Composite Supply and Mixed Supply under GST Explained

Many a times suppliers sold their product/services in a combination or as package. These package may be naturally bundled or not. These types of supplies may be containing two or more goods or services or any combination thereof. In certain cases, supplies are not clearly identifiable and each component of supplies may attract a different rate of tax. In such situation, determining the rate of tax is a challenging. To cater this issue, GST Law identifies Composite Supply and Mixed Supply and provides for tax treatment under GST.

Composite Supply

Analysis:

I. The supply should consist of two or more taxable supplies:

Reference to two or more ‘taxable supplies’ found in the definition appears as two or more ‘supplies’ in section 8(a). As section 8 guides the determination of tax liability based on that supply which enjoys the higher rate of tax, the definition must be read to main harmony with section 8.

The law merely specifies that the supplies included within a composite supply must contain two or more taxable supplies. A question may then arise as to what would be the treatment in case of a supply, that fulfils all the conditions, but involves an exempt supply – say, purchase of fresh vegetables from a store which offers home delivery for an added charge. Fresh vegetables are exempt from tax, whereas the service of home delivery would attract tax. No clarification has been issued in this regard. However, on a plain reading of the provision, it appears that this condition would not be satisfied where the composite supply involves an exempt supply. One could argue that taxable supply includes exempt by virtue of the definition of taxable supply under section 2(108).

II. The supplies may be of goods or services or both.

III. The supplies should be naturally bundled:

The way the supplies are bundled must be examined. Determining natural bundling must be done with caution such that two supplies occurring simultaneously ought not to be presented as naturally bundled. That is, one is the primary object for buyer but the others are for better enjoyment of that primary object. In general, buyer never comes to buy those other objects exclusively. Means, others objects are useful or have value, for the purpose of buyer, only when it is purchase with the principal supply.

Any artificial bundling must be sought out with equal care as they could fall within mixed supply and not composite supply. It is not necessary that two (or more) supplies occurring simultaneously must be forcibly categorized as composite (or mixed) supplies. There may each be an independent supply.

The concept of natural bundling needs to be examined on a case-to-case basis. What is naturally bundled in one set-up may not be regarded as naturally bundled in another situation. For instance, stay with breakfast is naturally bundled in the hotel industry, while the supply of lunch and dinner, even if they form part of the same invoice, may not be considered as naturally bundled supplies along with room rent.

IV. They should be supplied in conjunction (event, time or contract) with each other in the ordinary course of business:

Where certain supplies could be naturally bundled, it is essential that they are so supplied in the ordinary course of business of the taxable person. For instance, it is possible to consider the supply of a water purifier along with the first-time installation service as a naturally bundled supply. However, if a supplier of water purifiers does not ordinarily provide the installation service and arranges for a person to provide the installation service in the case of an important business customer, the supply would not satisfy the said condition.

• The product bundle generally advertised as a single package.
• Different elements of package are not available separately.
• Each element of package is integral to each other for bringing the full benefit from product. Means if any single element is removed from package, the usefulness of principal or other elements will be diminished.
• The method of billing, assignment of separate prices etc. may not be relevant. In other words, whether separate prices are charged for each of the components of supply or a single consolidated price charged, the identity of each of the components of supply must be unmistakably distinct in the arrangement.

V. One of the supplies being a principal supply (Principal supply means the predominant supply of goods or services of a composite supply and to which any other supply is ancillary):

 In every composite supply, there must be only one principal supply. Where a conflict between the various components of the supply, as to which of those qualify as the principal supply, cannot be resolved and results in multiple predominant supplies, the supply cannot be regarded as a composite supply.

Section 8 – “The tax liability of a composite or mixed supply shall be determined in the following manner, namely –

1. a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply; and
2. …….”

Clause (90) of section 2 of the CGST Act, defines “principal supply” means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary.

Principal supply recognises two or more supplies and arranges them in a two-step hierarchy – a single predominant supply and the ancillary supply(ies).

Neither the cost of each component nor the importance of each component relevant to determine the ‘principal’ supply. It is the object that is primary in the opinion and knowledge of recipient that helps make this determination. That is, a recipient cannot buy that which he has no knowledge of and whatever it is that recipient has knowledge of, is the principal supply even if that does not comprise substantial part of the total value. Principal supply is that for which the recipient approached the supplier.

The matters such as time of supply, invoicing, place of supply, value of supply, rate of tax applicable to the supply, etc. shall all be determined in respect of the principal supply alone, since the entire supply shall be deemed to be a supply of the principal supply alone.

VI. The supply must be made by taxable person:

This condition presumes that composite supplies can only be effected by a taxable person. Concept of Composite and mixed supply is incorporated solely for determining the what would be the tax treatment to goods or services or both when supply in combination or as package. And this question only arises when the supplier is a taxable person.

Some Illustrations and cases of composite supplies have been discussed in the following paragraphs:

1. Accommodation with breakfast;
2. Cocktail drink being a mixture of alcohol with a non-alcoholic pre-mix;
3. Supply of laptop and carry case of same company;
4. Supply of equipment and installation of the same;
5. Supply of repair services on computer along with requisite parts comprehensive AMC;
6. Supply of health care services along with in-patient medicaments.

Mixed Supply

 Analysis:

I. It involves two or more individual supplies:

It may be noted that the term used in the case of mixed supply is “individual supplies” as against “taxable supplies”. Therefore, a mixed supply can include both taxable and exempted supplies.

When two (or more) goods, or two or more services (need not be taxable), or a combination of goods and services, that each have individual identity and can be supplied separately, are deliberately supplied for a single consolidated price, the supply would be treated as a mixed supply.

However, Where the conjoint supply is neither a composite supply, nor supplied for a single price, the two or more supplies would be treated as individual supplies or non-composite supply, and not as a ‘mixed supply’.

II. It is made by a taxable person:

III. The supply is made for a single price:

The fact that a composite supply does not include this condition merits consideration. Where a supply of two or more goods or services is made for different prices, the supplies cannot be regarded as mixed supplies.

IV. The supply does not constitute a composite supply:

Most importantly, such a supply should not qualify as a composite supply, for it to be treated as a mixed supply. Means, we should first apply the test of composite supply and if supply failed to be a composite supply, then only it may be a mixed supply.

The expression “constitute” has a large ambit to include cases where the supply results in a composite supply, as well as a case where some of the components together make a composite supply, whereas the bundle together would make a mixed supply. While the condition as such is not explicit, given that there is no provision for treatment of a bundled supply where only some components together qualify as a composite supply, it may be safe to interpret that a mixed supply is one which is not regarded as a composite supply.

V. The matters such as time of supply, invoicing, place of supply, value of supply, rate of tax applicable to the supply, etc. shall all be determined in respect of that supply which attracts the highest rate of tax. However, the law remains silent on what is the treatment required to be undertaken where more than one component is subjected to the highest rate of tax.

VI. The tax rates applicable in case of mixed supply would be the rate of tax attributable to that one supply (goods, or services) which suffers the highest rate of tax from amongst the supplies forming part of the mixed supply. Therefore, a mechanism for separating the supplies could be examined, in case of mixed supplies where tax rates are differing.

It is important to ensure that there is a single price assigned in respect of the various supplies that are involved. And the supplies so involved are unnaturally bundled together for such single price. If the price were not one single amount but the visible aggregation of individual prices then, even if supplied together, each of them may be regarded as an individual non-composite supply.

• Some Illustrations and cases of mixed supplies have been discussed in the following paragraphs:

1. Supply of toothpaste, brush, plastic container for the two.
2.  Supply of laptop and printer.
3.  Supply of lectures in a coaching centre and monthly excursions such as trekking, etc.
4.  Supply of car, modular kitchen or whitegoods by builder to some apartment buyers is a mixed supply.

Comparative Analysis: