ITC reversal on re - work

[Kaustubh Karandikar]

During the period 2019 - 20, Re – Work carried out on goods received back from the Customers and after re – work it was sent back to customers under a Delivery Challan without payment of GST as it was within the warranty period. Whether proportionate input tax credit is required to be reversed on this?

[Amit Agrawal]

No reversal of ITC is required against repairs done during the warranty period. Please refer to Circular No. 195/07/2023-GST dated 17th July, 2023.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[KASTURI SETHI]

Dear Sir,

No reversal is required..

[KASTURI SETHI]

Extract of FAQ

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?

Answer : As parts are provided to the customer without a 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

[KASTURI SETHI]

Just for knowledge sake in changed scenario during warranty period.

Question 21 : An Original Equipment Manufacturer (OEM) has an obligation to provide repair services to their customers in the warranty period. This activity is outsourced by OEM to ‘D’, who bills the OEM for the services he provides to the customer. What is the tax liability of ‘D’?

Answer : ‘D’ is providing service to the OEM. GST is payable on the value of any supplies made by ‘D’ to OEM i.e. in respect of bills raised by ‘D’ on the OEM

[Ganeshan Kalyani]

Circular clarifies the doubt.

[Padmanathan KV]

Agreed with Experts. This is specifically covered under the recent Circular which states that the cost of re-work/repair during warranty period is included in the price of the product and hence, it is not actually without consideration.

[GUNASEKARAN K]

Agree with Experts views;

Replacement Warranties:

• A replacement warranty is an assurance provided by the supplier at the time of supply to replace the product post-supply in a specified time.
• Further, no separate charge is recovered from the customer at the point of supply, as such costs are generally included in the product’s price.

Warranties for Repair:

• In such a case, the supplier undertakes to repair the defects found in the product. He may or may not charge additional consideration/ payment.

Extended Warranty:

• An extended warranty is a prolonged warranty offered to consumers in addition to the standard warranty.
• It is usually an extension of the period of the manufacturer’s warranty provided at the time of supply of goods for consideration.

Implications of GST On Warranty Replacements / Repair

Input tax credit on input and input services used to provide warranty services is available to the supplier.

The price of warranty services is inbuilt in the supply price of the product; therefore, such warranty services have suffered output tax.

Thus, you are eligible to claim an input tax credit against such services.

[Kaustubh Karandikar]

Thanks all the experts for your kind and valuable advice.

[Shilpi Jain]

Recent circular has cleared doubts regarding this issue. Credit would be eligible.

AI Summary

Warranty repair and replacement do not require reversal of input tax credit when costs are inbuilt in the product price.
Re-work or replacement of parts performed during the warranty period and supplied without separate consideration are treated as covered by the original product price; therefore the supplier need not reverse input tax credit on inputs or input services used for warranty activities, and remains eligible to claim such credits. If repairs are outsourced, the service provider must pay GST on services billed to the OEM.