GST Liability & ITC Reversal: Replacement of Parts or Goods as such and Repair Services Provided by the Manufacturer- Circular No. 216/10/2024 Dated; 26.06.2024)
The Circular No. 216/10/2024 Dated; 26.06.2024 clarifies the GST liability on the replacement of parts and repair services provided under warranty by manufacturers and distributors. No GST is applicable if no additional consideration is charged to the customer during the warranty period, as GST is already paid on the original supply. ITC reversal is not required in such cases. However, if distributors use their stock or purchase from third parties for warranty replacements, they must charge GST to the manufacturer, who can claim ITC. Extended warranty sales are treated as a distinct service, subject to GST, depending on whether the warranty is sold at the time of the original goods’ supply or later. If provided by the same supplier as the goods, it is treated as a composite supply; if provided separately or after the original purchase, it is taxed as an independent service. Each entity involved in the transaction must handle its GST obligations accordingly, ensuring clarity in tax treatment for warranties.
GST Liability on Replacement of Parts or goods Repair Services During Warranty (By Manufacturer):
Question:
Is GST payable on replacement of parts or repair services provided by the manufacturer during the warranty period without charging any consideration from the customer?
Answer:
No GST is payable if no additional consideration is charged. GST is already paid on the original supply of goods, which includes the cost of future replacement or repair during the warranty period. However, GST will apply to any additional consideration charged.
ITC Reversal (By Manufacturer):
Question: Is the manufacturer required to reverse the input tax credit (ITC) for replacement parts or repair services provided during the warranty period without charging additional consideration from the customer?
Answer: No reversal of ITC is required. The original supply includes the likely cost of replacements or services, and these cannot be considered as exempt supplies. The manufacturer retains the ITC.
GST Liability & ITC Reversal: Replacement of Parts or Goods as such and Repair Services Provided by Distributors.
GST Liability on Replacement of Parts or Goods or Repair Services (By Distributor):
Question: Is GST payable on replacement of parts and/or repair services provided by a distributor without charging the customer as part of a warranty on behalf of the manufacturer?
Answer: No GST is payable by the distributor if no consideration is charged from the customer. If additional consideration is charged from the customer, GST is applicable on that amount.
Transactions Between Manufacturer and Distributor.
1. Distributor Replaces Parts or goods as such Using Own Stock or Purchases from a Third Party:
- If the distributor replaces parts from his stock or buys from a third party, the distributor charges the manufacturer for the parts by issuing a tax invoice.
- GST Implications: GST is payable by the distributor on the supply made to the manufacturer, and the manufacturer can avail the input tax credit (ITC), subject to other conditions.
- ITC Reversal: No reversal of ITC is required by the distributor.
2. Distributor Raises a Requisition to the Manufacturer for Parts or goods:
- If the distributor requests the manufacturer to provide the parts for replacement, and the manufacturer supplies them without charging any separate consideration, no GST is payable on this transaction.
- GST Implications: No GST is payable on the parts provided by the manufacturer for replacement.
- ITC Reversal: No reversal of ITC is required by the manufacturer.
3. Distributor Replaces Parts or goods Using Stock Already Supplied by the Manufacturer:
- If the distributor replaces parts from the supply already received from the manufacturer and the manufacturer issues a credit note for the parts replaced, the manufacturer can adjust the tax liability under section 34(2) of the CGST Act.
- GST Implications: The manufacturer can adjust the tax liability via a credit note.
- ITC Reversal: The distributor must reverse the ITC availed on the parts replaced, for the manufacturer to adjust the tax liability.
4. Distributor Replaces Parts or goods Using Own Stock & then raises a requisition to the manufacturer for replenishment of the goods or parts (Inserted by Circular No. 216/10/2024-GST_26.06.2024):
- A distributor replaces goods or parts for a customer under warranty by using his own stock. The distributor then raises a requisition to the manufacturer for replenishment of the goods or parts. The manufacturer provides the goods or parts to the distributor through a delivery challan without charging any consideration.
- GST Implications: No GST is payable on the replenishment of goods or parts from the manufacturer to the distributor.
- ITC Reversal: No reversal of ITC is required by the manufacturer for the goods or parts replenished to the distributor.
Service Charges Charged by Distributors to Manufacturer.
Scenario:
The distributor provides repair services to the customer, as part of the warranty, without charging any consideration from the customer, but charges the manufacturer for these services via a tax invoice or debit note.
GST Implications:
- The repair services provided by the distributor to the customer on behalf of the manufacturer are considered a supply of service.
- The manufacturer is the recipient of this service as per section 2(93)(a) of the CGST Act, 2017.
- GST is payable by the distributor on the repair services provided to the manufacturer.
- The manufacturer can avail the input tax credit (ITC) for the GST paid on these repair services, subject to the conditions of the CGST Act.
Extended Warranty.
- The supply of an extended warranty serves as an assurance provided to customers by the manufacturer or a third party that the goods will operate free of defects during the extended warranty period. If defects arise due to faulty materials or workmanship, the manufacturer or third party will be responsible for repairing or replacing the defective parts.
- However, at the time of selling or supplying the extended warranty, it is unknown whether the goods will require:
i) Replacement of parts.
ii) Just repair services, or
iii) Neither
- Therefore, the extended warranty is primarily an assurance, not an actual commitment to replace parts or provide repairs at the time of its sale. It simply guarantees that, if issues arise during the extended warranty period, they will be addressed by repair or replacement if needed.
(A) Extended Warranty Availed at the Time of Original Supply.
1. Supplier of Goods and Extended Warranty is the Same.
- Scenario:
The extended warranty is provided by the same entity that supplies the goods (e.g., a dealer or manufacturer).
- GST Treatment:
In this case, the extended warranty is treated as part of a composite supply, where the goods are the principal supply, and the extended warranty is ancillary.
GST is payable on the entire value, which includes the goods and the extended warranty, at the time of the original supply.
- Analysis:
As the same supplier is providing both the goods and the extended warranty, the GST treatment is unified under a composite supply. This results in a single GST rate applicable to the whole transaction.
2. Supplier of Goods and Extended Warranty are Different.
- Scenario:
The supplier of goods (e.g., a dealer) and the supplier of the extended warranty (e.g., OEM or a third party) are different entities.
- GST Treatment:
In this case, the supply of goods and the supply of the extended warranty are treated as separate supplies: a) The supply of goods is taxed separately based on the applicable GST rate for the goods.
- The supply of the extended warranty is also taxed separately, based on the GST rate for warranty services.
- Analysis:
Since different suppliers are involved, the transaction cannot be treated as a composite supply. Each entity providing goods or warranty services must handle its GST obligations individually. This means that GST is payable separately by the respective suppliers on their specific supplies:
i) The dealer (goods supplier) charges GST on the goods.
ii) The OEM or third party (warranty supplier) charges GST on the extended warranty.
- Key Takeaways:
Same Supplier: If the supplier of both goods and the extended warranty is the same, GST is treated under a composite supply, with one tax rate applied to the entire transaction.
Different Suppliers: If the supplier of goods and the supplier of the extended warranty are different, separate supplies are recognized, and each supply is taxed according to its respective GST rate. The two transactions are independent of each other, even if the agreement is made at the same time
(B) Extended Warranty Availed After the Original Supply.
Scenario:
When a consumer enters into an agreement for an extended warranty after the original supply of goods, the extended warranty is treated as a separate supply of services. The supplier of the extended warranty becomes liable for GST on this supply.
Analysis:
1) Nature of the Extended Warranty:
- The extended warranty in this case is considered a distinct service from the original supply of goods. It is no longer part of the original transaction and is treated independently.
2) GST Liability:
- The supplier of the extended warranty (whether it is the manufacturer, dealer, or third party) will be liable to discharge the GST applicable on the supply of services.
- GST is payable on the value of the extended warranty service, which is taxed separately from the original goods.
3) Time of Agreement:
- Since the agreement for the extended warranty occurs after the original supply, it cannot be included as part of the composite supply of goods. The extended warranty is treated as a service contract and taxed as such.
4) Tax Treatment:
- The GST rate applied to the extended warranty will be based on the classification of services under the GST framework.
- This ensures that the extended warranty is taxed separately, even though it may relate to the original goods purchased.
5) Conclusion:
- When a consumer purchases an extended warranty after the original supply of goods, it is treated as a separate service for GST purposes. The supplier of the extended warranty must pay the applicable GST on this service. This distinct tax treatment ensures that the extended warranty, although related to the goods, is independently recognized for tax purposes.
Also Read:
Clarification on ITC Availability for Warranty Replacement
GST credit Reversal on goods used for free supply under warranty period?
GST liability & reversal of ITC in case of Warranty/Extended Warranty
GST not leviable on free of cost supply during warranty period
GST liability and ITC Clarifications for Warranty/ Extended Warranty
Author Bio
