The supply of goods is under indirect taxes, but we often neglect services of goods. One of the services which often ignored is the warranty replacement under GST in India.
In this post, we will look into warranty replacement under Goods and Services Tax (GST) in India.
We will cover the following topics in this blog:
- What is a Warranty?
- Is Warranty a different Supply?
- What is Repair/ Replacement?
- Movement of goods for repair under warranty
- Replacement of product
- Procedure for warranty replacement of goods
What is a Warranty?
A warranty is a written guarantee of a manufacturer to the purchaser describing the condition of its product. The terms and situations in which repairs /exchanges you can make if the product does not function as originally described. While warranty seems to be a mere post-sale service, it also determines the nature of supply.
Is Warranty a different Supply?
Warranty is separate from the supply of the product. It is an assurance of continued use of a product in working condition for a specified period of time. However, the industry charges no separate price for such a warranty, as it is inbuilt in the price of the product. Thus, warranty supply to customers is a part of the sale of goods.
What is Repair/ Replacement?
When a customer requests a warranty repair/replacement, he files a claim. The company must file this claim. Every time there is a claim the company will then reduce the liability amount for the cost of participating in the claim.
There are many ways to fulfill a claim. You can replace the item with inventory by reducing the inventory. The business can repair the product using inventory and external labour (require cash) or inside (wage payable) parts of labour. Always record the replacement/ repair at cost, not at the retail price of the item/ parts.
Movement of goods for repair under warranty
You can send the defective parts for repair with a delivery challan along with the e-way bill. GST is chargeable on the repair amount, including the cost of parts, charged by the repairing center.
Replacement of product
Replacement of the product requires proper maintenance of records as units supplied by branches under different GSTIN. It would then constitute a supply to the manufacturing unit as a bill to ship to supply.
The credit of these supplies is available to the manufacturing unit. However, with the 2nd provision of Rule 28, the difference in the value of the product supplied and replaced has to run through a series of litigations.
It is also compensated by the corresponding number of free units by the manufacturing units during VAT. During the GST it was changed as it only addressed the issue of Sale between units.
The recipient needs to issue a regular taxable invoice for the goods for warranty replacement and has to pay the appropriate GST on such supply.
Procedure for warranty replacement of goods
Under the GST Act, the tax levied on the supply of the warranty replacement of goods.
As per Section 7 (1) (a) of CGST Act, 2017 “supply” includes all forms of supply of goods/services or both such as sale, transfer, barter, exchange, license, rental, lease, or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.
The supply of a new component or damaged goods comes under “exchange” (free of cost) and it is liable to GST.
Now let us see some frequently asked questions by CBIC regarding warranty replacement under Goods and Services Tax (GST).
Question 1: Whether software is regarded as goods or services in GST?
Ans: In terms of Schedule II of the CGST Act 2017, development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software, and temporary transfer or permitting the use or enjoyment of any intellectual property right are treated as services.
But, if a pre-developed or pre-designed software is supplied in any medium/storage (commonly bought off-the-shelf) or made available through the use of encryption keys, the same is treated as a supply of goods classifiable under heading 8523.
Question 17: I am obtaining online database access services from a company abroad over the net, would I have to pay tax on reverse charge?
Ans: The recipient, if registered, has to pay the applicable IGST on a reverse-charge basis. If the recipient is not registered, the matter is treated as online information and database access or retrieval service (OIDAR) and the OIDAR service provider is liable to take registration and
Question 20: What would be the tax liability on replacement of parts (no consideration is charged from a customer) under a warranty and whether the supplier is required to reverse the input tax credit?
Ans: As parts are provided to the customer without consideration under warranty, no GST is chargeable on such replacement. The value of 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.
Question 23: What is the tax liability in a scenario where supplies are made from multiple locations (in different States) of the supplier to the recipient under a single contract?
Answer: Delivering services from various locations and integrated pricing for the contract as a whole is the norm in the IT/ITES industry. Normally the contract or agreement with the recipient is entered into by one of the branches (let us say “The main Branch”). Therefore, in such cases of service delivery from multiple locations of the supplier to the recipient, the supply could be visualized as consisting of two distinct supplies.
First supply- the different branches of the supplier located across different States are making the supply to the main branch which entered into a contract or an agreement with the recipient for the supply of such service. Second supply- the main branch is making a supply to the customer. GST is to be levied accordingly. In such a scenario, the main branch would get an input tax credit of GST paid by the other branches on supplies made by them to the main branch.
For more FAQs on warranty under GST on IT/ITES services – Click Here.
With that, we have come to the end of this post on warranty replacement under GST. Share your queries and views with us in the comments section below.