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.

AI Summary

GST permits principal-owned textiles to use successive job workers charging 5% under HSN 998821; ITC on input services allowed The described arrangement - a textile principal retaining ownership while two successive job workers each perform parts of processing and charge GST at 5% under HSN 998821 - is permissible under GST; there is no prohibition on a job worker subcontracting work to another job worker. Input tax credit on input services such as effluent treatment charges taxed at 12% is claimable by the job worker and is not barred merely because the job-work output is taxed at the concessional 5% rate, so ITC eligibility is not lost by applying the lower output rate.