GST on Job work by way of milling of wheat into flour or of paddy into rice – Analysis of CBIC Circular

CLARIFICATION ON JOB WORK BY WAY OF MILLING OF WHEAT INTO FLOUR OR OF PADDY INTO RICE

Circular No. 153/09/2021-GST, 17th June 2021

Introduction:

• Job work activity done by way of milling of wheat into flour or of paddy into rice is taxable activity @ 5% under entry 26 of notification no .11/2017 CT-rate 28-06-2017.
• However circular recently issued clarifies that when the job work is done for the state government under Public Distribution system (PDS) than the same may be conditionally exempt. In this document we have tried to give the brief understanding the circular has passed and its analysis.

Clarification on Taxability:

• The circulars clarifies that entry No. 3A would apply to composite supply of milling of wheat and fortification thereof by miller, or of paddy into rice, provided that value of goods supplied in such composite supply (goods used for fortification, packing material etc) does not exceed 25% of the value of composite supply. It is a matter of fact as to whether the value of goods in such composite supply is up to 25% and requires ascertainment on case-to-case basis.
• Let us see and analysis what entry no.3A of exemption notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 says

“Composite supply of goods and services in which the value of supply of goods constitutes not more than 25 per cent of the value of the said composite supply provided to the Central Government, State Government or Union territory or local authority or a Governmental authority or a Government Entity by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution”

Coverage in 11^th Schedule:

• The circular further clarifies that in para 3.1 that Public Distribution specifically figures at entry 28 of the 11th Schedule to the constitution, which lists the activities that may be entrusted to a Panchayat under Article 243G of the Constitution. Job work is done as part of Public Distribution hence will be covered by entry 28 of the 11th Schedule to the constitution.

• Another important aspect of the exemption entry is the services is provided to Central Government, State Government or Union territory or local authority or a Governmental authority or a Government Entity.
• Generally the job work is undertaken by the state government through marketing federation of respective state, which is san Apex level Federation of Cooperative Marketing Societies in the every state including State of Chhattisgarh. In some places the work is executed through local authorities or through district magistrate office.  It has to be seen that work is executed for any receiver which can be classifiable into Central Government, State Government or Union territory or local authority or a Governmental authority or a Government Entity.

Composite Supply:

• The job work in the course of providing service of milling provides other services as well and supplies some goods also like transportation services or supply of gunny bags, fortified goods etc. All the multiple supply of goods and services qualifies to be composite supply where the principal supply is “job work service”. If the value of goods supplied along with the Job work services does not exceed 25% of the total composite supply value than the exemption as per entry 3A discussed in the previous paragraph will be available.
• Let us understand this by following illustration 

S. No.	Particulars of Billing	In Rs.	% of Total Composite supply
1	Service of Job Work	10 Lakh	85.72%
2	Service of Transportation	2 Lakh
3	Supply of Gunny Bags	1.50 Lakh	14.28%
4	Supply of Other goods	0.50 Lakh
Total		14 Lakh	100.00%

In the above illustration, it is clearly less than 25% and hence Qualifies for exemption in entry 3A.

Taxable:

• If the value of goods supplied exceeds 25% of the total composite supply value, then the job work will be taxable @ 5%.

Pure Services:

• If there are no supply of goods along with supply of services of job work than based on it will fall in entry 3 of of exemption notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 and will be exempt.

Refund:

• There is no change in the law or any exemption entry; these entries were very well existed in the past from initial times of GST law. If the taxpayers have paid the tax on any services which qualifies to be exempt under entry 3 or 3A then the tax payers has valid claim for refund. The refund claim off course will be subject to unjust enrichment. Even the law prescribes limitation of time of 2 years from payment for claiming refund, we feel the same can also be challenged before the court and there are jurisprudence which allows benefit to the payers.