GST Liability/ITC on Warranty Period Replacement/ Repair Services: CBIC Clarifications

The CBIC has received representations from trade and industry in respect of the common practice of providing warranties for goods and services by original equipment manufacturers and suppliers. During the warranty period, replacement goods or services are supplied to the customers free of charge without any separate consideration at the time of replacement. This has resulted in confusion and unnecessary litigation due to divergent interpretations by the investigation wings and field formations in respect of GST liability and requirement of reversal of ITC on such warranty replacements and repair services.

To address this issue and ensure uniformity in the implementation of the law, the CBIC has examined the matter and issued clarifications under section 168(1) of the CGST Act, 2017. These clarifications provide clear guidance on the GST liability and the requirement for ITC reversal in respect of warranty replacements and repair services supplied without any consideration from customers during the warranty period. CBIC has so far issued two clarification circulars as under:

i) CBIC GST Circular 195/07/2023 dated 17/07/2023: Clarification on ITC Availability for Warranty Period Replacement/ Repair Services

ii) CBIC GST Circular 216/10/2024 dated 26/06/2024: Clarification on taxability and ITC availability in respect of replacement of parts and repaid services during Warranty/ Extended Warranty period

The clarifications provided by the CBIC in the above Circulars are summarised hereunder:

Issue #1: GST Liability on Warranty Replacement and Repair Services

Whether GST is payable on the replacement of parts or supply of repair services provided by the original equipment manufacturer to the customer during the warranty period, when no separate consideration is charged at the time of such replacement or repair services?

The value of the original supply of goods includes the warranty and already takes into account the probable cost of replacement parts and repair services provided during the warranty period, and tax has been paid on this at the time of the original supply. Therefore, no additional GST is chargeable on the replacement of parts or repair services provided during the warranty period without separate consideration. Nevertheless, if any additional consideration is charged for the replacement of parts or services, GST will be payable on that additional amount. [Circular 195/07/2023]

Issue #2: Reversal of Input Tax Credit Not Required

Whether the manufacturer is obliged to reverse the ITC, when replacement parts or repair services are supplied under warranty without an additional consideration being charged from the customer?

The value of the original supply, including the warranty, already includes the cost of replacement parts and repair services during the warranty period. Hence, these supplies are not exempt, and the manufacturer would not be required to reverse the ITC for the replacement parts or repair services provided under warranty. [Circular 195/07/2023]

What about the cases where goods as such or the parts are replaced under warranty?

GST Circular 195/07/2023 has dealt only with the replacement of parts and has invited requests for clarification on the replacement of goods as such also. The CBIC has now confirmed that the guidance provided in the circular also applies to the replacement of entire goods under warranty. Hence, references to ‘parts’ in the circular should be read to include ‘goods or its parts’ as may be applicable. [Circular 216/10/2024]

Issue #3: GST Liability of Distributor

Whether GST is payable on replacement of parts and/or repair services provided by a distributor without any consideration from the customer as part of warranty on behalf of the manufacturer?

Where a distributor provides replacement parts and/or repair services under warranty on behalf of a manufacturer without charging the customer, no GST is payable by the distributor for these services. However, where the distributor charges any additional consideration for the replacement parts or services, GST will be payable on that additional amount. [Circular 195/07/2023]

Issue #4: Supply and ITC Reversal between Manufacturer and Distributor

Whether any supply is made between the distributor and the manufacturer when the distributor provides replacement parts to the customer under warranty on behalf of the manufacturer, and whether the distributor needs to reverse the ITC for such replacements?

The CBIC has clarified this issue in three parts, as may be applicable:

(a) If the distributor replaces parts using his stock or purchases from a third party and charges the manufacturer, GST is payable by the distributor and the manufacturer can claim ITC without the distributor having to reverse ITC.

(b) If the distributor requests parts from the manufacturer for replacement under warranty, no GST is payable by the manufacturer, and no ITC reversal is required by the manufacturer.

c) Where the distributor uses the parts already received from the manufacturer and the manufacturer issues a credit note, the tax liability can be adjusted provided the distributor reverses the ITC availed on the replaced parts. [Circular 195/07/2023]

CBIC further requested to clarify the implications in this scenario where the distributor replaces goods to customer under warranty, out of his own stock in order to provide prompt service on behalf of the manufacturer. Thereafter, the distributor raises a requisition to the manufacturer for the replaced goods. The manufacturer subsequently sends the goods to the distributor by delivery challan to replace the stock of goods earlier replaced by him. 

CBIC explains that when a distributor replaces goods or parts under warranty using his stock and subsequently raises a requisition to the manufacturer, the manufacturer supplies the goods or parts to the distributor by way of delivery challan at the time of replenishment, for which no consideration is charged by the manufacturer. In that case, no GST shall be payable on the replacement of goods or parts, and no reversal of ITC shall be required by the manufacturer for the replaced goods or parts. [Circular 216/10/2024]

Issue #5: Repair Services Provided by Distributor under Warranty

The distributor provides repair services, in addition to replacing parts, to the customer without any consideration as part of the warranty on behalf of the manufacturer. Subsequently, the distributor recovers from the manufacturer the said repair services rendered by him through a tax invoice or a debit note. Whether GST would be payable on such activities by the distributor?

CBIC states that in such a scenario, the distributor is providing a service, and the manufacturer is the recipient of the said repair service under the said provisions of the CGST Act, 2017. GST is payable on the supply of repair services by the distributor to the manufacturer. The input tax credit of the said service can be availed by the manufacturer subject to the conditions under the CGST Act. [Circular 195/07/2023]

Issue #6: GST on Extended Warranties

Whether GST would be payable when companies offer extended warranties to customers, either at the time of the original supply or just before the expiry of the standard warranty period?

The CBIC clarified that if a customer agrees to an extended warranty at the time of the original supply, the consideration for the extended warranty becomes part of the composite supply’s value, with GST payable accordingly. However, if the agreement for an extended warranty is entered into after the original supply, it would be treated as a separate contract, and GST would be payable by the service provider, be it the manufacturer, distributor, or a third party, depending upon the nature of the contract. [Circular 195/07/2023]

Further clarification sought from the CBIC on situations where an agreement for an extended warranty is made at the time of the original supply of goods and the supplier of the extended warranty is different from the supplier of the goods. How the extended warranty should be treated, whether as a supply that is separate and independent of the supply of goods or as a composite supply where the principal supply is the goods?

CBIC has clarified that where such an agreement for an extended warranty is entered at the time when the original supply of goods and the supplier of the extended warranty are different from the supplier of goods, then supplying of the extended warranty and supplying the goods cannot be considered as one composite supply. Instead, the supply of the extended warranty will be treated as a separate supply from the original supply of goods. [Circular 216/10/2024]

Further clarification also sought from the CBIC regarding the treatment of extended warranties sold after the original supply of goods. Whether these should be considered solely as a supply of services, as opposed to the current Circular which states that GST applicability depends on the nature of the contract (whether the extended warranty covers goods, services, or a composite supply of both).

In this regard, CBIC has clarified that when an extended warranty is sold subsequent to the original supply of goods or is treated as a separate supply from the original goods, it should be considered a supply of services distinct from the original supply of goods. Consequently, the supplier of the extended warranty is required to discharge the GST liability applicable to such a supply of services. [Circular 216/10/2024]