No GST on replacement of parts during warranty period, says council

Clarification provides certainty on the tax treatment of warranty repairs, say experts


The GST council has spoken on the controversial issue of taxing the replacement of parts and goods or repair services during the warranty period.


The council, at a meeting on Tuesday, said that there will be no goods and services tax (GST) on parts or goods supplied free of cost and services associated with it provided free of cost during the warranty period. However, companies can claim input tax credit (ITC) on taxes paid on goods and parts supplied by vendors for this purpose.
“The clarification provides much-needed certainty on the tax treatment of warranty repairs. The clarification also means that businesses will not have to reverse any ITC that they claimed on the parts or goods they used for warranty repairs,” said Saurabh Agarwal, tax partner at EY.
In GST, manufacturers and suppliers frequently encounter situations where they must provide free replacement of parts and repair services within the agreed warranty or guarantee period. This gives rise to the issues of applicability of GST on parts or goods supplied free of cost or without consideration during the warranty period, the eligibility of ITC for those parts or goods.
GST officers have issued demand notices to companies for reversal of ITC in relation to the parts supplied free of cost. Besides, many applications have been filed in the authorities for advance ruling (AARs) with respect to this issue.
“The clarification reduces the need for companies to approach the AARs or face notices from tax departments,” said Agarwal.
Experts said that when a manufacturer supplies replacement parts or provides repair services free of cost during the warranty or guarantee period, no GST should be levied due to the absence of consideration, as the original supply of goods already included the cost of potential replacements during the warranty period.
Further, since the value of the supply made earlier includes the charges to be incurred during the warranty period, the supplier is not required to reverse the ITC on parts or components replaced under warranty, they said.