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GST on Warranty in India

Updated on: Aug 4th, 2023

4 min read

Warranty refers to a guarantee made by a seller to a customer, promising to repair or replace a product if necessary within a specified period of time. It also provides the conditions and circumstances under which the repairs or replacement will be provided if the product does not perform as originally intended.

In this article, we discuss the applicability of GST on warranty and decode the latest circular on various scenarios covering GST on warranty.

Does warranty fall under the scope of supply under GST?

As per Section 7 of the Central Goods and Services Tax (CGST) Act 2017, the term ‘supply’ includes:

Various forms of transactions involving goods or services or both, such as sale, transfer, barter, exchange, license, rental, lease, or disposal, made for a consideration in the course or furtherance of business.
The import of services for consideration, whether or not in the course or furtherance of business, and certain activities specified in Schedule I, even if made without consideration.
Activities or transactions mentioned in Schedule III and those carried out by the Central Government, State Government, or any local authority as public authorities, as notified by the Government, are not considered supplies of goods or services.

Hence, the supply of materials and labour without any consideration during the warranty period does not fall under the definition of ‘supply’ as per Section 7 of the CGST Act, 2017, and is not taxable under GST.

However, there could be cases where consideration is provided by the recipient to the manufacturer during the warranty period, on which GST may apply. Let’s dive into these cases.

Warranty On Replacement
Under replacement warranties, goods are given to customers for free during the warranty period without any extra charges. The cost of these replacements is already included in the original price of the goods, and the applicable taxes are paid at that time.

Regarding GST implications on warranty, the supplier can claim input tax credit (ITC) on the materials and services used to provide a warranty. Besides, for replacements made under warranty where no charges are taken from the customer, no GST is applicable, and the supplier does not need to reverse the input tax credit on the replaced parts/components since the warranty costs are already included in the original supply value.

Warranty On Repairs

If the supplier offers repair services for product defects without charging separately, it is not treated as a separate supply. The cost of repair is already included in the price of the goods, making it a composite supply. Similarly, if the distributor provides goods with warranty repair services at no additional cost, no GST needs to be paid for the warranty service offered.

Here are the implications of GST on warranty:

Case 1: If the distributor recovers the cost of warranty repairs from the original supplier, no GST is payable as there is no separate supply between them.

Case 2: If the distributor charges an additional amount for repair services on behalf of the manufacturer, GST must be charged on the total amount invoiced the manufacturer.

Case 3: When a third-party vendor performs warranty repairs for the supplier, and the supplier is billed for it, it is considered a supply related to the goods supplied by the original supplier.

Extended Warranty

When the original supplier charges a fee for extending the warranty period, it is considered a supply and attracts goods and service tax.

However, if any goods or services are provided under warranty without an additional charge after the warranty extension, it is not treated as a separate supply. This is because the consideration for such warranty services has already been included in the price paid for the warranty extension.

GST Circular On Warranty

In Circular No. 195/07/2023-GST, the CBIC gives clarifications regarding the availability of Input Tax Credit (ITC) and GST on the replacement of parts and repair services during the warranty period.

The following points summarize the applicability of GST on warranty and the reversal of ITC:

S. No	Issue	Clarification
1.	When the original equipment manufacturer provides a warranty for goods and offers replacement parts or repair services during the warranty period without charging any separate consideration, does GST apply to these replacements or services?	During the warranty period, no GST is chargeable when manufacturers provide replacement goods/services to customers free of charge. However, if any additional fee is charged for the replacements, GST will be applicable on the additional consideration.
2.	Is the manufacturer obligated to reverse ITC for the replacement of parts or supply of repair services provided as part of the warranty when no additional consideration is charged from the customer?	Manufacturers are not required to reverse the ITC in respect of the said replacements or repair services as they are already likely included in the value of the original supply.
3.	Does GST need to be paid on the replacement of parts and/or repair services provided by a distributor on behalf of the manufacturer when no consideration is charged from the customer and the services are offered as part of the warranty?	In cases where distributors provide replacement parts or repair services on behalf of the manufacturer without charging any consideration from the customer, no GST is payable by the distributor. However, if any additional consideration is charged, GST will apply to that.
4.	In the given situation where the distributor provides replacement of parts to the customer as part of the warranty on behalf of the manufacturer, is there any supply transaction between the distributor and the manufacturer?	GST is applicable if a distributor supplies parts to the manufacturer for replacement or provides repair services as part of the warranty and charges the manufacturer. Plus, the manufacturer can avail ITC of the same, provided other conditions under the CGST Act are met. However, in a case where the manufacturer provides the distributor with the part(s) to be replaced under warranty without charging a consideration for them, no GST would be payable on such replacement of parts. Further, the manufacturer need not reverse ITC. There could also arise a third scenario where the distributor replaces the parts of the customer under warranty out of the supply already received from the manufacturer. The distributor then issues a credit note in respect of the parts replaced. In this case, the tax liability may be adjusted by the manufacturer provided the distributor has reversed the ITC availed against the parts replaced.
5.	If the distributor, on behalf of the manufacturer, provides repair services to the customer as part of the warranty without charging any consideration but later charges the manufacturer for these repair services through a tax invoice or a debit note, would GST be applicable on this activity carried out by the distributor?	In this case, there is a supply of service by the distributor to the manufacturer. Hence, GST would be payable on this provision of service, and the manufacturer would be entitled to avail input tax credit of the same, provided other conditions under the CGST Act are met.
6.	In the case of extended warranty offers provided by companies to customers, whether GST would be applicable in both scenarios: when the extended warranty is availed at the time of original supply and when it is availed just before the expiry of the standard warranty period?	If the extended warranty is taken at the time of the original supply, the consideration for the same becomes a part of the value of a composite supply. The principal supply here would be the supply of goods and GST is payable accordingly. If the agreement is made after the original supply, it is treated as a separate contract. The GST liability depends on what kind of contract it is (i.e. a contract only for goods or for services or a composite supply involving both goods and services).

Recent Advance Rulings On GST On Warranty

An advance ruling in GST is a legislative mechanism that allows taxpayers to get clarification on the interpretation and application of GST regulations regarding particular transactions or activities. Here is an advance ruling on GST on warranty:

Summary of the Case: The applicant—M/s South Indian Federation of Fishermen Societies—sought clarification on whether Goods and Services Tax (GST) applies to the supply of materials and labour during the warranty period, provided free of cost to customers.

Ruling: The Authority for Advance Rulings Karnataka observed that the supply of materials and labour during the warranty period, without any consideration (free of cost), does not fall under the definition of ‘supply’ according to Section 7 of the CGST Act, 2017. Therefore, no GST is leviable on such free-of-cost replacements and labour services.

This clarification is also supported by the Central Board of Indirect Taxes and Customs (CBIC) Sectorial FAQs for IT/ITES sectors. According to the ruling, when parts are provided to customers without consideration under warranty, no GST is chargeable on such replacements. This is because the value of the earlier supply already includes the charges for the warranty period, and the supplier is not required to reverse the input tax credit on the replaced parts/components.

Explanation: The applicant is engaged in supplying materials and labour during the warranty period without charging any separate consideration from customers. This warranty is a promise or guarantee for the goods/services supplied. Since the consideration for the warranty services has already been recovered at the time of the supply of principal goods, and GST has been paid on such supply, the subsequent replacement of goods and services during the warranty period does not qualify as a taxable supply. Therefore, no GST is applicable on such free-of-cost warranty replacements and labour services.

About the Author

Athena Rebello

Manager - Content

A Chartered Accountant by profession and a writer by passion, my expertise extends to creating insightful content on topics such as GST, accounts payable, and invoice discounting.. Read more

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