Composite Supply & Mixed Supply under GST

Back ground:

Introduction of GST in India, one of the biggest fiscal and economic reforms since independence, is inching close to its implementation with receipt of presidential assent to the four GST Acts viz. Central Goods & Services Tax Act, Union Territory Goods & Services Tax Act, Integrated Goods & Services Tax Act and the GST (Compensation to States) Act, 2017.

“SUPPLY” this expression has become the foundation stone for all the future financial transactions in India. Complete structure of the indirect taxation in India have been built on and around this one word. Under the proposed GST regime, any transaction which is not a supply cannot be taxed and a transaction may be taxed under GST only if it is a supply.

Initially when Model GST law was released in the month of June 2016 there was a no concept of Mixed and composite supply. Said concepts has been introduced in Revised Model GST law which released in November 2016 and same has been retained in final GST Acts too.

As GST soon becomes a reality, it is important to understand the Key concepts of GST one amongst them is Composite supply and Mixed Supply.

Relevance of Composite & Mixed Supply

If we look at the market today, we will notice very often, two or more goods, or a combination of goods and services, are supplied together. This could be due to either of the following reasons:

• A sales strategy – to attract more customers
• The nature or type of goods or services, which requires them to be bundled or supplied together

Under Service Tax, this mechanism is called Bundled Service – which is the rendering of a service or services with another element of service of services.

The service tax law was dealing with pure services and not with goods per se. Now the concept introduced is for goods and is linked with the concept of Principal Supply. Organised Retailing shall have serious impact of such definitions which will be fraught with litigation unless the Companies and the retailers change their business models.

Under GST law, supplies which are bundled with two or more supplies of goods or services or combination of goods and services are classified, with distinct characteristics, as:

• Composite Supply
• Mixed Supply

Composite Supply under GST Law

Section 2(30) of CGST Act “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;

Illustration (as provided in Act): Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply.

In simple terms Composite supply is one where 2 or more goods or services are supplied together, in a natural bundle and in a normal course of business, provided one of which is a principal supply. The composite supply is taxed at the rate applicable to the principal supply.

What is principal supply?

Section 2(90) of CGST Act defines Principal Supply to mean that, the pre-dominant element in the supply of goods or services, forming part of composite supply, is principal supply, and any other dependent supply, forming part of composite supplies, are secondary to principal supply.

Determination of Composite Supply

Let us understand this with an example,

1. A 5-star hotel in Hyderabad provides a 5 days/4 nights package, with breakfast.

This is a composite supply as the package of accommodation facilities and breakfast is natural combination in the ordinary course of business for a hotel. In this case, the hotel accommodation is the principal supply, and breakfast is ancillary to the hotel accommodation.

Tax rate: A 5-star hotel in Hyderabad provides a 5 days/4 nights package with the breakfast. Let us assume, the hotel accommodation attracts 18% tax and the restaurant service attracts 12% tax

As per the example, hotel accommodation is the principal supply, and the entire supply will be taxed at 18%.

2. A 5-star hotel in Hyderabad provides a 5 day/4 nights package with the breakfast and one day Visit to Ramoji Film city.

The inclusion of Visit to Ramoji Film city in this package is not a natural requisite to accommodation in the hotel. Hence, this does not amount to composite supply. This is a mixed supply.

3. Sale of laptop with bag -this is a composite supply because laptop bag is natural requisite to carry the laptop. But if the customers opts for a multipurpose bag like backpack bag, it is not a composite supply since it is not naturally bundled.

4. Another example of composite supply can be construction of residential complex service along with Electrification and Water System Development Services (Except Statutory deposits), preferential location service etc. This is for the reason that no residential complex can be constructed without electrification and water system development. Tax rate applicable to these services would be the rate applicable to principal supply i.e. construction of residential complex service (Treated as service under GST)

5. Booking train tickets: You are booking a Shatabdi Express train ticket which includes meal. It is a bundle of supplies. It is a composite supply where the products cannot be sold separately. You will not buy just the train meal and not the train ticket. The transportation of passenger is, therefore, the principal supply.

Rate of tax applicable to the principal supply will be charged to the whole composite bundle. Therefore, rate of GST applicable to transportation of passengers by rail will be charged by IRCTC on the booking of Shatabdi Express ticket.

Key Indicators for determining Composite Supply

The following are some of the indicators in determining whether a transaction is a composite supply.

1. The components are sold as a package at a single price.
2. The components are advertised as a package.
3. The different components are not available separately.
4. Goods are physically packaged together (e.g. a plastic toy enclosed in a packet of cereal).
5. It would not normally make sense to supply part of the package independently (e.g. a new fridge and its delivery from the warehouse).
6. Although components are separately priced, the value of each component is arbitrarily assigned.
7. The customer perceives what they receive as a single supply, not independent components (e.g. one supply of a tailor-made suit, not separate supplies of cloth and tailoring services).
8. The different components are aspects of the quality or grade of the overall supply.
9. The different components are integral to one main supply. If one or more of the components is removed, the nature of the main supply would be affected.
10. Some components are clearly incidental or ancillary to an identifiable main supply.
11. The separation of components, on an invoice or otherwise, is artificial.

The above indicators are not exhaustive or conclusive proof of a composite supply. If the transaction has more of these indicators, it is likely that it is a composite supply.

Mixed Supply under GST Law

Section 2(74) of CGST Act “mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply;

Illustration: A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately.

When two (or more) goods, or two or more services, or a combination of goods and services, that each have individual identity and can be supplied separately, are deliberately supplied conjointly for a single consolidated price, the supply would be treated as a mixed supply.

Most importantly, such a supply should not qualify as a composite supply, for it to be treated as a mixed supply, i.e., in case of a mixed supply:

• The two or more supplies are not naturally bundled and supplied conjointly in the ordinary course of business;
• The principal supply cannot be identified – more than one of the supplies form the “predominant element” of the supply
• 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, and not as a ‘mixed supply’

Common examples of situations where mixed supplies might occur are:

Example 1:

A housing developer sells a residential house and supplies a furniture as a complimentary gift. This is a mixed supply consisting of two components i.e. construction of a residential house and a supply of a furniture. The supply of a furniture is not integral to the supply of the house but a separate supply by itself because both components are available separately and not interdependent on each other.

Example 2:

A hamper (different goods packaged together) consisting of wheat flour,canned foods, sweets, branded chocolates, crackers, cakes, non-alcoholic drink and fruit juices is on sale at a single price of Rs.500/-. This is a mixed supply wheat flour and other components. The components can be made available separately and are not interdependent on each other. The components are capable of being separate supplies in themselves.

Example 3:

A car repair workshop supplies both repair services and car batteries to its customers. When it charges a customer for supply of repair services and a car battery at a single inclusive price, it is making a mixed supply.

Example 4:

Supply of laptop and printer: Although a printer is used for the purpose of printing, the commands for which can be given through the laptop, the two goods are not naturally bundled and supplied conjointly in the ordinary course of business. Therefore, this supply is a mixed supply.

Example 5:

Supply of lectures in a coaching center and monthly excursions such as trekking, etc.: The two services are not naturally bundled in the ordinary course of business. Therefore, this supply is a mixed supply.

Key Indicators for determining Mixed Supply

The following indicators suggest a transaction is a mixed supply.

1. 1. Separate pricing where separate prices on different components of the supply are listed out.
   2. The individual components are not integral to each other.
   3. A single price is charged for separate principal supplies.
   4. The components are available separately.
   5. There is time differential between parts of the supply.

• The components are not interdependent or connected.
  

These are not exhaustive or conclusive proof of a mixed supply but if the transaction has more of these indicators, it is likely that it is a mixed supply.

My View:

In my view, the above concepts will definitely create disputes and litigation as whether the supply is composite or mixed will be dependent on facts and circumstances of a particular case. Moreover, the revenue authorities will consider a supply as composite or mixed according to the highest tax criteria. It was hoped that the GST regime would dispense with the classification disputes and lead to lesser litigation but introduction of above concepts will definitely ignite litigation.

There should be no doubt. The concepts like these will only create litigation; the tax payers shall plan according to their sales strategies and the Revenue will take them on.

Hence it is important for businesses to look at the types of supplies made by them and re-assess them in order to achieve the objectives of bundling the goods and services, in context with the concepts of mixed supply and composite supply.

Disclaimer:

This article includes general information about legal issues and developments in GST Law. Such materials are for informational purposes only and may not reflect the most current legal developments. These informational materials are not intended, and must not be taken, as legal advice on any particular set of facts or circumstances.

We disclaim all liability in respect to actions taken or not taken based on any or all the contents of this article to the fullest extent permitted by law. Do not act or refrain from acting upon this information without seeking professional legal counsel.

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