Introduction
Warranties are standard in the sale of goods. Manufacturers provide a warranty period during which they repair or replace defective goods at no additional cost. Many manufacturers also offer extended warranties for an additional charge. The question arises: How are warranty and extended warranty charges treated under GST?
The CBIC has issued Circular No. 216/10/2024-GST dated 26th June 2024 to clarify the GST liability and ITC implications in warranty and extended warranty cases.
This guide explains the legal framework and the practical implications.
Legal Framework: Circular No. 216/10/2024-GST
Normal Warranty
The circular clarifies that:
- Normal Warranty provided by the supplier is a composite supply if supplied along with the supply of goods. The principal supply is the supply of goods.
- The value of the supply of goods includes the cost of the warranty.
- No GST is payable on the replacement of parts or goods under warranty, as the cost is embedded in the original supply.
- No ITC reversal is required by the manufacturer for warranty replacements.
Extended Warranty
The circular provides the following clarifications for extended warranty:
- Extended Warranty is in the nature of conveying an assurance and not an actual replacement of parts or repairs.
- Supply of extended warranty is treated as a supply of services distinct from the original supply of goods.
- The supplier of the extended warranty is liable to discharge GST on such supply of services.
- If the extended warranty is supplied along with the goods as part of a composite supply, the principal supply is the supply of goods.
- If the extended warranty is supplied after the supply of goods, it is treated as a supply of service.
- If the extended warranty is provided by a third party, it is treated as a supply of service.
GST Rate on Extended Warranty
Extended warranty charges attract 18% GST as they are treated as a supply of services.
ITC Implications
Manufacturer's Position
- Normal Warranty: No ITC reversal is required. The cost of warranty is embedded in the original supply price.
- Extended Warranty: The manufacturer can claim ITC on the inputs and input services used in providing the extended warranty services.
Distributor's Position
Where a distributor replaces parts under warranty from their own stock and later receives replenishment from the manufacturer without charge:
- No GST is applicable on the replenished goods.
- No ITC reversal is required by the manufacturer.
- The distributor may need to reverse ITC on the parts used for warranty replacement if the manufacturer issues a credit note.
Documentation Required
- Warranty Policy: Documentation of the warranty terms.
- Extended Warranty Agreement: Agreement for the extended warranty.
- Replacement Records: Records of warranty replacements.
- Replenishment Records: Records of replenishment from the manufacturer.
Best Practices
- Document Warranty Terms: Clearly document the warranty terms in the supply agreement.
- Separate Extended Warranty: Issue separate invoices for extended warranty.
- Maintain Records: Document all warranty replacements and replenishments.
- Reconcile ITC: Reconcile ITC on warranty replacements.
- Seek Professional Assistance: For complex warranty arrangements, seek guidance.
Conclusion
Normal warranty is a composite supply with the principal supply being the goods. No GST is payable on warranty replacements, and no ITC reversal is required. Extended warranty is a supply of services, taxable at 18% GST. Proper documentation and reconciliation are essential.
Offering warranty or extended warranty? Anuj Desai & Associates provides expert guidance on GST liability and ITC. Contact us today.
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