Gst on extented warranty

This query is : Resolved

Ronak jain (Querist)
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08 January 2018 Dear Sir,
one of my client (NBFC) started to provide extended warranty service. it is 2+2 year warranty scheme. since customer get 2 year basic warranty from dealer itself my client warranty is started after 2 year for next 2 year. but they received whole warranty charges at the time of purchase of vehicle. & the accounting treatment is done in such a way that income is deferred for first 2 year then will be booked after two year on SLM basis
so the my problem is when they are liable to pay GST on warranty service ? if today, then how they will be able to match their income with their taxation after two year ?

Asha Kanta Sharma online

Asha Kanta Sharma online

(Expert)
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07 July 2024 In the scenario described, where your client (an NBFC) is providing an extended warranty service for a 2+2 year period:

1. **Liability to Pay GST:**
- GST liability arises at the time of supply of services. In this case, the supply of warranty services can be considered to occur at the time the warranty period begins for the customer, which is after the initial 2-year basic warranty provided by the dealer.
- Therefore, GST would generally be payable when the warranty services commence for the customer, which is after the first 2 years of the vehicle purchase.

2. **Accounting Treatment and GST Payment:**
- As per GST rules, when GST liability arises, your client needs to pay GST on the value of the warranty services provided.
- Since your client has received the entire warranty charges upfront at the time of vehicle purchase but is deferring the recognition of income over the warranty period (2+2 years), they should account for GST liability when they start providing the warranty services.
- This means they need to calculate and set aside the GST liability based on the value of the warranty services for each period as per the applicable GST rate.

3. **Matching Income with GST Payment:**
- The deferral of income recognition for accounting purposes (SLM basis) does not affect the timing of GST liability. GST liability is based on the time of supply, which, in this case, aligns with the commencement of the extended warranty period.
- Your client should plan their cash flows and GST payments accordingly. They can set aside the GST liability from the upfront payment received and remit it to the government when due.

4. **Consultation with Tax Advisor:**
- It's advisable for your client to consult with a tax advisor or GST expert to ensure they are correctly interpreting and complying with GST rules regarding the timing of liability and payment, especially given the deferred income recognition for accounting purposes.

By managing the GST liability based on the commencement of warranty services and aligning it with their income recognition schedule, your client can ensure compliance with GST regulations while managing their cash flows effectively.

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