The Central Board of Indirect Taxes and Customs (CBIC) has recently issued GST Circular 195/07/2023 dated July 17, 2023, providing valuable clarification regarding the availability of Input Tax Credit (ITC) for warranty replacement of parts and repair services during the warranty period. This circular aims to bring uniformity in the interpretation and implementation of the law across different field formations.
Background and Industry Representation
The CBIC received representations from trade and industry, highlighting a common trade practice where original equipment manufacturers (OEMs) and suppliers offer warranties for the goods and services they provide. Under these warranties, replacement goods and services are supplied to customers free of charge without any separate consideration. However, varying interpretations by investigation wings and field formations have led to conflicting views on the GST liability and the need to reverse ITC for such supplies. To address these concerns and reduce unnecessary litigation, the CBIC issued the following clarifications.
Issue #1: GST Liability on Warranty Replacement and Repair Services
It has been a common practice for original equipment manufacturers/suppliers to offer warranty for their goods/services. During the warranty period, replacement goods/services are provided to customers free of charge, without any separate consideration. However, there have been conflicting interpretations regarding the GST liability on such replacement parts and repair services. The CBIC has clarified this issue as follows:
Clarification: The value of the original supply of goods already includes the estimated cost of replacement parts and repair services during the warranty period, on which GST has been paid. Hence, if the manufacturer provides replacement parts or repair services during the warranty period without charging any consideration, no additional GST is applicable. However, if any additional consideration is charged for these services, GST will be payable on that amount.
Issue #2: No Reversal of Input Tax Credit
Another concern raised was whether the manufacturer is required to reverse the input tax credit for replacement parts or repair services provided during the warranty period without charging any additional consideration from the customer. The CBIC has provided the following clarification:
Clarification: Since the value of the original supply already includes the estimated cost of replacement parts and repair services during the warranty period, these supplies are not considered exempt. Therefore, the manufacturer is not required to reverse the input tax credit for the replacement parts or repair services provided during the warranty period without any extra consideration.
Issue #3: Distributor’s Role in Warranty Replacement and Repair Services
There have been instances where a distributor provides warranty-related replacement parts or repair services on behalf of the manufacturer without charging any consideration from the customer. The CBIC has provided clarity on the GST implications in such cases:
Clarification: If the distributor provides these services without charging any consideration from the customer, no GST is payable by the distributor. However, if any additional consideration is charged for the replacement parts or services, GST will be applicable on that amount.
Issue #4: Supply and Input Tax Credit Reversal between Manufacturer and Distributor
In scenarios where the distributor replaces parts under warranty on behalf of the manufacturer, questions have arisen regarding the supply between the distributor and the manufacturer and the need to reverse the input tax credit. The CBIC has addressed this issue comprehensively:
a) If the distributor replaces parts using their own stock or purchased from a third party and charges the manufacturer for those parts, GST will be payable by the distributor. The manufacturer can then claim input tax credit for the amount paid to the distributor. In this case, the distributor is not required to reverse the input tax credit.
b) If the distributor requests replacement parts from the manufacturer and the manufacturer provides them to the distributor without charging any consideration, no GST is payable on the replacement parts provided by the manufacturer. Additionally, the manufacturer is not required to reverse the input tax credit for the replaced parts provided by the distributor.
c) If the distributor replaces parts using the supply already received from the manufacturer and the manufacturer issues a credit note for the replaced parts, the manufacturer can adjust the tax liability, provided the distributor has reversed the input tax credit availed for the replaced parts.
Issue #5: Repair Services Provided by Distributor under Warranty
The CBIC has provided clarification on the GST implications when a distributor provides repair services without any consideration as part of the manufacturer’s warranty but charges the manufacturer separately:
Clarification: In such cases, there is a supply of service by the distributor to the manufacturer. GST should be payable on these repair services by the distributor and the manufacturer can claim input tax credit, subject to other conditions of the CGST Act.
Issue #6: GST on Extended Warranties
The circular also addresses the GST implications of extended warranties offered by companies:
a) If a customer agrees to an extended warranty at the time of the original supply, the consideration for the extended warranty is part of the value of the composite supply (goods). GST should be payable accordingly.
b) However, if a customer enters into an extended warranty agreement after the original supply, it is considered a separate contract. GST should be payable by the service provider (manufacturer, distributor or third party) based on the nature of the contract (goods, services or composite supply of goods and services).
CBIC GST Circular 195/07/2023 dated 17/07/2023: Clarification on ITC Availability for Warranty Period Replacement/ Repair Services
With the issuance of GST Circular 195/07/2023, the CBIC has provided much-needed clarity on the availability of ITC for warranty replacement of parts and repair services during the warranty period. This clarification will help businesses avoid unnecessary litigation and ensure consistency in the interpretation and implementation of the law.
CA Abhinav Aggarwal is a qualified Chartered Accountant and ICAI member since 2010. He holds vast experience in Audit, Income Tax & GST and is a passionate writer on the CA profession and related topics.
Disclaimer: While reasonable efforts have been made to ensure the accuracy and reliability of the information presented in this article, it should not be considered as professional tax advice or guidance. For compliance, the readers are advised to directly refer to the relevant laws, regulations and notifications issued by the appropriate authorities.