GST Circular on Warranty
A circular on the GST charge on warranties has been released by the CBIC’s GST Policy department. In this case, the guarantee covers components replacement and repair services rendered during the warranty period. Additionally, if ITC is available for warranty replacements and repairs.
The board has fielded countless questions about the GST that is levied on warranties that are issued at the time of purchase, as well as warranties that are renewed at the time of purchase and when the original guarantee expires. Some consumers pay for the extended warranty at the time of purchase, while others pay for it immediately in order to prevent the original product warranty from expiring within a predetermined window of time.
The issue of whether to charge GST for parts replacement or repairs made while the warranty is still in effect arises in a few different contexts. Additionally, whether the distributor or producer may use the ITC in the different circumstances covered below:
1. The first instance of this type of scenario is when the original equipment or product maker grants the consumer a warranty for the items they purchased from him, replaces parts as needed, or performs repairs without collecting payment in advance. Can the customer be charged GST for the repaired part or for the services rendered in this scenario?
Here, the answer is simply no. Since the GST was previously paid at the time of the first purchase and the guarantee covers the cost of such replacements and repairs, there is no need to charge additional GST.
There are situations where the manufacturer may charge the client more for any part replacement or repair services; in these situations, GST must be paid.
2. If an equipment manufacturer replaces or repairs a part of the equipment under warranty for the customer without charging more, is the company able to reverse the input tax credit for such replacement or repair?
Once again, the answer is no. The products’ pricing covers any replacement or repair costs for goods or parts throughout the warranty term; as a result, they are not offered for free and are not excluded from being eligible to claim an ITC reversal.
3. Another situation is when a distributor offers a customer a replacement or performs repairs on behalf of the manufacturer for no charge as part of the warranty. Can a distributor of this kind pay the GST?
Again, since there is no further consideration, no GST is due. GST is due on any additional charges that are made to the client in exchange for additional consideration.
4. Here’s the case: the distributor, acting on behalf of the manufacturer, offers the customer part replacements as part of the warranty. Supplies may be exchanged between the producer and the distributor. Is the distributor required to reverse the ITC on replaced parts in such a scenario?
The following options are available in this situation:
The distributor may purchase the parts from a third party and raise a tax invoice on the manufacturer, or he may replace the parts for the customer under warranty from his own stock. The manufacturer is entitled to an input tax credit (ITC) for the supplies that the distributor pays the GST for. The ITC must be reversed by the distributor.
The manufacturer will provide the part to the distributor upon receiving a requisition from the latter. The manufacturer is not obligated to pay any GST, and the distributor is not required to reverse any ITC.
The third option in this scenario is for the distributor to swap out the part that is under warranty for the client using the part that he has already received from the manufacturer, who then gives the distributor a credit note for the replaced part. If the distributor has reversed the ITC against the replaced parts, the manufacturer may modify his tax liability.
5. The distributor will raise a tax invoice on the manufacturer or issue a debit note, but he may not charge the consumer for the repair services he offers. Is the distributor required to pay GST on such a tax invoice?
In this case, the manufacturer would be eligible to receive the ITC for the services rendered and would be the beneficiary of the GST.
6. Nowadays, a lot of product manufacturers provide extended warranties at the time of purchase or just before the usual guarantee expires. Is the GST due in both situations under such circumstances?
Since the extended warranty in the first instance is a component of the composite supply and is covered by the product’s price, there is no additional GST due because it is a composite supply.
In the second scenario, opting for an extended warranty at the time the original warranty expires is akin to entering into a new agreement and, as such, constitutes a new transaction. As such, the person making the extended warranty agreement must pay GST.
Any issues that the parties involved have putting this circular into practice should be brought to the board’s attention.
