Job Work — Outsourced Manufacturing

Not everything needs to be manufactured in-house. Indian SMBs routinely send materials to external contractors for specialized processes — heat treatment, electroplating, powder coating, CNC machining, embroidery, dyeing, or any operation that requires equipment the company does not own or capacity it does not have.

This practice is known as job work (also called subcontracting, outsourced processing, or contract manufacturing). It is deeply embedded in India's manufacturing ecosystem, where networks of small, specialized workshops serve larger manufacturers. The GST framework explicitly recognizes job work and provides specific provisions for it under Section 143 of the CGST Act.

Udyamo ERP Lite provides a Contractor management module to maintain your registry of external processors, and Job Work Orders to track the materials you send out and the processed goods you receive back. This chapter covers the contractor master and the concepts behind job work. The next chapter covers job work orders and receipts in detail.

What You Will Learn

• What job work is and why it is prevalent in Indian manufacturing
• Common reasons SMBs use job work
• GST implications of job work in India
• What a Contractor record is and how to manage it
• Active vs. inactive contractor status
• Step-by-step: adding a contractor to the system

Prerequisites

Required: Before setting up job work in the system:

• You should understand the manufacturing workflow (see Chapter 12)
• Items that will be sent for job work should exist in the Item Master
• You should have your contractors' GSTIN and contact details available

What is Job Work?

Job work is a manufacturing arrangement where a principal manufacturer sends raw materials or semi-finished goods to an external contractor (the "job worker") for a specific processing operation. The contractor processes the materials and returns the finished or semi-finished goods to the principal manufacturer.

The key characteristic of job work is that the ownership of the materials remains with the principal manufacturer. The contractor is performing a service (the processing operation) on the principal's materials, not buying and selling goods. This distinction has important implications for accounting, taxation, and inventory tracking.

A Practical Example

A steel fabrication shop manufactures MS flanges. The shop has cutting, drilling, and assembly capabilities in-house, but does not own a heat treatment furnace. The heat treatment step — which hardens the steel and relieves internal stresses — is outsourced to a nearby heat treatment contractor.

The workflow is:

1. The fabrication shop cuts and drills the flange blanks in-house
2. The blanks are sent to the heat treatment contractor
3. The contractor performs the heat treatment process
4. The treated flanges are returned to the fabrication shop
5. The shop performs final assembly, coating, and inspection

The materials (flange blanks) belong to the fabrication shop throughout the process. The contractor provides only the heat treatment service.

Why SMBs Use Job Work

Job work is not a stopgap — it is a strategic manufacturing decision. Indian SMBs use job work for several well-founded reasons:

Specialized equipment. Some processes require expensive, specialized machinery that a small manufacturer cannot justify purchasing. A CNC 5-axis machining centre costs crores. A powder coating plant requires significant capital and space. Job work provides access to these capabilities without the capital investment.

Capacity overflow. During peak demand periods, in-house capacity may not be sufficient. Rather than turning away orders or investing in capacity that will sit idle during lean periods, manufacturers send overflow work to contractors. This flexes capacity up without fixed cost increases.

Cost optimization. Contractors who specialize in a single process often achieve better economies of scale than a manufacturer doing the same process for a fraction of their volume. The unit cost of electroplating 500 parts at a dedicated electroplating shop may be lower than running a small in-house setup.

Focus on core competencies. By outsourcing non-core processes, a manufacturer can focus its capital, management attention, and shop floor space on the operations where it adds the most value.

Speed to market. When launching a new product, outsourcing some processes allows faster start-up than building all capabilities in-house.

GST Implications of Job Work in India

Job work has specific provisions under Indian GST law that manufacturers must understand and comply with:

Section 143 of the CGST Act

Section 143 allows a registered person (the principal manufacturer) to send inputs or capital goods to a job worker for processing without payment of GST at the time of sending. This is a significant provision — it means the outward movement of goods to a job worker is not treated as a supply, and no GST is charged.

However, there are conditions:

Practical Implications for ERP Tracking

These GST provisions make it essential to track:

• What was sent to the job worker (item, quantity, description)
• When it was sent (date — the 1-year clock starts ticking)
• What was received back (quantity, date)
• What is still outstanding at the job worker's premises

Udyamo ERP Lite's job work orders and receipts provide exactly this tracking, ensuring you have the data needed for GST compliance.

Warning: The 1-year time limit for inputs at the job worker's premises is a strict requirement. Set up reminders to track outstanding job work orders and follow up with contractors before the deadline approaches. Failure to comply converts the transaction into a supply, triggering GST liability with interest.

GST on Processing Charges

The job worker charges the principal for the processing service. This charge is subject to GST:

• The applicable rate depends on the nature of the processing service (typically 12% or 18%)
• The principal can claim Input Tax Credit (ITC) on the GST paid on processing charges
• The job worker must be registered under GST if their aggregate turnover exceeds the threshold

The Contractor Master

In Udyamo ERP Lite, a Contractor record represents an external job worker — the person or business that performs outsourced processing operations on your materials.

The contractor master is your registry of all external processors. Maintaining accurate contractor records enables:

• Quick selection when creating job work orders
• GST compliance (GSTIN is captured and validated)
• Performance tracking over time
• Communication management (contact details, address)

Contractor Fields

Active vs. Inactive Contractors

The active field controls whether a contractor appears in selection lists when creating new job work orders. The Toggle Active action lets you switch a contractor between active and inactive status.

When to deactivate a contractor:

• The contractor has shut down operations
• You have permanently stopped using the contractor due to quality or delivery issues
• The contractor's GST registration has been cancelled

Why not delete instead of deactivate? Historical records. If you delete a contractor, you lose the reference on all past job work orders. Deactivating preserves the history — you can still see past job work orders and their details — while preventing the contractor from being used in new transactions.

Tip: Periodically review your contractor list. Deactivate contractors you have not used in over a year. This keeps the selection list clean and relevant for users creating new job work orders.

Step by Step: Adding a Contractor

Step 1: Navigate to the contractor list.

Go to Manufacturing > Contractors. You will see a list of existing contractors. Click New Contractor.

Step 2: Fill in the contractor details.

For this example, we are adding a heat treatment contractor:

Step 3: Save the contractor.

Click Save. The contractor is now available for selection when creating job work orders.

Step 4 (if needed later): Deactivate the contractor.

If you stop using this contractor, navigate to the contractor record and click Toggle Active. The status changes from active to inactive. The contractor will no longer appear in selection lists for new job work orders.

Tips & Best Practices

Tip: Always capture the contractor's GSTIN. Even if the field is not mandatory in the system, the GSTIN is essential for GST-compliant documentation of job work transactions. Verify the GSTIN on the GST portal (gst.gov.in) before entering it.

Tip: Use the Contact Person field to record the person you actually coordinate with at the contractor's facility — this is often different from the proprietor whose name appears on the GST registration. Having the right contact name speeds up communication when following up on deliveries or quality issues.

Tip: Maintain a separate internal note (in the contractor record or in your own files) about each contractor's capabilities, typical lead times, and quality track record. This institutional knowledge helps when deciding which contractor to use for a specific job.

Warning: Do not create duplicate contractor records for the same business. If a contractor changes their address or contact person, update the existing record rather than creating a new one. Duplicates split your job work history and make it difficult to get a complete picture of your dealings with a contractor.

Quick Reference

Contractor Actions