Clarification on GST Tax Rate for Marine Parts in Fishing Vessels

The Authority for Advance Rulings clarified that marine parts used in fishing vessels are taxable at a 5% GST rate under entry 252 of the 1st schedule. Parts of fishing vessels under HSN Code 8902 are also taxable at 5% GST. Replacement of parts during the warranty period constitutes a free supply not subject to GST. Suppliers can claim input tax credit on raw materials even if taxed at a higher rate than the finished products. The rulings provide detailed guidance on these tax issues.

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Issues:
1. Tax rate applicable to Marine propellers, Rudder set, Stern tube set, Propellers shaft, MS shaft for couplings used in fishing vessels.
2. Classification of parts of fishing (floating vessels under HSN Code 8902.
3. Whether replacement of parts during warranty period constitutes a taxable supply under GST.
4. Eligibility to avail input tax credit on raw materials when the manufactured products are taxed at a lower rate.

Analysis:

Issue 1: Tax Rate for Marine Parts
The Authority for Advance Rulings clarified that Marine propellers, Rudder set, Stern tube set, Propellers shaft, MS shaft for couplings used in fishing vessels are taxable at 5% GST rate under entry 252 of the 1st schedule. However, ambiguity existed regarding the tax rate for parts of shipping vessels since raw materials attract an 18% tax rate. The ruling emphasized the specific inclusion of parts of goods covered under HSN 8902, making the general tax rate applicable to machinery parts inapplicable if the vessels are used for fishing purposes.

Issue 2: Classification of Parts under HSN Code 8902
Parts of fishing or floating vessels falling under HSN Code 8902 are taxable at 5% GST under Serial No. 252 of the 1st Schedule. The ruling highlighted that the specific inclusion of parts of goods under HSN 8902 in the 1st Schedule overrides the general tax rate applicable to machinery parts under HSN 8487 when the vessels are utilized for fishing activities.

Issue 3: Replacement of Parts during Warranty
The judgment clarified that the replacement of parts during the warranty period constitutes a free supply. Warranty, defined as a written guarantee by the manufacturer to repair or replace goods within a specified period, does not attract GST when parts are provided under warranty without consideration. The consideration for "the promise to repair or replace" is included in the value of the initial supply, absolving the supplier from reversing input tax credit on replaced parts.

Issue 4: Input Tax Credit on Raw Materials
Despite raw materials being taxed at a higher rate than the finished products, the supplier is eligible to claim input tax credit on the higher tax paid on raw materials, provided such goods or services are used in the course of business. Section 54(3) of the GST Law allows for the refund of unutilized input tax credit accumulated due to the higher tax rate on inputs compared to output supplies, except for input tax paid under IGST.

In conclusion, the rulings issued by the Authority for Advance Rulings clarified the tax rates for marine parts, classification of parts under HSN Code 8902, treatment of warranty replacements, and eligibility for input tax credit on raw materials, providing detailed insights into each aspect of the applicant's queries.

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