Clarification in respect of GST liability and input tax credit (ITC) availability in cases involving Warranty/ Extended Warranty

27Jun 2024 by admin

Circular No.: 216/10/2024-GST
Date: 26th June, 2024
Subject: Clarification in respect of GST liability and input tax credit (ITC) availability in cases involving Warranty/ Extended Warranty

Key Points and Clarifications:

Background:

This circular addresses the GST liability and the availability of input tax credit (ITC) in scenarios involving the provision of warranty and extended warranty services. It aims to provide clarity on how GST applies to these services and the implications for ITC, ensuring uniformity in the implementation of these provisions across all field formations.

Key Provisions Involved:

  • Section 2(102) of the CGST Act, 2017: Defines “services”.
  • Section 2(30) of the CGST Act, 2017: Defines “composite supply”.
  • Section 15 of the CGST Act, 2017: Determines the value of supply.
  • Section 16 of the CGST Act, 2017: Pertains to eligibility and conditions for taking input tax credit.
  • Section 168(1) of the CGST Act, 2017: Empowers the Board to issue instructions and directions to GST officers to ensure uniformity in the implementation of the Act.

Issues and Clarifications:

Issue 1: GST Liability and ITC Availability for Goods/Parts Replaced Under Warranty

  • Concern: Clarification on GST liability and ITC availability when goods or parts are replaced under warranty without any additional consideration.
  • Clarification:
    • The replacement of goods or parts under warranty without any additional consideration is treated as a composite supply. The principal supply being the warranty, it takes the nature of the principal supply.
    • No GST is payable on such replacements as the consideration is already included in the original supply of goods.
    • The supplier can avail ITC on goods or parts procured for replacement under warranty.

Issue 2: Distributor Replacing Goods/Parts Under Warranty and Getting Replenishment from Manufacturer

  • Concern: Treatment of transactions where a distributor replaces goods or parts under warranty and subsequently receives replenishment from the manufacturer.
  • Clarification:
    • When a distributor replaces goods or parts under warranty, it does not constitute a supply. The distributor is not required to charge GST on such replacements.
    • The replenishment received by the distributor from the manufacturer is considered a supply, and the manufacturer is required to issue an invoice and charge GST.
    • The distributor can avail ITC on the GST paid for the replenishment received from the manufacturer.

Issue 3: Nature of Supply of Extended Warranty at Original Supply and After Original Supply

  • Concern: Clarification on the nature of supply for extended warranty services offered at the time of original supply and when offered after the original supply.
  • Clarification:
    • Extended Warranty at Original Supply:
      • When the extended warranty is provided along with the original supply of goods, it is treated as a composite supply where the principal supply is the goods.
      • The entire consideration, including the amount charged for the extended warranty, is subject to the GST rate applicable to the principal supply (goods).
    • Extended Warranty After Original Supply:
      • When the extended warranty is offered separately after the original supply of goods, it is treated as a distinct supply of service.
      • The GST rate applicable to the extended warranty service will apply.

Key Points from Circular:

  1. Replacement Under Warranty:
    • Goods or parts replaced under warranty without additional consideration are part of a composite supply where the principal supply is the warranty.
    • No additional GST is payable on such replacements, and ITC is available for procurement of replacement goods or parts.
  2. Distributor Replacement and Replenishment:
    • Distributors replacing goods or parts under warranty do not need to charge GST on such replacements.
    • Replenishment received from the manufacturer is treated as a supply, and the manufacturer must charge GST. Distributors can claim ITC on such transactions.
  3. Extended Warranty:
    • At Original Supply: Considered a composite supply with goods as the principal supply, and the entire amount is subject to the GST rate on goods.
    • After Original Supply: Treated as a separate service supply and subject to the GST rate applicable to services.

Tabular Summary

IssueClarification
GST liability and ITC availability for goods/parts replaced under warrantyNo additional GST payable on replacements; ITC available for procurement of replacement goods/parts.
Distributor replacing goods/parts under warranty and getting replenishment from manufacturerNo GST on replacement by distributor; GST charged by manufacturer on replenishment, and distributor can claim ITC.
Nature of supply of extended warranty at original supply and after original supplyAt Original Supply: Composite supply with goods as principal supply. After Original Supply: Separate service supply subject to GST rate on services.