GST on Free Warranty Repairs: No Tax? Full Legal Explanation with Procedures

Reference: Circular No. 195/07/2023-GST and Circular No. 216/10/2024-GST

When machinery is sold with a warranty, and repairs are carried out either at the customer’s location (off-site) or at a service centre, the GST implications and procedures are clarified under the above circulars.

1. Impact on GST

a. Repairs or Replacements During Warranty (No Charge to Customer)

• GST Liability: No GST is payable where repairs or replacement of parts are carried out free of cost during the warranty period.
• Rationale: The cost of warranty repairs and replacement parts is deemed to be included in the original sale price of the machinery, on which GST has already been discharged.
• Input Tax Credit (ITC): No reversal of ITC is required on parts or components used for warranty repairs, as these are not treated as free gifts but as fulfilment of a contractual obligation.

b. Repairs or Services with Additional Charges

• If any amount is charged for labour, visit fees, or parts not covered under the warranty, GST is payable on the additional consideration charged.

2. Procedure for Off-Site Repairs

The applicable procedure depends on the party performing the repairs.

A. Repairs Performed Directly by the Manufacturer

• Movement of spare parts to the customer site should be covered by a Delivery Challan, as there is no supply at the time of movement.
• No tax invoice is required where repairs are carried out free of cost under warranty.

B. Repairs Performed by Distributor / Third Party on Behalf of Manufacturer

Scenario 1 - Free Repair to Customer

• The distributor does not charge the customer.
• No GST is payable on the transaction between the distributor and the customer.

Scenario 2 - Distributor Bills the Manufacturer

• The distributor issues a Tax Invoice to the manufacturer for services rendered.
• GST is payable on such invoice.
• The manufacturer is eligible to claim ITC, subject to normal conditions.

Scenario 3 – Replenishment of Parts

Where the distributor uses its own stock to replace a part and the manufacturer later replenishes the same free of cost:

• The replenishment is made under a Delivery Challan .
• No GST is payable on such replenishment.
• No ITC reversal is required by the manufacturer.

3. Extended Warranty

a. Extended Warranty Sold at the Time of Original Supply

• If provided by the same supplier, it constitutes a composite supply, with machinery being the principal supply.
• GST is payable at the applicable GST rate of the machinery.

b. Extended Warranty Sold Separately or by a Different Supplier

• Treated as a separate supply of services.
• GST is generally applicable at 18%, unless otherwise specified.

Summary of Circular No. 216/10/2024-GST

This circular further clarifies GST liability and ITC availability in warranty and extended warranty cases, building upon Circular No. 195/07/2023-GST dated 17.07.2023.

1. Warranty Replacement of Parts / Goods

a. Replacement Without Additional Charge

• No additional GST is payable.
• No ITC reversal is required.

b. Replacement With Additional Charge

• GST is payable on the additional amount charged.

2. Replacement by Distributors on Behalf of Manufacturer

1. Without Additional Charge: No GST is payable.
2. With Additional Charge: GST is payable on the charged amount.
3. Replenishment by Manufacturer:

• Replenishment without consideration is not liable to GST.
• No ITC reversal is required.

3. Extended Warranty

At the Time of Original Supply:

• Same supplier – composite supply.
• Different supplier – separate supply of services.

After Original Supply:

• Treated as a separate supply of services.
• GST is applicable based on the nature of the contract.

Rule 55 - Transportation of Goods Without Issue of Invoice

Under Rule 55 of the CGST Rules, goods may be transported without issuing a tax invoice in certain cases, including transportation for reasons other than supply.

Key Provisions

Goods may be moved under a Delivery Challan instead of a tax invoice.

The delivery challan must contain prescribed details such as:

1. Date and number
2. Consigner and consignee details
3. HSN and description of goods
4. Quantity and taxable value
5. Applicable tax details (where relevant)
6. Place of supply (for inter-State movement)
7. Signature

Copies of Delivery Challan

• Original: Consignee
• Duplicate: Transporter
• Triplicate: Consigner

Additional Provisions

• Details must be declared in the e-way bill, wherever applicable.
• Where goods are supplied in SKD/CKD or in lots, invoices and delivery challans must be issued as prescribed under Rule 55.

(Inserted w.e.f. 04.09.2018 vide Notification No. 39/2018–CT dated 04.09.2018)