Understanding GST Credit Reversal on Goods Used for Free Supply under Warranty Period

Goods and Services Tax (GST) is a destination-based indirect tax that was implemented in India in July 2017. GST is levied on the supply of goods and services in India and has replaced multiple indirect taxes like VAT, Excise Duty, and Service Tax. GST is a comprehensive tax reform that aims to simplify the tax system and increase tax compliance.

When a business offers free goods or services as part of a warranty or guarantee, it is known as a 'free supply under warranty period'. In such cases, the business can claim input tax credit on the goods used for the free supply. However, if the goods are subsequently returned or the warranty is invoked, the input tax credit claimed on the goods used for the free supply must be reversed or canceled.

The GST credit reversal on goods used for free supply under warranty period is governed by section 18(6) of the Central Goods and Services Tax (CGST) Act, 2017. According to this section, if the goods are supplied free of charge or as a part of warranty, and the recipient subsequently returns the goods or invokes the warranty, the input tax credit claimed on those goods must be reversed.

The GST credit reversal is applicable only when the goods are returned within the warranty period. If the goods are returned after the warranty period, the input tax credit claimed on those goods need not be reversed. For example, if a business supplies free goods to a customer with a warranty period of six months and the customer returns the goods after four months, the input tax credit claimed on those goods must be reversed.

The GST credit reversal is calculated based on the value of the goods or services supplied free of charge. The input tax credit claimed on the goods used for the free supply is reversed in the same proportion as the value of the goods or services supplied free of charge bears to the total value of the goods or services supplied.

The GST credit reversal is done in the same manner as the input tax credit is claimed. If the input tax credit was claimed in the same month in which the goods were used for the free supply, the reversal must be done in the same month. If the input tax credit was claimed in a subsequent month, the reversal must be done in the month in which the goods are returned or the warranty is invoked.

In conclusion, businesses need to be aware of the GST credit reversal on goods used for free supply under warranty period. Reversing the input tax credit claimed on the goods used for the free supply is necessary when the goods are returned or the warranty is invoked within the warranty period. Businesses must ensure that they maintain proper records of the goods used for the free supply and the input tax credit claimed on those goods to avoid any compliance issues.