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Circular No. 195/07/2023 – GST: ITC on Warranty Repair Guide

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F. No. CBIC-20001/5/2023-GST
Government of India
Ministry of Finance
Department of Revenue
Central Board of Indirect Taxes and Customs
GST Policy Wing
****

New Delhi, Dated the 17^th July, 2023

Circular No. 195/07/2023 - GST: Clarification on Availability of ITC in Respect of Warranty Replacement of Parts and Repair Services During Warranty Period

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 on availability of ITC in respect of warranty replacement of parts and repair services during warranty period.

Representations have been received from trade and industry that as a common trade practice, the original equipment manufacturers /suppliers offer warranty for the goods / services supplied by them. During the warranty period, replacement goods /services are supplied to customers free of charge and as such no separate consideration is charged and received at the time of replacement. It has been represented that suitable clarification may be issued in the matter as unnecessary litigation is being caused due to contrary interpretations by the investigation wings and field formations in respect of GST liability as well as liability to reverse ITC against such supplies of replacement of parts and repair services during the warranty period without any consideration from the customers.

2. The matter has been examined. In order to ensure uniformity in the implementation of the provisions of the law across the field formations, the Board, in exercise of its powers conferred under section 168(1) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act), hereby clarifies as follows:

S. No.	Issue	Clarification
1.	There are cases where the original equipment manufacturer offers warranty for the goods supplied by him to the customer and provides replacement of parts and/ or repair services to the customer during the warranty period, without separately charging any consideration at the time of such replacement/ repair services. Whether GST would be payable on such replacement of parts or supply of repair services, without any consideration from the customer, as part of warranty?	The value of original supply of goods (provided along with warranty) by the manufacturer to the customer includes the likely cost of replacement of parts and / or repair services to be incurred during the warranty period, on which tax would have already been paid at the time of original supply of goods. As such, where the manufacturer provides replacement of parts and/ or repair services to the customer during the warranty period, without separately charging any consideration at the time of such replacement/ repair services, no further GST is chargeable on such replacement of parts and/ or repair service during warranty period. However, if any additional consideration is charged by the manufacturer from the customer, either for replacement of any part or for any service, then GST will be payable on such supply with respect to such additional consideration.
2.	Whether in such cases, the manufacturer is required to reverse the input tax credit in respect of such replacement of parts or supply of repair services as part of warranty, in respect of which no additional consideration is charged from the customer?	In such cases, the value of original supply of goods (provided along with warranty) by the manufacturer to the customer includes the likely cost of replacement of parts and/ or repair services to be incurred during the warranty period. Therefore, these supplies cannot be considered as exempt supply and accordingly, the manufacturer, who provides replacement of parts and/ or repair services to the customer during the warranty period, is not required to reverse the input tax credit in respect of the said replacement parts or on the repair services provided.
3.	Whether GST would be payable on replacement of parts and/ or repair services provided by a distributor without any consideration from the customer, as part of warranty on behalf of the manufacturer?	There may be instances where a distributor of a company provides replacement of parts and/ or repair services to the customer as part of warranty on behalf of the manufacturer and no separate consideration is charged by such distributor in respect of the said replacement and/ or repair services from the customer. In such cases, as no consideration is being charged by the distributor from the customer, no GST would be payable by the distributor on the said activity of providing replacement of parts and/ or repair services to the customer. However, if any additional consideration is charged by the distributor from the customer, either for replacement of any part or for any service, then GST will be payable on such supply with respect to such additional consideration.
4.	In the above scenario where the distributor provides replacement of parts to the customer as part of warranty on behalf of the manufacturer, whether any supply is involved between the distributor and the manufacturer and whether the distributor would be required to reverse the input tax credit in respect of such replacement of parts?	(a) There may be cases where the distributor replaces the part(s) to the customer under warranty either by using his stock or by purchasing from a third party and charges the consideration for the part(s) so replaced from the manufacturer, by issuance of a tax invoice, for the said supply made by him to the manufacturer. In such a case, GST would be payable by the distributor on the said supply by him to the manufacturer and the manufacturer would be entitled to avail the input tax credit of the same, subject to other conditions of CGST Act. In such case, no reversal of input tax credit by the distributor is required in respect of the same. (b) There may be cases where the distributor raises a requisition to the manufacturer for the part(s) to be replaced by him under warranty and the manufacturer then provides the said part(s) to the distributor for the purpose of such replacement to the customer as part of warranty. In such a case, where the manufacturer is providing such part(s) to the distributor for replacement to the customer during the warranty period, without separately charging any consideration at the time of such replacement, no GST is payable on such replacement of parts by the manufacturer. Further, no reversal of ITC is required to be made by the manufacturer in respect of the parts so replaced by the distributor under warranty. (c) There may be cases where the distributor replaces the part(s) to the customer under warranty out of the supply already received by him from the manufacturer and the manufacturer issues a credit note in respect of the parts so replaced subject to provisions of sub-section (2) of section 34 of the CGST Act. Accordingly, the tax liability may be adjusted by the manufacturer, subject to the condition that the said distributor has reversed the ITC availed against the parts so replaced.
5.	Where the distributor provides repair service, in addition to replacement of parts or otherwise, to the customer without any consideration, as part of warranty, on behalf of the manufacturer but charges the manufacturer for such repair services either by way of issue of tax invoice or a debit note, whether GST would be payable on such activity by the distributor?	In such scenario, there is a supply of service by the distributor and the manufacturer is the recipient of such supply of repair services in accordance with the provisions of sub-clause (a) of clause (93) to section 2 of the CGST Act, 2017. Hence, GST would be payable on such provision of service by the distributor to the manufacturer and the manufacturer would be entitled to avail the input tax credit of the same, subject to other conditions of CGST Act.
6.	Sometimes companies provide offers of Extended warranty to the customers which can be availed at the time of original supply or just before the expiry of the standard warranty period. Whether GST would be payable in both the cases?	(a) If a customer enters into an agreement of extended warranty with the manufacturer 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. (b) However, in case where a consumer enters into an agreement of extended warranty at any time after the original supply, then the same is a separate contract and GST would be payable by the service provider, whether manufacturer or the distributor or any third party, 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)

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

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

Sanjay Mangal
Principal Commissioner (GST)

📚 Frequently Asked Questions (FAQs): Circular No. 195/07/2023 - GST

Q1. What is Circular No. 195/07/2023-GST?

Answer:
Circular No. 195/07/2023-GST clarifies the GST treatment of warranty replacement of parts, repair services, Input Tax Credit (ITC), distributor transactions, and extended warranty contracts. The circular addresses several practical issues faced by manufacturers, distributors, and taxpayers regarding GST liability and ITC reversal during the warranty period. It was issued to ensure uniform implementation of GST law and reduce unnecessary litigation.

Q2. Is GST payable when a manufacturer replaces defective parts free of cost during the warranty period?

Answer:
No. Where a manufacturer replaces defective parts or provides repair services during the warranty period without charging any additional consideration, no separate GST is payable.
In simple terms, the warranty cost is already included in the value of the original supply of goods. Since GST has already been paid on that original transaction, no additional GST is required on free warranty replacements or repairs.

Q3. Does the manufacturer need to reverse Input Tax Credit (ITC) on warranty replacements?

Answer:
No. The manufacturer is not required to reverse ITC on parts replaced or repair services provided free of cost during the warranty period.
Many businesses actually face this issue because warranty replacements are supplied without additional consideration. The circular clarifies that these supplies are not exempt supplies, as the warranty cost forms part of the original taxable supply. Therefore, ITC reversal under the CGST Act is not required.

Q4. Is GST payable if additional charges are collected during warranty repairs?

Answer:
Yes. If the manufacturer or distributor collects any additional consideration from the customer for replacement parts or repair services during the warranty period, GST becomes payable on that additional amount.
The relief provided by the circular applies only where warranty services are supplied without separate consideration. Once an additional charge is collected, the normal GST provisions apply.

Q5. Is GST payable when a distributor provides warranty replacement on behalf of the manufacturer?

Answer:
No, if the distributor replaces parts or provides warranty services without charging the customer, no GST is payable by the distributor on that activity.
Let’s understand this with an example. A dealer replaces a defective car battery under the manufacturer's warranty without charging the customer. Since no consideration is collected from the customer, the replacement itself is not liable to GST.

Q6. When does GST become payable between the distributor and the manufacturer?

Answer:
GST becomes payable where the distributor supplies replacement parts or repair services to the manufacturer and raises a tax invoice or debit note for reimbursement.
If you look at it practically, the customer receives the warranty service free of cost, but there is a separate commercial transaction between the distributor and the manufacturer. That transaction constitutes a taxable supply under GST, and the manufacturer can claim ITC subject to the prescribed conditions.

Q7. Can the manufacturer claim ITC on GST charged by the distributor?

Answer:
Yes. Where the distributor issues a tax invoice to the manufacturer for warranty replacement parts or repair services, the manufacturer is entitled to claim Input Tax Credit, subject to the general conditions prescribed under the CGST Act.
This clarification ensures that genuine warranty-related business transactions do not result in denial of ITC merely because the end customer receives the service without consideration.

Q8. What happens if the manufacturer supplies replacement parts directly to the distributor?

Answer:
Where the manufacturer supplies replacement parts to the distributor solely for replacing defective parts under warranty, without charging separate consideration, no GST is payable on such replacement parts.
Further, the manufacturer is not required to reverse ITC on the parts supplied for warranty replacements because these costs are already embedded in the value of the original taxable supply.

Q9. How is GST treated when the manufacturer issues a credit note to the distributor?

Answer:
The circular recognizes situations where the distributor replaces warranty parts from its existing stock and the manufacturer subsequently issues a credit note under Section 34(2) of the CGST Act.
In such cases, the manufacturer may adjust its tax liability, provided the distributor reverses the corresponding ITC relating to the replacement parts. This ensures proper adjustment of GST without resulting in double benefit.

Q10. How is extended warranty treated under GST?

Answer:
The GST treatment depends on when the extended warranty is purchased.
If the extended warranty is purchased at the time of the original sale, it forms part of the composite supply, with the principal supply being the goods, and GST applies accordingly. However, if the customer purchases the extended warranty after the original supply, it becomes a separate contract, and GST is payable as an independent supply based on the nature of the agreement.
Related Resource:
GST Compliance: https://finodha.in/gst-compliance/

Q11. Does this circular amend the GST law?

Answer:
No. Circular No. 195/07/2023-GST is clarificatory in nature.
It does not amend the CGST Act or the CGST Rules. Instead, it explains the practical application of GST provisions relating to warranty replacements, repair services, valuation, Input Tax Credit, composite supply, distributor reimbursements, and extended warranty arrangements.