GST on warranty replacements & extended warranty provisions: New Circular

The Goods and Services Tax (GST) regime in India frequently undergoes refinements to address practical challenges faced by businesses. One such recent update is the issuance of Circular No. 216/10/2024-GST dated 26/06/2024, which provides critical clarifications on warranty replacements and extended warranty provisions. This circular not only elucidates previously ambiguous areas but also introduces significant changes to the guidelines established in Circular No. 195/07/2023-GST dated 17/07/2023. This article delves into these clarifications and changes, offering a comprehensive analysis to ensure businesses remain compliant while maximizing their GST benefits.

Detailed Analysis of Circular No. 216/10/2024-GST w.r.t  Circular No. 195/07/2023-GST dated 17/07/2023

A. Substitutions of the words “Part/Parts” with “Goods or their parts”

The circular clarifies that when manufacturers or suppliers provide a warranty for goods and defects are detected within the warranty period, the manufacturer may need to replace either parts or the entire goods, depending on the extent of the damage. While the table in Paragraph 2 of the circular specifically addresses the replacement of parts, it also applies to the replacement of whole goods under warranty. Consequently, any references to “part(s)” in Paragraph 2 of Circular No. 195/07/2023-GST dated 17/07/2023 should be interpreted to include “goods or their parts, as applicable.”

B. Replacement of Parts and Goods under Warranty

> Issue: When distributors replace parts or goods under warranty on behalf of manufacturers, several questions arise:

• • Is there a supply transaction between the distributor and the manufacturer?
  • Is the distributor required to reverse the input tax credit (ITC) for the replaced parts?

√ Clarification:

(a) Scenario 1: Distributor Replaces Parts and Invoices Manufacturer

• • Process: The distributor replaces parts using their own stock or by purchasing from a third party, then invoices the manufacturer.
  • GST Implication: GST is payable by the distributor on the invoice to the manufacturer. The manufacturer can claim ITC, and no ITC reversal is needed by the distributor.

Example: Distributor A replaces a faulty part using their stock and invoices Manufacturer B, charging GST, which Manufacturer B can claim as ITC.

(b) Scenario 2: Manufacturer Supplies Parts to Distributor Without Consideration

• • Process: The distributor requests the manufacturer to supply parts for replacement under warranty, and the manufacturer provides these parts without charging consideration.
  • GST Implication: No GST is payable, and no ITC reversal is required by the manufacturer.

Example: Distributor A requests parts from Manufacturer B, who supplies them without issuing an invoice. No GST is involved, and no ITC reversal is necessary.

(c) Scenario 3: Manufacturer Issues Credit Note for Parts Supplied to Distributor

• • Process: The distributor uses parts previously supplied by the manufacturer, who then issues a credit note.
  • GST Implication: The manufacturer adjusts the tax liability, and the distributor must reverse the ITC availed on these parts.

Example: Distributor A uses parts from Manufacturer B’s previous supply. Manufacturer B issues a credit note, and Distributor A reverses the corresponding ITC.

New Point as per Circular No. 216/10/2024-GST:

(d) Scenario 4: Distributor Replenishes Stock from Manufacturer

• • Process: The distributor replaces parts from their stock and later requests replenishment from the manufacturer, who supplies the parts via a delivery challan.
  • GST Implication: No GST is payable on the replenishment, and no ITC reversal is required by the manufacturer.

Example: Distributor A replaces parts from their stock and requests replenishment from Manufacturer B, who supplies the parts through a delivery challan without charging GST.

C. Extended Warranty Provisions

> Issue: Is GST payable when companies offer extended warranty options to customers at different times?

√ Clarification:

(a) Extended Warranty at Original Supply

• • Process: If a customer purchases an extended warranty at the time of the original supply, it forms part of the composite supply.
  • GST Implication: The consideration for the extended warranty is included in the price of the goods, and GST is payable on the total amount.

Example: Customer A buys a TV with an extended warranty at purchase time. GST is charged on the total price, including the warranty.

(b) Extended Warranty After Original Supply

• • Process: If a customer purchases an extended warranty after the original supply, it is considered a separate contract.
  • GST Implication: GST is payable by the service provider based on the contract nature (goods, services, or composite supply).

Example: Customer A buys an extended warranty for their TV a year later. This is treated as a separate supply of services, and GST is charged accordingly.

New Substitution in Point (a) as per Circular No. 216/10/2024-GST:

(a) Updated Point:

• • • Process: If a customer buys an extended warranty from the same supplier at the time of original purchase, it forms part of the composite supply. If the warranty is supplied by a different entity, it is treated as a separate supply.
    • GST Implication: GST is charged on the total amount if from the same supplier, but treated as a separate service supply if from a different entity.

Example: Customer A buys a car and an extended warranty from the dealer (same supplier). GST is charged on the total. If the warranty is bought later from a third party, it is treated as a separate service.

Conclusion

Circular No. 216/10/2024-GST offers essential clarifications and updates to ensure consistency and clarity in handling warranty replacements and extended warranties under GST. By extending the applicability of existing rules to whole goods replacements and distinguishing between same-supplier and different-supplier warranties, the circular aims to streamline compliance and minimize ambiguities. Businesses must carefully review these updates to ensure proper application and maximize their tax benefits while remaining compliant with GST regulations.