Tanning services classified as job work under manufacturing services with different GST rates based on customer registration status

The AAR-TN ruled on classification of tanning services where the applicant received raw hides and skins from customers, added tanning chemicals, and returned finished leather while ownership remained with the customer. The Authority held this constituted job work services under manufacturing services on physical inputs owned by others. Where the principal is a registered person, the activity falls under item (i)(e) attracting 2.5% CGST and 2.5% SGST. However, if undertaken for unregistered persons, it falls under item (iv) attracting 9% CGST and 9% SGST rates.

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Issues Involved:
1. Classification of the tanning activity under GST.
2. Determination of the applicable tax rate for the tanning activity.

Issue-wise Detailed Analysis:

1. Classification of the Tanning Activity under GST:
The applicant, a registered entity under GST, sought an advance ruling to determine whether their tanning activity, involving the use of chemicals, falls under the purview of job work as per Section 2(68) of the CGST Act. The applicant processes hides and skins owned by others, adding tanning chemicals during the process. The applicant contended that their activity should be classified as job work, supported by various rulings and a circular from CBIC.

According to Section 2(68) of the CGST Act, job work is defined as any treatment or process undertaken by a person on goods belonging to another registered person. The applicant argued that despite the significant value of the chemicals used, the activity remains job work. The authority examined the definition of composite supply under Section 2(30) of the CGST Act and concluded that the applicant's activity does not constitute a composite supply. The raw hides and skins (Chapter 41) are processed into finished leather (Chapter 41) and returned to the principal without transferring ownership. Therefore, the activity is classified as job work.

2. Determination of the Applicable Tax Rate for the Tanning Activity:
The authority referred to Schedule II, Section 7 of the CGST Act, which treats any treatment or process applied to another person's goods as a supply of services. The relevant provisions of Notification No. 11/2017-Central Tax (Rate) dated 28-6-2017, as amended by Notification No. 20/2017, were examined to determine the tax rate for manufacturing services on physical inputs owned by others.

The notification specifies that services by way of job work in relation to processing hides, skins, and leather fall under Heading 9988 and are chargeable to CGST at 2.5% and SGST at 2.5%, totaling 5%. However, if the job work is performed on goods owned by unregistered persons, the applicable tax rate is 18% (CGST 9% and SGST 9%).

The authority also referenced Circular No. 126/45/2019-GST, which clarifies the distinction between job work services for registered and unregistered persons. The ruling concluded that if the tanning activity is performed on goods belonging to another registered person, the applicable GST rate is 5%. If the goods belong to an unregistered person, the applicable GST rate is 18%.

Ruling:
The activity of the applicant is classified as a service by way of treatment or processing undertaken on hides, skins, and leather belonging to another person. The applicable GST rates are as follows:
- If the goods belong to another registered person, the GST rate is 5% (CGST 2.5% and SGST 2.5%).
- If the goods belong to an unregistered person, the GST rate is 18% (CGST 9% and SGST 9%).

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