[Opinion] GST on Warranties – Must Needed Clarification

Komal Sampat, Komal Patolia & Chirag Patel – [2023] 153 taxmann.com 438 (Article)

It has been 6 years since the introduction of the Goods and Services Tax (‘GST’) law in India. Given that the GST law is relatively new, there have been continued efforts by the Central Board of Indirect Taxes and Customs (CBIC) to simplify and clarify the taxability on various transactions including, but not limited to, concerns around product/service classifications, eligibility of input tax credit, taxability of transactions, etc. Among the various aspects of GST, tax treatment for free replacements of parts and/or repairs services under the warranty period and eligibility of GST input tax credit on such parts so replaced, has been an area of concern for original equipment manufacturers (“OEM”).

Given the above background, it is first important to understand the term “warranty”. Generally, in commercial parlance, a warranty is a contract between the manufacturer or seller and the buyer, promising protection in the form of without-cost replacement of parts or free repair services against defects and malfunctions for a specified period. Generally, a warranty is of two types, base or standard warranty, and extended warranty. Base warranty is the initial warranty coverage provided by the manufacturer at the time of purchase without any additional consideration charged from the customer, whereas, an extended warranty also referred to as a service contract or extended service plan can be purchased separately by paying additional consideration.

Under GST Act, sectoral FAQs for the IT/ITES industry clarifies that

“As parts are provided to the customer without consideration under warranty, no GST is chargeable on such replacement. The value of the supply made earlier includes the charges to be incurred during the warranty period. Therefore, the supplier who has undertaken the warranty replacement is not required to reverse the input tax credit on the parts/components replaced.”

Similarly in the case of Saraswathi Metal Works Before AAR (Kerala) [Advance Ruling No. KER/25/2018, dated 20-10-2018] and South Indian Federation of Fishermen Societies Before AAR (Kerala) [Advance Ruling No. KER/102/2021, dated 25-5-2021], the Authority of Advance Ruling under GST (‘AAR’) observed that no GST is payable for the supply of parts under warranty without consideration and also that the supplier who undertakes warranty replacement is not required to reverse the GST input tax credit of parts so replaced.

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