Key Takeaways:

1. Clarification on GST liability for replacement of goods as a whole under warranty, not just parts.

2. Guidance on GST treatment when distributors replace goods/parts from their stock and get replenished by manufacturers.

3. Distinction between extended warranty as part of original supply and as a separate service.

4. Clarification on GST treatment of extended warranty sold after the original supply of goods.

5. Emphasis on treating extended warranty as a service in specific scenarios.

6. Right Click here and open Official Circular in new tab

The Issue at Hand:

Imagine you're a manufacturer, distributor, or even a consumer dealing with warranties and extended warranties. You might be wondering: How does GST apply in these situations? This circular aims to clear up several confusing scenarios.

Key Clarifications:

a) Replacement of Goods Under Warranty:

• The Scenario:

- Sometimes, it's not just a part that needs replacing, but the entire product.

• The Clarification:

- The rules that apply to replacing parts under warranty now also apply to replacing entire goods.

• What it means:

- Wherever the previous circular (No. 195/07/2023-GST) mentioned "parts," it now includes "goods or its parts, as the case may be" .

b) Distributors Replacing Goods from Their Stock:

• The Scenario:

- A distributor replaces a faulty product for a customer using their own stock.

- Later, they get a replacement from the manufacturer.

• The Clarification:

- No GST is payable when the manufacturer replenishes the distributor's stock.

- The manufacturer doesn't need to reverse any input tax credit for these replenishments .

• Why it matters:

- This ensures smooth customer service without additional tax burdens.

c) Extended Warranty - When It's Part of the Original Supply:

• The Scenario:

- You buy a product, and at the same time, you're offered an extended warranty by a different company.

• The Clarification:

- This is treated as a separate supply, not part of a composite supply with the product .

• What it means:

- The extended warranty provider needs to charge GST separately on their service.

d) Extended Warranty - When Sold Later:

• The Scenario:

- You buy a product today, and a month later, you decide to purchase an extended warranty.

• The Clarification:

- This is always treated as a separate supply of service .

• Why it matters:

- It's simpler - always a service, always subject to GST as a service.

The Big Picture:

1. For Manufacturers and Distributors:

- Clearer rules on when to charge GST and when to claim input tax credit in warranty scenarios.

- Simplified process for stock replenishments under warranty.

2. For Consumers:

- More transparency in how warranties and extended warranties are taxed.

- Potential for smoother warranty claim processes.

3. For Tax Authorities:

- Uniform implementation of GST rules across India in these scenarios.

Examples:

1. Full Product Replacement:

- Your laptop fails under warranty.

- The manufacturer replaces the entire laptop.

- GST treatment: Same as if they had replaced a part.

2. Distributor Replacement:

- Your phone breaks, you go to the local distributor

- They give you a new phone from their stock.

- Later, the manufacturer sends them a replacement phone.

- No additional GST is charged in this replenishment process.

3. Extended Warranty at Purchase:

- You buy a TV from Electronics Store A.

- Warranty Company B offers an extended warranty at the checkout.

- This is a separate supply - B charges GST on their warranty service.

4. Extended Warranty Later:

- You buy a refrigerator in January.

- In March, you decide to buy an extended warranty.

- This is always treated as a service supply, subject to GST accordingly.

FAQs:

Q1: Does this circular change how warranties are provided to customers?

A1: No, it doesn't change how warranties are provided. It clarifies the GST treatment of various warranty-related transactions.

Q2: If I buy an extended warranty from a third party at the time of purchase, is it part of the product's price for GST purposes?

A2: No, if the extended warranty is provided by a different supplier than the product supplier, it's treated as a separate supply for GST purposes.

Q3: As a distributor, do I need to charge GST when I replace a product under warranty from my stock?

A3: No, you don't need to charge GST in this scenario. When the manufacturer replenishes your stock, they also don't need to charge GST or reverse any input tax credit.

Q4: Is an extended warranty always treated as a service for GST purposes?

A4: When sold separately from the original product supply (either by a different supplier or at a later time), an extended warranty is always treated as a supply of service for GST purposes.

Q5: How does this circular affect consumers buying extended warranties?

A5: Consumers might see more transparent pricing of extended warranties, as they'll be clearly separated from the product price when provided by third parties or sold later.

Key Precedents:

1. Central Goods and Services Tax Act, 2017 (CGST Act)

2. Section 168(1) of CGST Act (power of the Board to issue instructions)

3. Circular No. 195/07/2023-GST dated 17.07.2023

4. Circular No. 216/10/2024-GST dated 26th June, 2024

Circular No. 216/10/2024-GST

F. No. CBIC-20001/4/2024-GST

Government of India

Ministry of Finance

Department of Revenue

Central Board of Indirect Taxes and Customs

GST Policy Wing



North Block, New Delhi

Dated the 26th June, 2024

To,

The Principal Chief Commissioners/ Chief Commissioners/ Principal Commissioners/ Commissioners of Central Tax (All)

The Principal Directors General/ Directors General (All)

Madam/Sir,

Subject: Clarification in respect of GST liability and input tax credit (ITC) availability in cases involving Warranty/ Extended Warranty, in furtherance to Circular No.195/07/2023-GST dated 17.07.2023-reg.

Reference is invited to Circular No. 195/07/2023-GST dated 17.07.2023 (herein after referred to as “the said circular”) clarifying certain issues regarding GST liability and availability of input tax credit (ITC) in respect of warranty replacement of parts and repair services during warranty period. Representations have been received from trade and industry requesting for some further clarifications in related matters.

2. In order to ensure uniformity in the implementation of the provisions of law across the field formations, the Board, in exercise of its powers conferred by section 168 (1) of the Central Goods & Services Tax Act, 2017 (herein after referred to as the “CGST Act”), hereby clarifies the following issues as below.

3. Clarification regarding GST liability as well as liability to reverse input tax credit in respect of cases where goods as such or the parts are replaced under warranty:

3.1 Table in Para 2 of Circular No. 195/07/2023-GST dated 17.07.2023 clarifies regarding GST liability as well as liability to reverse ITC, only in cases involving replacement of 'parts' and not if goods as such are replaced under warranty. Request has been made to also issue a clarification in respect of cases where the goods as such are replaced under warranty.

3.2 In cases where warranty is provided by the manufacturer/ suppliers to the customers in respect of any goods, and if any defect is detected in the said goods during the warranty period, the manufacturer may be required to replace either one or more parts or the goods as such, depending upon the extent of damage/ defect noticed in the said goods. However, Table in Para 2 of the said circular only clarifies in respect of the situations involving replacement of part/ parts and does not specifically refer to the situation involving replacement of goods as such. It is clarified that the clarification provided in Para 2 of the said circular is also applicable in case where the goods as such are replaced under warranty.

3.3 Accordingly, wherever, ‘any part,’ ‘parts’ and ‘part(s)’ has been mentioned in Para 2 of Circular No. 195/07/2023-GST dated 17.07.2023, the same may be read as ‘goods or its parts, as the case may be’.

4. Clarification in respect of cases where the distributor replaces the parts/ goods to the customer as part of warranty out of his own stock on behalf of the manufacturer and subsequently gets replenishment of the said parts/ goods from the manufacturer:

4.1 Sr. No. 4 of Para 2 of the said Circular clarifies about the GST liability as well as liability to reverse ITC in cases where the distributor provides replacement of parts to the customer as part of warranty on behalf of the manufacturer. However, it does not cover the scenario where the distributor replaces the goods to the customer as part of warranty out of his own stock on behalf of the manufacturer to provide prompt service to the customer, and then raises a requisition to the manufacturer for the goods replaced by him under warranty.

The manufacturer, thereafter, provides the said goods to the distributor vide a delivery challan, as replenishment for the goods provided as replacement to the customer by the distributor. Request has been made to issue clarification in respect of such a scenario also.

4.2 In cases where the distributor replaces the parts/ goods to the customer as part of warranty out of his own stock on behalf of the manufacturer and subsequently gets replenishment of the said parts/ goods from the manufacturer, the key aspects, viz.(i) distributor providing replacement out of his own stock; (ii) manufacturer replenishing the distributor for the said replacement; and (iii) the replacement being made at no additional cost on the distributor, are all covered in the scenario specified in point (b) of Sr. No.4 of Para 2 of the said Circular. Therefore, GST liability as well as liability to reverse ITC in cases covered by the said scenario should be similar to that in respect of the scenario covered in point (b) of S. No. 4 of Para 2 of the above circular.

4.3 Accordingly, to specifically clarify in respect of such a scenario, in column 3 of the table in Para 2 of the said circular, against S. No. 4, after point (c), point (d)shall be inserted as below:

“(d) There may be cases where the distributor replaces the goods or its parts to the customer under warranty by using his stock and then raises a requisition to the manufacturer for the goods or the parts, as the case may be. The manufacturer then provides the said goods or the parts, as the case may be, to the distributor through a delivery challan, without separately charging any consideration at the time of such replenishment. In such a case, no GST is payable on such replenishment of goods or the parts, as the case may be. Further, no reversal of ITC is required to be made by the manufacturer in respect of the goods or the parts, as the case may be, so replenished to the distributor.”

5. (i) Nature of supply of extended warranty, at the time of original supply of goods, as a separate supply from supply of goods, if the supply of extended warranty is made by a person different from the supplier of the goods;

(ii) Nature of supply of extended warranty, made after original supply of goods:

5.1 It has been represented that in respect of cases, where agreement for extended warranty is made at the time of original supply of goods, and the supplier of extended warranty is different from the supplier of goods, the extended warranty should be treated as a separate and independent transaction from the supply of goods, whereas Sr. No. 6 of Para 2 of the said Circular has treated it to be in the nature of composite supplies, the principal supply being the supply of goods. Request has been made to issue a suitable clarification in the matter.

5.1.1 There may be cases where the supplier of the goods may be the dealer while the supplier of extended warranty may be the OEM or third party. In such cases, the supplies being made by different suppliers cannot be treated as part of the composite supply. It is, therefore, clarified that in cases, where agreement for extended warranty is made at the time of original supply of goods, and the supplier of extended warranty is different from the supplier of goods, the supply of extended warranty and supply of goods cannot be treated as the composite supply. In such cases, supply of extended warranty will be treated as a separate supply from the original supply of goods.

5.2 It has also been represented that in cases where extended warranty is sold subsequent to the original supply of goods, the same should be considered as supply of services only whereas the said Circular clarifies that GST on the same would be payable depending on the nature of the contract (i.e. whether the extended warranty is only for goods or for services or for composite supply involving goods and services). Request has been made to issue a revised clarification in respect of the same.

5.2.1 Supply of extended warranty is an assurance to the customers by the manufacturer/ third party that the goods will operate free of defects during the extended warranty coverage period, and in case of any defect attributable to faulty material or workmanship at the time of manufacture, the same will be repaired/ replaced by the said manufacturer/ third party. Further, whether the goods will later on require replacement of parts or just repair service or neither during the said extended warranty period, is also not known at the time of sale/ supply of extended warranty. Thus, extended warranty is in the nature of conveying of an “assurance” and not an actual replacement of part or repairs.

5.3 Accordingly, it is clarified that in cases, where supply of extended warranty is made subsequent to the original supply of goods, or where supply of extended warranty is to be treated as a separate supply from the original supply of goods in cases referred in Para 5.1.1 above, the supply of extended warranty shall be treated as a supply of services distinct from the original supply of goods, and the supplier of the said extended warranty shall be liable to discharge GST liability applicable on such supply of services.

5.4 Accordingly, in Sr. No. 6 of Table in para 2 of the said Circular, in column No. 3 of the table, the following shall be substituted:

“(a) If a customer enters into an agreement of extended warranty with the supplier of the goods at the time of original supply, then the consideration for such extended warranty becomes part of the value of the composite supply, the principal supply being the supply of goods, and GST would be payable accordingly. However, if the supply of extended warranty is made by a person different from the supplier of the goods, then supply of extended warranty will be treated as a separate supply from the original supply of goods and will be taxable as supply of services.

(b) In case where a consumer enters into an agreement of extended warranty at any time after the original supply, then the same shall be treated as a supply of services distinct from the original supply of goods and the supplier of the said extended warranty shall be liable to discharge GST liability applicable on such supply of services.”

6. It is requested that suitable trade notices may be issued to publicize the contents of this Circular.

7. Difficulty, if any, in the implementation of this Circular may be brought to the notice of the Board. Hindi version would follow.

(Sanjay Mangal)

Principal Commissioner (GST)