Clarification on ITC for Warranty Period Replacement

Whether in such cases, the manufacturer is required to reverse the input tax credit in respect of such replacement of parts or supply of repair services as part of warranty, in respect of which no additional consideration is charged from the customer?

Circular No. 195/07/2023-GST dated 17th July, 2023 provides clarity in this matter :-

In such cases, the value of original supply of goods (provided along with warranty) by the manufacturer to the customer includes the likely cost of replacement of parts and/ or repair services to be incurred during the warranty period. Therefore, these supplies cannot be considered as exempt supply and accordingly, the manufacturer, who provides replacement of parts and/ or repair services to the customer during the warranty period, is not required to reverse the input tax credit in respect of the said replacement parts or on the repair services provided.

Interpretation of circular:-

1. The Value of Original Supply:

When a manufacturer sells a product to a customer along with a warranty, the value of the original supply of goods includes not only the physical product but also the likely cost of replacement parts and/or repair services that may be incurred during the warranty period.

2. Not an Exempt Supply:

As per the circular, these supplies cannot be considered exempt supplies.

3. No Reversal of Input Tax Credit:

Consequently, the manufacturer who provides replacement parts and/or repair services to the customer during the warranty period is not required to reverse or reduce the input tax credit claimed on the purchase of these replacement parts or on the cost of providing repair services as this is not treated as exempt supply.

Example :

Original Sale of Washing Machine: INR 30,000 (inclusive of the likely warranty-related service cost).
Manufacturer provides warranty repairs or replacement parts during the warranty period without charging the customer any additional consideration.
Manufacturer incurred Rs. 5,000 on warranty-related services (like parts replacement and other services).
Input Tax Credit (ITC) claimed on Rs.5,000 cost of warranty-related services remains unaffected and does not need to be reversed.
In this example, the manufacturer is not required to reverse or reduce the input tax credit on the Rs. 5,000 cost of providing warranty-related services since it is not treated as an exempt supply.

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