Taxing Job Work Services By Malsters: Imbroglio Settled By GST Council
27 Oct 2023
- DMD Advocates
The introduction of the Goods and Services Tax (GST) regime on 01.07.2017 marked a watershed moment in India’s indirect tax landscape. While the GST law is still at a nascent stage, we are gradually witnessing a shift from compliance related disputes to substantive disputes under the new tax regime.
The systemic levy of GST is also applicable on the services of job work rendered by maltsters (engaged in processing barley to malt) to Alcohol Beverage (Alcobev) companies. Until 2021, the incidence of GST on the Alcobev companies for availing the job work services for conversion of barley to malt a.k.a. the malting process, by the maltsters, was only 5 per cent. This was on account of 5 per cent GST applicable under the Rate Notification to job work services rendered ‘in relation to food and food products’.
However, in its 45th Meeting, the GST Council recommended 18 per cent GST on job work services provided ‘in relation to manufacture of alcoholic liquor for human consumption’. This recommendation, which was followed by a corresponding amendment to the Rate Notification, was erroneously interpreted by the GST Department to even include within its scope the job work services rendered by maltsters processing barley grains into malt. This interpretation would have led to 18 per cent GST outflow on job-work services rendered by maltsters.
Accordingly, various maltsters started receiving notices from the GST Department demanding the differential GST on the job work services rendered by them to Alcobev companies. This, in turn, meant excessive tax cost for the Alcobev companies on account of the non-availability of input tax credit of GST paid on input and input services.
Essentially, malt is one of the constituting ingredients that goes into the preparation of not only alcoholic beverages but also other non- alcoholic beverages, cereals, confectionaries, baked food items, pet foods, pharmaceuticals etc. The process of malting involves mainly three steps – steeping of barley grains, germinating and kilning/heating.
Generally, the Alcobev companies/ breweries procure the barley grains from the farmers and outsource the activity of conversion of barley into malt to the maltsters. Once the barley is converted into usable form for brewing liquor, the malsters supply the processed barley i.e. malt back to the breweries.
For manufacturing of beer (brewing), the malt is crushed and mashed in water at different temperatures, filtered and boiled along with hops, cooled, and then transferred for fermentation along with yeast. The fermented beer is then sent for maturing and bottling as liquor brewed for consumption. Sometimes, the brewing activity is outsourced by the Alcobev companies to contract bottlers which was recommended to be saddled with the higher rate of 18 per cent GST by the GST Council in its 45th meeting.
In the backdrop of the above, various representations were made by the Alcobev Industry to the Central Board of Indirect Taxes and Customs (CBIC)/GST Council seeking clarification on the applicable rate of GST on job work services rendered for conversion of barley into malt. The issue was also challenged before the High Court.
Fortunately, the issue was taken up by the GST Council in its 52nd Meeting held on 7 October 2023. The GST Council has sought to clear the air in this regard by way of clarification that job work services for processing of barley into malt attracts 5 per cent GST as applicable to ‘job work in relation to food and food products’ and not 18 per cent. This comes as a major relief to the Alcobev industry which otherwise was staring at huge tax costs.
The formal shape and form of the clarification is, however, awaited.
Authored by Shashank Shekhar (Partner), Tushar Joshi (Principal Associate), and TRISHA SHREYASHI (Consultant) for the BW Legal.