GST- Section 8 Tax liability on composite and mixed supplies

Today we will do a study of Section 8 of CGST Act, 2017 which talks about tax liability on composite and mixed supplies

Firstly, we’ll get acquainted with the legal provision, then relevant definitions and eventually we’ll get through the explanations w.r.t. the legal provisions.

Section 8 of CGST Act, 2017

The tax liability on a composite or a mixed supply shall be determined in the following manner, namely:—

a) 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

b) a mixed supply comprising

• two or more supplies
• shall be treated as a supply of that particular supply
• which attracts the highest rate of tax.

Summary

Definitions

Section 2(30) Composite Supply : 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.— 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;

A works contracts and restaurant services are classic examples of composite supplies, however the GST Act identifies both as supply of services and chargeable to specific rate of tax mentioned against such services. (Works contract and restaurant).

Section 2(74) Mixed Supply : 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;

Section 2(90) Principal Supply: 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.

Explanations for understanding

Composite Supply:

In respect of composite supplies, the need to determine the supply as a composite one, will arise, so as to determine the appropriate classification. It will be necessary to determine as to whether a particular supply is naturally bundled in the ordinary course of business and what constitutes principal supply in such composite supplies.

Illustration: A hotel provides a 4-Day/3-Night package with the facility of breakfast. This is a natural bundling of  services in the ordinary course of business. The service of hotel accommodation gives the bundle the essential character and would, therefore, be treated as service of providing hotel accommodation.

Illustration: A 5 star hotel is booked for a conference of 100 delegates on a lump sum package with the following facilities:

• • Accommodation for the delegates
  • Breakfast for the delegates
  • Tea and coffee during conference
  • Access to fitness room for the delegates
  • Availability of conference room
  • Business centre

As its evident a bouquet of services is being provided, many of them chargeable to different effective rates of tax. None of the individual constituents are able to provide the essential character of the service. However, if the service is described as convention service it is able to capture the entire essence of the package. Thus, the service may be judged as convention service and chargeable to full rate.

Bundled Services:

The concept of composite supply under GST is identical to the concept of naturally bundled services prevailing in the existing service tax regime.

Bundled service means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services.

The rule is – ‘If various elements of a bundled service are naturally bundled in the ordinary course of business, it shall be treated as provision of a single service which gives such bundle its essential character’

Whether services are bundled in the ordinary course of business would depend upon the normal or frequent practices followed in the area of business to which services relate.

• The perception of the consumer or the service receiver. If large number of service receivers of such bundle of services reasonably expect such services to be provided as a package, then such a package could be treated as naturally bundled in the ordinary course of business.
• Majority of service providers in a particular area of business provide similar bundle of services.

Illustration: bundle of catering on board and transport by air is a bundle offered by a majority of airlines.

• The nature of the various services in a bundle of services will also help in determining whether the services are bundled in the ordinary course of business. If the nature of services is such that one of the services is the main service and the other services combined with such service are in the nature of incidental or ancillary services which help in better enjoyment of a main service.

Illustration:  service of stay in a hotel is often combined with a service or laundering of 3-4 items of clothing free of cost per day. Such service is an ancillary service to the provision of hotel accommodation and the resultant package would be treated as services naturally bundled in the ordinary course of business.

No straight jacket formula can be laid down to determine whether a service is naturally bundled in the ordinary course of business. Each case has to be individually examined in the backdrop of several factors some of which are outlined above.

Mixed Supply:

As the definition says 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.

In order to identify whether any particular supply is a Mixed Supply, the first requisite is to rule out that the supply is a composite supply. A supply can be a mixed supply only if it is not a composite supply.

As a corollary it can be said that if the transaction consists of supplies not naturally bundled in the ordinary course of business then it would be a Mixed Supply.

Illustration: A house is given on rent one floor of which is to be used as residence and the other for housing a printing press.

Such renting for two different purposes is not naturally bundled in the ordinary course of business. 

Therefore, if a single rent deed is executed it will be treated as a service comprising entirely of such service which attracts highest liability of GST.

In this case renting for use as residence is a negative list service while renting for non-residence use is chargeable to tax.

Since the latter category attracts highest liability of service tax among the two services bundled together, the entire bundle would be treated as renting of commercial property.

Certain clarifications on composite and mixed supply given by CBIC

The printing industry in India in particular faces a dilemma in determining whether the nature of supply provided is that of goods or services and whether in case certain contracts involve both supply of goods and services, whether the same would constitute a supply of goods or services or if it would be a composite supply and in case it is, then what would constitute the principal supply.

Refer circular no.11/11/2017-GST dated 20.10.2017

It is clarified that supply of books, pamphlets, brochures, envelopes, annual reports, leaflets, cartons, boxes etc. printed with logo, design, name, address or other contents supplied by the recipient of such printed goods, are composite supplies and the question, whether such supplies constitute supply of goods or services would be determined on the basis of what constitutes the principal supply.

In the case of printing of books, pamphlets, brochures, annual reports, and the like, where only content is supplied by the publisher or the person who owns the usage rights to the intangible inputs while the physical inputs including paper used for printing belong to the printer, supply of printing is the principal supply and therefore such supplies would constitute supply of service.

In case of supply of printed envelopes, letter cards, printed boxes, tissues, napkins, wall paper etc., printed with design, logo etc. supplied by the recipient of goods but made using physical inputs including paper belonging to the printer, predominant supply is that of goods and the supply of printing of the content is ancillary to the principal supply of goods and therefore such supplies would constitute supply of goods.

Refer Circular No. 32/6/2018-GST dated 12.02.2018

Food supplied to the in-patients as advised by the doctor/nutritionists is apart of composite supply of healthcareand not separately taxable. Other supplies of food by a hospital to patients (not admitted) or to their attendants or visitors are taxable.

Refer Circular No. 34/8/2018-GST dated 01.03.2018

Whether activity of bus body building, is a supply of goods or services?

In the case of bus body building there is supply of goods and services. Thus, classification of this composite supply, as goods or service would depend on which supply is the principal supply which may be determined on the basis of facts and circumstances of each case.

Whether retreading of tyres is a supply of goods or services?

In retreading of tyres, which is a composite supply,the pre-dominant element is the process of retreading which is a supply of service. Rubber used for retreading is an ancillary supply. Which part of a composite supply is the principal supply, must be determined keeping in view the nature of the supply involved. Value may be one of the guiding factors inthis determination, but not the sole factor. The question to be asked is what is the essential nature of the composite supply and which element of the supply imparts that essential nature to the composite supply.

However, Supply of retreaded tyres, where the old tyres belong to the supplier of retreaded tyres, is a supply of goods.

Refer Circular No. 47/21/2018-GST dated 08.06.2018

How is servicing of cars involving both supply of goods (spare parts) and services (labour), where the value of goods and services are shown separately, to be treated under GST?

The taxability of supply would have to be determined on a case to case basis looking at the facts and circumstances of each case. Where a supply involves supply of both goods and services and the value of such goods and services supplied are shown separately, the goods and services would be liable to tax at the rates as applicable to such goods and services separately.