The Goods & Services Tax (GST) has changed the manner of levy of indirect tax pursuant to introduction of the concept of supply. Section 7 of the CGST Act defines supply as sale, transfer, barter, exchange, licence, rental, lease, or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. Comparing the scope of levy with the erstwhile indirect tax law which was primarily based on manufacture, provision of services and sale, it becomes apparent that GST law has expanded the scope of levy. However, the concept of manufacture which the GST law tried to do away with does not become obsolete and is still relevant today.
In terms of the Central Excise Act, the term manufacture includes any process:
- Incidental or ancillary to the completion of a manufactured
product, AND
- Which is specified in relation to any goods in the section or
chapter notes of the 1st Schedule to the Central Excise Tariff Act,
as amounting to manufacture (deemed manufacture) OR
- Which in relation to goods specified in 3rd Schedule of the Central Excise Tariff Act involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including 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 (deemed manufacture).
n the Delhi Cloth Mills case, the Apex Court has held that 'an activity or process, in order to amount to manufacture must lead to emergence of a new commercial product, different from the one with which the process was started. In other words, it should be article with different name, character and use.' 'Manufacture' implies a change but every change in raw material is not manufacture, something more is necessary. There must be such transformation of raw material that a new and different article emerges having a distinct name character and use. In the case of Mahalaxmi Stores, the Supreme Court has held that every type of variation of goods or finishing of goods would not amount to manufacture unless it results in emergence of new commercial commodity. Repair or reconditioning of an article does not amount to manufacture because no new product comes into existence.
Thus, under the Excise Act the concept of manufacture seeks to include a new product which is a result of an activity or process undertaken.
Under the GST Law, the term manufacture has been defined under Section 2(72) of the CGST Act as 'processing of raw material or inputs in any manner that results in emergence of a new product having a distinct name, character...'. Therefore, under the GST law the definition of manufacture is similar to that stipulated in the Excise Act. However, the definition of manufacture under the CGST Act is not relevant for the purpose of determination of supply under the CGST Act. The same has been used for different purposes such as determination of transitional credits, registration of person under GST, etc.
However, there seems to be anomaly in the GST laws where taxing of manufacturing process is concerned. GST rates have been provided vide two notifications separately for goods and services. Notification No 11/20171 (Services Notification) has been issued to provide the rate of GST for services. Serial No. 26 Heading 9988 includes 'Manufacturing services on physical inputs (goods) owned by others' and provides the rate for services in relation to manufacture as 18%.
However, under the Notification No 1/20172 (Goods Notification) there are multiple entries which provide for rate of goods for articles which have arisen in the course of manufacture. Some examples are 'Residues of starch manufacture and similar residues, beet-pulp, bagasse and other waste of sugar manufacture, brewing or distilling dregs and waste, whether or not in the form of pellets', 'All ores and concentrates [other than slag, dross (other than granulated slag), scaling and other waste from the manufacture of iron or steel; slag, ash and residues (other than from the manufacture of iron or steel) containing metals, arsenic or their compounds; other slag and ash, including seaweed ash (kelp); ash and residues from the incineration of municipal waste', Granulated slag (slag sand) from the manufacture of iron or steel and Coal; briquettes, ovoids and similar solid fuels manufactured from coal which are taxable @5% GST.
Thus, there seems to be an apparent conflict between the two notifications with respect to taxability of process of manufacture. The Services Notification seeks to levy GST @18% on manufacturing; however, Goods Notification seeks to levy GST @ 5%. It is pertinent to note here that both the notifications seek to tax the process of manufacture.
The Authority for Advance Ruling in the application filed by S B Reshellers Pvt Ltd3 reported at 2019-TIOL-205-AAR-GST has ruled that in a situation where the principal has sent goods for job-work and the job-worker has applied substantial labour and input, then the job-work would result in supply of goods rather than supply of services.
Though, manufacture is not a taxable event under the GST, we see that through the rate notifications, the classification of specific supply of goods or services is coming into the forefront in garb of process of manufacture. Given the above position under the notifications and the ruling issued by AAR, the concept of manufacture under the GST would lead to a new classification dispute and the settled position under the erstwhile will be disrupted.
Footnotes
1. Notification No 11/2017-CT(Rate) dated 28.06.2017
2. Notification No 1/2017-CT (Rate) dated 28.06.2017
3. 2019-TIOL-205-AAR-GST
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