Free of cost supplies, warranty replacements and moulds
Three fact patterns where nothing is charged and the department nevertheless finds a supply.
A supply without consideration is taxable only where Schedule I applies, principally supplies between related or distinct persons and permanent transfers of business assets on which credit was availed. Warranty replacements provided without separate consideration, where the value of the warranty was included in the original price, do not attract a fresh liability and credit need not be reversed, as clarified by Circular 195/07/2023-GST. Free of cost supplies by a customer, such as moulds and dies, raise a valuation question for the supplier under Section 15(2)(b).
Warranty replacements
Circular 195/07/2023-GST clarified that where goods or parts are replaced under warranty without separate consideration, no GST is payable on the replacement because the value of the warranty was included in the original supply, and the manufacturer is not required to reverse credit on the replaced parts.
Where a distributor replaces the part from its own stock and is reimbursed or compensated by the manufacturer, the treatment depends on the mechanism, and the circular addresses the common models.
Extended warranty sold separately is a supply of service in its own right, taxable at the applicable rate, and the treatment differs from warranty included in the price.
The documentation to keep is the warranty terms, the claim record, the replacement record and the reimbursement mechanism.
Free of cost material and tooling
Where a customer supplies moulds, dies, jigs, fixtures or tools free of cost to a component maker, Section 15(2)(b) requires inclusion in the value of any amount the recipient is liable to pay which the supplier has incurred. Where the customer was contractually liable to provide the tooling, the amortisation is generally not includible; where the supplier was liable to provide it and the customer provided it instead, the value is includible.
The analysis therefore turns on the contract. The obligation to provide the tooling should be stated expressly, and the amortisation treatment recorded.
Where free of cost material is supplied for a job work process, Section 143 governs the movement and the value of that material is not the job worker's consideration.
Circular 47/21/2018-GST addressed moulds and dies provided free of cost by an original equipment manufacturer to a component manufacturer, and it should be read with the current position.
Free samples and gifts
A free sample given without consideration to an unrelated person is not a supply, but credit on it is blocked by Section 17(5)(h).
A gift to an employee exceeding fifty thousand rupees in a financial year is a supply under Schedule I.
A buy one get one free offer is a supply of two goods for a single price, not a free supply, and credit is not blocked. Circular 92/11/2019-GST is the authority.
A permanent transfer of a business asset on which credit was availed is a supply under Schedule I even without consideration, which catches asset write offs and give aways.
Authorities relied on
Clarified that no GST is payable on warranty replacement of parts without consideration where the warranty value was included in the original supply, and that credit reversal is not required.
Addressed the treatment of moulds and dies provided free of cost by an original equipment manufacturer to a component manufacturer.
What to do on Monday
Keep the warranty terms, claim records and reimbursement mechanism documented for every warranty model.
State the tooling obligation expressly in customer contracts and record the amortisation treatment.
Reconcile samples and gifts to a credit reversal and to the fifty thousand rupee employee threshold annually.
Review asset write offs and give aways against Schedule I before disposal.
This page states the general position. A reader with a specific question on their own facts may write to the GST practice at AMLEGALS.
Write to the GST practiceQuestions we are asked on this
Do we pay tax on warranty replacements?
Not where they are provided without separate consideration and the warranty value was in the original price, per Circular 195/07/2023-GST.
Is credit reversal required on parts used in warranty?
No, on the same circular. Keep the claim and replacement records.
Is customer supplied tooling includible in our price?
It turns on who was contractually liable to provide it. State the obligation expressly in the contract.
Are free samples a supply?
Not without consideration to an unrelated person, but credit on them is blocked under Section 17(5)(h).
Is an extended warranty taxable?
Yes, as a separate supply of service at the applicable rate.
In this cluster
- Valuation under Section 15: transaction value and its exceptions
- Rule 28 in practice: related party and distinct person supplies
- Corporate guarantees between group companies: the one percent rule
- Northern Operating Systems: secondment, and the notice that follows every expatriate
- Cross charge of common costs between branches
- Mandatory Input Service Distributor: the compliance rebuild
- Post sale discounts: the agreement requirement and the credit note trail
- Reimbursements and the pure agent exclusion under Rule 33
- Liquidated damages, penalties and notice pay recovery
- Vouchers and gift cards: the amended treatment
GST Insights is published by AMLEGALS for general information. Law stated as on 3 September 2026. Not advice on any particular set of facts; not an advertisement or a solicitation under Rule 36 of the Bar Council of India Rules. Readers with a question on their own facts may write to the GST practice of their own accord.