Job work: the credit on material you sent out, and reconciling what comes back

Almost every manufacturer sends material out. Plating, heat treatment, machining, powder coating, printing, stitching, galvanising — the operation you do not own, done by somebody who does. Commercially it is a small decision. Fiscally it is one of the few places where doing nothing wrong for eleven months and then forgetting for one turns into a tax liability backdated to the day you sent the goods.

The three things that are actually true

One: it moves on a challan, not an invoice. Sending inputs or capital goods to a job worker is not a supply, so there is no invoice and no tax on it. It moves on a delivery challan carrying the description, quantity, value and the job worker’s details, and the challan number is what everything downstream hangs off.

Two: you keep the credit — conditionally. The input tax credit on material sitting at a job worker’s premises is not reversed. That concession is conditional on the goods coming back, and there is a clock: one year for inputs, three years for capital goods, from the date they were sent out. Moulds, dies, jigs, fixtures and tools are outside that clock — they can stay at the job worker indefinitely.

Three: missing the clock is not a penalty, it is a deemed supply. If the goods do not come back in time, the law treats them as having been supplied to the job worker on the day they were sent out. Not on the day the year expired. So the tax is due with interest running from a date eleven months in the past, and it is discovered by whoever eventually reconciles, usually in a hurry.

There is also a return to file — ITC-04 — summarising what went out and what came back. Its frequency depends on turnover; larger taxpayers file it twice a year and smaller ones annually. It is not hard to file. It is hard to populate, if the underlying challan register was never maintained, which is the real reason it gets delayed.

Where the reconciliation actually goes wrong

The tax treatment is the easy half. The half that costs money is the physical one: you sent 1,000 kg and you got back 940 kg of finished parts. Is that right?

It depends entirely on a number somebody has to agree in advance — the input-output norm, or conversion ratio, for that process. Every process has one, and most plants carry it in somebody’s head:

• Machining and fabrication: turnings, boring swarf, offcuts. Recoverable as scrap and worth real money at metal prices.
• Plating and coating: drag-out and bath losses, plus the rejections that get stripped and re-plated. The rework loop is where quantity quietly disappears.
• Heat treatment: scale loss, small but consistent — and if it stops being consistent, the furnace is telling you something.
• Cutting and stamping: skeleton scrap, entirely predictable from the nesting.

With a norm agreed, the reconciliation is arithmetic: sent, minus what should be consumed at the norm, minus scrap accounted for, equals what should come back. The difference against what did come back is either a process problem, a costing problem or a shortage, and you cannot tell which until the norm exists.

Two practical notes. Scrap generated at the job worker’s premises can be supplied from there directly if he is registered — which is often the sensible commercial answer, but it has to be a decision rather than an assumption, because the alternative is that the scrap is yours and should be coming back. And material can move from one job worker to another without returning to you, which is efficient and also the single easiest way to lose track of a challan.

What good looks like

• A challan-wise open balance, not a monthly total. “We have 4.2 tonnes out at platers” is not a control; “challan JW-2211, 380 kg, out 74 days” is.
• Ageing against the clock, visible before it matters. A one-year deadline needs a flag at nine months, not a report in month thirteen.
• Norms on the process, in the system, so the expected return is computed rather than argued about after the fact.
• Rework counted separately from fresh work. A part that went out twice has been through the process twice, and if that is not visible the job worker’s yield looks better than it is and yours looks worse.
• The return filing built from the challan register, not assembled from it.

What MANUPRIME does about it

Job work and subcontracting are part of the production module rather than a bolt-on: material goes out on a challan against the work order it belongs to, the open balance and its ageing sit on the same screen, wastage norms are held per process on the BOM so the expected return is a computed number, and what comes back is reconciled against it line by line. The compliance module carries ITC-04 alongside the other periodic returns with its period and due date, populated from those challans.

Rejections and rework at an external processor are tracked per job worker, which is what turns a vague sense that “their yield is poor” into a rate you can put in front of them.

Ask to see production and job cards on a demo call.