Auditing a textile business with job work arrangements means tracking goods sent out for processing (yarn for dyeing, grey fabric for finishing, fabric for stitching) as the principal's own inventory in transit rather than as a sale, confirming the goods come back within the time limits GST law prescribes for inputs and capital goods sent for job work, and testing the GST treatment at each leg — the principal typically does not charge GST on goods sent for job work, the job worker charges GST on the job work service (processing/labour charge) itself, and goods returned after processing need to be matched back to what was originally sent, not treated as a fresh purchase.
Tracking goods sent for job work as the principal's own stock
Under section 143 of the CGST Act, inputs or capital goods sent to a job worker without payment of tax remain, for GST purposes, deemed to be the principal's own stock, and need to be received back (or supplied further from the job worker's premises, where permitted) within prescribed time limits — commonly one year for inputs and three years for capital goods, though these limits can be extended and have been revised, so confirm the current position. For financial reporting, the goods should continue to be recognised in the principal's own inventory while at the job worker's premises, since risk and control have not transferred.
- 01Obtain the job-work-out register and reconcile it against delivery challansGoods sent for job work move on a delivery challan (form GST ITC-04 reporting references the same movement), not a tax invoice. Confirm every challan has a matching entry in the job-work-out register.
- 02Age goods sent for job work against the statutory time limitGoods still with the job worker beyond the prescribed period are deemed a supply from the date they were originally sent, which can trigger a GST liability the client may not have recognised.
- 03Confirm goods sent out are still included in the principal's physical and book inventoryA common error is removing job-work-out goods from the inventory count and the books entirely, as if they had been sold, when they remain the principal's asset.
- 04Reconcile quantity sent against quantity received back, accounting for process lossDyeing, bleaching and finishing all involve an expected process loss (shrinkage, wastage) — confirm the loss booked matches an industry-reasonable norm and isn't being used to disguise diverted or sold-off goods.
GST on the job work charge itself
The job worker's invoice for the processing service attracts GST at whatever rate applies to that specific job work service, and this is a separate transaction from the goods movement — the principal pays GST on the labour/processing charge and claims input credit on it in the normal way, while the goods movement itself (sending and receiving back) is typically not a taxable supply at all when done under the section 143 framework.
| Leg of the transaction | GST treatment to verify |
|---|---|
| Principal sends raw material/semi-finished goods to job worker | No GST — movement under delivery challan, not a taxable supply, subject to time-limit compliance |
| Job worker's processing/labour charge invoice | GST charged by job worker on the job work service; principal takes input credit |
| Job worker returns processed goods to principal | No GST — return of principal's own goods |
| Job worker directly supplies processed goods to a third party on the principal's instruction | Treated as a supply by the principal, with specific conditions to be met for this route |
Regulatory requirement
The specific ITC-04 filing requirement, the time limits for return of goods, and the conditions for a job worker supplying directly to a third party are set out in the CGST Act and rules and have seen procedural changes over time. Confirm the current filing obligations and time limits before concluding on compliance.
A principal that has stopped filing ITC-04 returns, or never started, because the job work volume 'is small,' is still non-compliant if the filing threshold applies to it — check the client's actual filing history rather than accepting a materiality argument that GST law itself doesn't make.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- GST & GSTR-2BReverse charge mechanism (RCM) audit testingHow to test that reverse-charge GST liability was actually paid in cash, not offset against ITC, and that the matching credit landed in the right period.
- Inventory & stockInventory valuation audit: FIFO, weighted average and cost testingTesting the cost formula actually applied against the one disclosed, NRV testing, and overhead absorption into manufacturing cost.
- Inventory & stockConsignment stock: audit treatment and testingDistinguishing consignment-in from owned stock and the reverse, who recognizes it, GST implications at a high level, and common misclassification.
- GST & GSTR-2BGSTR-2B reconciliation: a practical guide for auditorsWhat GSTR-2B is, how the Invoice Management System changed it, the statutory conditions that govern input credit, and how to run and conclude the reconciliation.
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