We seek clarification on the GST applicability in the following business model:

[UDHAYKUMAR KANDASAMY]

Our client owns a Dyeing Factory and undertakes job work in the textile sector. The goods (grey fabrics) are received from other registered job work contractors, and not from the principal directly. The process carried out by our client is limited to washing of the grey fabrics with clean water mixed with peroxide chemicals. Our client holds the license to operate the factory, is a member of CETP, and pays effluent treatment charges with GST @12% besides electricity, water, and maintenance charges. He recovers such expenses with a margin and charges 5% GST under HSN 998821 as 'Textile Manufacturing Services.'

The machinery used for further processing (dyeing/finishing) belongs to the other job work contractors, who supply dyes, chemicals, firewood, etc., and in turn charge 5% GST under the same HSN 998821 to the principal. Neither our client nor the subcontractors own the fabrics; the goods remain the property of the principal throughout.

The issue requiring clarification is:

1. Whether such a model of operation is acceptable under GST, where one job worker (our client) performs only part of the processing and charges GST @5% under HSN 998821, while another job worker performs the subsequent processing and also charges GST @5% under the same HSN 998821 to the principal.

2. Whether our client is eligible to avail Input Tax Credit (ITC) on input services such as effluent treatment charges (GST @12%) while discharging output tax at 5% on the job work services performed by him.

Kindly clarify whether the above arrangement is compliant with GST law and whether ITC eligibility is affected due to the concessional rate of 5% applicable to job work in the textile sector.

[Sadanand Bulbule]

Your similar query has already been answered vide issue ID No. 120353.

ITC on effluent treatment charges are not restricted under Section 17 of the CGST Act. Hence it is allowed even when output tax is @ 5% in this case.

[UDHAYKUMAR KANDASAMY]

Thank you so much for your reply. Thanks sir.

[Shilpi Jain]

These kind of transactions exist and there is no specific restriction on being a job worker for another job worker. Also the 5% rate is applicable since its a transaction of job work of textile articles.

AI Summary

GST treatment of textile job work permits sequential subcontracting and allows input tax credit on effluent service charges. The document explains that sequential subcontracting among job workers in textile processing is permissible, with textiles remaining property of the principal, and that Input Tax Credit on input services such as effluent treatment charges is allowed even where the output job work service is taxed at a concessional rate, subject to general ITC eligibility conditions.