etc.
After introduction of Service Tax levy, taxability of such services provided by the job workers to the principals has been a contentious issue. Although a number of clarifications and notifications were issued, the Service Tax department continued to maintain a view that such services provided by the job worker or contractor to their principals would be taxable under “Business Auxiliary Services” which resulted in multiplicity of litigations. Hopefully the inclusion of such service within the Negative List would help and save such job workers and contractors from frivolous disputes and create a conducive atmosphere for smooth functioning of industrial activity within the country.