Strategic Structuring, Tax Optimization & Litigation-Proofing under Indian GST Law
“In export compliance, how you describe a service is more powerful than what the service actually is.”
Applicability
This advisory is designed for:
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Exporters (any turnover)
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Job workers, processors, finishing units
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Tax consultants, CFOs & GST professionals
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Industries: Textiles, Apparel, Leather, Electronics, Gems, Pharma, Auto Parts
1. The Hidden Problem
Exporters frequently engage vendors for:
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Stitching, Embroidery, Ironing
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Finishing, Washing, Labeling
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Packing, Sorting, QC, etc.
But here’s the compliance trap:
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These are often wrongly classified as manpower supply.
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GST is paid @18% under SAC 9985 instead of 5% or 12% under 9988.
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Refunds get rejected; exporters suffer working capital blockage, and vendors receive SCNs (Show Cause Notices).
2. Legal Framework: Manpower vs Job Work
A. Job Work
Section 2(68), CGST Act:
“Job work means any treatment or process undertaken by a person on goods belonging to another registered person.”
✅ Ownership remains with the principal (exporter)
✅ Goods move under delivery challan (Rule 45)
✅ Registered job worker can even export directly
B. Manpower Supply
SAC 9985 – Circular 115/34/2019-GST
“Providing manpower services under recipient's control and supervision.”
❌ Treated as support service, not process
❌ Exporter supervises labor, not the vendor
❌ Refund eligibility denied
3. Comparative Table – At a Glance
| 🔍 Point | ✅ Job Work (SAC 9988) | ❌ Manpower Supply (SAC 9985) |
|---|---|---|
| Goods Used | Exporter’s goods | No goods involved |
| Control Over Labor | Job worker | Exporter |
| SAC Code | 9988 (Treatment/processing) | 9985 (Support services) |
| GST Rate | 5% / 12% (with ITC) | 18% |
| Export Refund Eligibility | Eligible (as Input) | Not eligible |
| Supporting Documents | Challan, ITC-04, Agreement | Invoice & agreement only |
| Movement of Goods | Yes, under delivery challan | Not required |
| Risk Level | Low (when compliant) | High (frequent audit triggers) |
4. Law, Circulars & Judicial Precedents
Statutory References
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Section 2(68) – Defines job work
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Section 143 – Goods can be sent for job work without payment
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Rule 45 – Requires challans, ITC-04
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SAC 9988 vs. 9985 – As per GST Rate Notification No. 11/2017-CT(R)
CBIC Circulars
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Circular 38/12/2018: Stitching, embroidery, testing – clearly treated as job work
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Circular 115/34/2019: Clarifies distinction based on control and supervision
Judicial Insight
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Super Poly Fabriks Ltd. v. CCE:
Even if labor is used, the service is job work if controlled by the service provider and done on principal’s goods.
5. Case Study: How Structuring Saved ₹21 Lakhs
🔍 Facts
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Aryan Garments (Exporter) engaged Vishal Enterprises
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Services: Stitching and Finishing
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GST charged: 18% (SAC 9985)
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Refund claim of ₹21 lakh denied
❌ Mistake
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Invoices said “Manpower Supplied”
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Workers were reporting directly to Aryan
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No challan issued under Rule 45
✅ Solution Implemented
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New Job Work Agreement
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Goods sent under delivery challan
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Premises declared as Additional Place of Business
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Labor supervised by Vishal, not Aryan
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SAC corrected to 9988, tax @5%
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Full refund claim granted upon correction
6. Actionable Advisory for Structuring & Compliance
A. Contractual Language
✅ Use: “Job Work for processing of garments”
❌ Avoid: “Deputation of workers”, “Labor supply”
B. Movement of Goods – Rule 45
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Issue delivery challan
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Declare vendor as Additional Place of Business if export from vendor’s site
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File ITC-04 quarterly without fail
C. Correct Invoice Format
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SAC Code: 9988
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Description: “Stitching and Finishing Job Work on Garments”
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No mention of worker count or daily rate
D. Export Procedure
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Export under LUT (Letter of Undertaking) – no tax
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Claim refund of accumulated ITC
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Do NOT pay IGST and claim refund unless unavoidable
7. Structural SOP for Exporters & Vendors
| 🔧 Task | ✅ Implementation |
|---|---|
| Contract Drafting | Use clear “job work” clauses |
| GST Registration | Declare vendor location if export from there |
| Goods Movement | Mandatory challans under Rule 45 |
| GST Returns | Match GSTR-1, GSTR-3B, ITC-04 |
| Refund Application | Attach delivery challans + job work invoice |
| Staff Training | Train procurement & tax team on service classification |
8. Common Mistakes to Avoid
❌ Using “manpower” in invoice for stitching/washing
❌ No challan issued when sending goods
❌ Vendor working under your staff’s supervision
❌ Selecting wrong SAC code (9985 instead of 9988)
❌ Vendor registered under Composition Scheme (ineligible for refund flow)
9. Strategic Planning Tips
| 🎯 Goal | 🧩 Tip |
|---|---|
| Maximize ITC & Refund | Always classify as job work where eligible |
| Prevent Notices | Ensure contracts, invoices, and challans are aligned |
| Reduce GST Burden | Opt for SAC 9988 @ 5% where applicable |
| Audit-Ready Compliance | Keep ready trail: Agreement + Challans + ITC-04 + Invoice |
| Future-Proof GST Structure | Conduct quarterly review of all third-party vendor services |
10. Templates You Must Use
Sample Job Work Clause
“The Vendor shall undertake stitching and finishing on garments belonging to the Principal at its own premises, with its own staff, under its own supervision. The Principal shall not supervise or control the labor directly or indirectly.”
Delivery Challan Format
“Processed under Section 143 read with Rule 45 of CGST Rules – Sent for Job Work – Non-taxable Movement.”
11. Final Wisdom
"It’s not the service, but the way you declare it, that decides your refund."
— Be wise with SAC codes, contracts, challans, and supervision.
12. Summary at a Glance
| 🧩 Area | ✅ Best Practice |
|---|---|
| SAC Code | Use 9988 for job work |
| GST Rate | 5% / 12% (with ITC), not 18% |
| Goods Ownership | Must remain with Exporter |
| Export Refund | Available under LUT route |
| Risk Exposure | Low with proper documentation |
| Legal Backing | Sec 143, Rule 45, Circulars 38/2018 & 115/2019 |
