Warranty is a written promise which is given by the supplier of the goods, to repair (service warranty) or replace the goods (replacement warranty) if necessary, within a specified period of time.
Original Warranty – Warranty for which the purchaser does not pay any extra money. This is considered as single composite supply and the deemed supply provisions are not applicable here.
Extended Warranty – Warranty for which the purchaser pays separately. Such additional charges are considered as separate supply and is subject to VAT.
a) VAT implication on Service Warranty No VAT to be charged on services of repair provided for the goods under warranty. This is because the cost of repair services is considered to be inclusive in the sale price of the goods, originally sold under warranty.
b) VAT implication on Replacement of goods under Warranty On Replacement of goods under warranty, the supplier (generally retailer / authorized dealer) recovers the cost price of goods supplied under replacement from the distributor / manufacturer / entity funding the warranty. On recovery of such cost price, supplier should issue the Tax Invoice with VAT at 5%. Please note that the above rule shall apply even in cases where the recovery of such replacement goods is made from the manufacturer /entity located outside UAE. We have observed that many businesses are not issuing a Tax Invoice on replacement of goods supplied under warranty.
Let’s take an example to understand why VAT is chargeable on such replacements:
▪ 1 January 2019 – Product A is sold at AED 100 with replacement warranty. VAT is charged on the sale price of the product.
▪ 15 February 2019 – Supplier purchases Product B (cost price of AED 80, VAT AED 4) and recovers the Input VAT of AED 4 in the tax return filed with FTA
▪ 15 April 2019 – Purchaser of Product A comes for replacement under warranty and the supplier gives Product B as replacement.
▪ Replacement of Product B under warranty may not be considered as supply for VAT purposes. Hence, the supplier shall not issue a Tax Invoice to the customer when the product is replaced.
▪ The supplier recovers the cost price of Product B from the manufacturer / entity funding the warranty (located in UAE). This is a separate supply and is taxable at 5%
▪ Where the manufacturer funding the warranty is located outside the UAE, the supply shall be subject to VAT, as the place of supply is the place where the ownership of the goods is transferred i.e. the UAE. Currently, we have observed that manufacturer issues a credit note to the supplier towards the cost price of Product B. Please note that supply of Product B is a new supply, the place of supply is UAE and is taxable at 5% under UAE VAT Law.
▪ Date of supply – Date on which the Product B is given under replacement shall be the date of supply.
We hope businesses have taken into consideration the above and issued Tax Invoice with VAT charged on the cost price of the goods replaced under warranty.
Note: The above analysis is done for goods which are taxable at standard rate (5%) of VAT sold with warranty.
For more information please contact us
Chartered House Tax Consultancy
Office # 1711 The Metropolis Tower
Business Bay, Dubai, U.A.E.
T: +971 4 2435666