Taxability of Composite and Mixed Supplies under GST

Introduction

With the advent of modern ways of selling, it is imperative for the law maker to make a law which matches with the new ways of doing business. During the previous decades, there were simple ways of doing business wherein one providing goods would not generally combine it with other goods or services and vice-versa.

In today’s world though, every person wants their deal to look more attractive and for doing that, everyone is out there to make a supply which is a combination of a host of goods and services. While doing so, there are a lot of combinations of goods and services being supplied simultaneously. There may be supplies of goods and services which are required to be supplied together so that the main purpose of supply is solved and there may be supplies where goods and services are supplied simultaneously even when there is no necessity to do so.

In either case, it is imperative on the part of lawmaker to clarify the taxability in each such case. The lawmaker has taken lessons from the service tax regime wherein they had specified certain combination (bundle) of services to clarify that such transactions/activity shall be considered as rendering of which services and attract what rate of service tax.

With the introduction of GST, they’ve gone a step ahead and introduced the concept of mixed supplies as well.

In this article, we will be discussing the meaning of Taxable Supply, Non-taxable Supply, Composite Supply, Mixed Supply and their taxability under the GST GST Regime

1. Analysis of Definition of ‘Taxable Supply’

• 2(108): Taxable Supply: The term taxable supply has been defined in clause (108) of Section 2 of the Act to mean a supply of goods or services or both which is leviable to tax under this Act.

Analysis:

Taxable Supply = There should be a Supply (as per Section 7) + There should be a power to levy tax under the GST Act on those supplies.

Therefore, for determining whether a transaction or an activity is a taxable supply or not, we shall check whether it is a supply in the first place. Only when it is established that it is a supply shall we proceed to determine whether there is any power with the government to levy tax on it.

2. Steps to determine whether a transaction/activity is a “taxable supply” or not:

Step 1: Determine whether the transaction is a supply.

Step 2: Determine whether there is any power to levy tax on it.

Transaction specified in Schedule III, Stock transfers to unit within the State for which no separate GST registration is obtained or receipts that satisfy exclusion from valuation as pure agent are all examples of cases where there is no supply in the first place. So, in these types of cases, we need not proceed to determine whether these are taxable supplies or not.

Sale of alcoholic liquor for human consumption or the five petro-products as mentioned in section 9 get covered in the definition of supply as they involve sale for a consideration in the course or furtherance of business but there is no power to tax them under GST Act. Therefore, supply of alcoholic liquor for human consumption and 5 Petro-products as mentioned in Section 9 is a supply but not a taxable supply.

On the other hand, this means that even supplies which enjoy full exemption from tax by way of an exemption notification would still be classified as a taxable supply as the lawmaker has the power to levy tax on it but has opted not to do so.

3. Analysis of Definition of ‘Non-Taxable Supply’

• 2(78): Non-Taxable Supply: The term Non-taxable supply has been defined in clause (78) of Section 2 of the Act to mean a supply of goods or services or both which is not leviable to tax under this act (CGST) or the Integrated Goods and Services Tax Act.

Analysis:

In the simplest sense, a supply which is not a taxable supply can be said to be a non-taxable supply. Thus, a transaction or an activity has to first be a supply and then only we can classify it as a taxable or a non-taxable supply. If something is outside the scope of supply, then it is neither a taxable supply nor a non-taxable supply. Thus, activities or transactions specified in Schedule III are neither taxable supplies nor non-taxable supplies as they are not covered in the scope of supply.

Sale of alcoholic liquor for human consumption is an example of non-taxable supply.

4. Tax liability on composite and mixed supplies

Section 8. 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.

Analysis:

To understand the taxability of transactions on composite or mixed supplies, we need to understand the meaning of these terms and the rationale behind them.

Generally, there is no problem of identifying the rate of taxation as the supply is of individual goods or service. However, there arises a problem if a bundle of goods or services or both are provided together. In such a case, if the rate of tax on the different goods and services provided together is different, then there is an issue of segregating the price of the total supply. The supplier may try to offload the tax liability by putting a higher value on those items which attract a lower rate of tax. On the other hand, the department may try to increase the tax burden by doing just the opposite. In any case, these types of transactions are always prone to litigation. To avoid litigations and provide clarity in relation to complex transactions involving multiple supplies, the lawmaker has introduced the concept of Composite Supply and Mixed Supply. If two or more goods or services or both are provided together as a bundle, then those supplies are either composite supplies or mixed supplies. Thus, it becomes necessary to understand the concept of composite and mixed supplies as the taxability of the two is significantly different.

5. Analysis of Definition of ‘Composite Supply’

2(30): Composite Supply: The term composite supply has been defined in clause (30) of Section 2 of the Act to mean 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;  

Analysis:

The word taxable supply in the definition of composite supply has an important role to play. A non-taxable supply of goods or services along with a taxable supply will not be covered in the definition of composite supply. The supplier will have to compulsorily segregate the values in such a case.

A restaurant supplying catering services along with alcoholic liquor for human consumption is the best example of this situation.

Say, the catering services are provided at ₹2000 per person including liquor. Catering services are generally classified as composite supplies as it includes supply of goods and services which are naturally bundled. However, another important criterion is that all the supplies shall be taxable supplies. If, any supply is a non- taxable supply, then the said supply (catering + liquor) cannot be said to be a composite supply. Assuming the supplier segregates the value of alcohol at ₹800 per person, the caterer shall pay GST on ₹1200 at 18% as after the segregation, the bundle of remaining supply can be said to be of taxable supplies and hence a composite supply.

6. Analysis of Definition of ‘Principal Supply’

2(90): Principal Supply: The term principal supply has been defined in clause (90) of section 2 of the Act to mean a 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.

Analysis:

As per the definition, Composite supply is a taxable supply of two or more goods or services or both as a part of a single package, and they are naturally bundled in the ordinary course of business. The supplies are in conjunction with each other and one of which is a principal supply.

Principal Supply is that supply which is the main reason for which the entire supply is being made. However, in order to execute such supply efficiently and as per the market requirements, there are certain other ancillary supplies which are also required to be made. Thus, we can see that the proper execution of the principal supply requires supply of other ancillary goods and services which is why these supplies are said to be naturally bundled.

In short, in a supply of two or more goods and services together, the supply which forms the basic purpose of the supply is called as the principal supply and the supplies without which the principal supply cannot be made properly are called as ancillary supplies.

Naturally bundled means a bundle of two or more supplies wherein all the supplies forming part of the main supply are a natural necessity, i.e. without which the main supply cannot be effectively made. The supplies forming part of the main bundle are dependent on each other in such a way that removing any one of them might render the entire supply irrelevant.

It is important to note that charging a single price for the entire supply is not an essential condition for a supply to be held as a composite supply. It is generally seen that a single price is charged in these cases but it cannot be said to be a legal condition as per the reading of the definition of Composite Supply.

For example: 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.

7. Steps for determining whether a supply of goods and services is a composite supply:

There cannot be a standard procedure for determining whether a supply is a composite supply or a mixed supply as there is a lot of subjectivity involved. However, a few steps have been illustrated to generally identify a composite supply.

Step 1: Determine whether there are two or more supplies being made. – Yes, in the given example, Sale of goods and the service of transportation and insurance are being supplied as a bundle.

Step 2: Determine the importance of the supplies and their dependency on each other. – If there is a dependency of the supplies on each other, then proceed to the next step. However, if there is no dependency, i.e. the supplies are just artificially bundled, then it can be clearly stated that the said supply is not a composite supply.

Here, the sale of goods is dependent on the service of transport and insurance in such a way that without it, the sale cannot be made. Also, if there was no sale of goods, there would have been no supply of service of transportation or insurance.

Thus, it can be clearly stated that the said supply is a Composite Supply.

Please note that the term dependency shall have a very wide meaning so as to include even those supplies which although are not necessary to be supplied together but when given together, enhance the enjoyment of goods or services being supplied.

For example: Where an air transport company supplies services of transportation along with on-board food and entertainment, the supply of food and entertainment is not a necessity but it enhances the satisfaction level of the customer and therefore the supply of transportation along with supply of food and entertainment is a composite supply wherein transportation service is the principal supply.

Step 3: Once we have established that the said supply is a composite supply, we shall determine the Principal supply and the ancillary supply. – As the main intention of the supply is to sale goods, the supply of goods is the principal supply and the other supplies of transportation and insurance are ancillary supplies.

Step 4: As Section 8 clearly states that a composite supply shall be treated as a supply of principal supply, Thus, the entire consideration received for the composite supply shall be taxed at the rate at which principal supply is taxed.

Here, the entire consideration received for the sale of goods and transportation and insurance shall be taxed at the rate of tax applicable on the goods.

Another important thing worth mentioning is that Para 6 of Schedule II specifically states the two composite supplies of Works Contract as defined in clause (119) of section 2 and Restaurant and Catering as a supply of service. So, we do not have to determine as to which supply is the principal supply. These two have been specifically stated to be supply of services in Schedule II and so they shall be taxed at the rate applicable on those services.

8. Analysis of Definition of ‘Mixed Supply’

2(74): Mixed Supply: The term mixed supply has been defined in clause (74) of Section 2 of the act to mean 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 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.

Analysis:

As per the definition, Mixed supply is a supply of two or more goods or services or both where a single consideration is charged for the supply and the said supply is not a composite supply. In other words, it can be said that a single consideration must be charged for the entire supply and the said supply shall be an artificial bundle, i.e. not an ordinary bundle in the normal course of business.

9. Steps for determining whether a supply is a mixed supply:

Step 1: Determine whether there are two or more supplies being made:  Yes, in the above illustration, Sale of dry fruits, aerated drinks, cakes etc. are being supplied as a bundle.

Step 2: Determine whether the bundle is being supplied at a single price: If yes, then only we can proceed further. If all the supplies are given an individual value, then it cannot be a mixed supply. In the given case, a single price is charged. Hence, we can proceed towards the next step.

Step 3: Determine whether the supply is a composite supply: If yes, then the bundle shall be taxed at the rate at which the principal supply is taxed and the question of ascertaining mixed supply is over. However, if the said supply is not a composite supply, i.e. the bundle is an artificial one, then, it can be said to be a mixed supply.

In the given case, no supply can be said to be the principal supply and neither is any supply dependent on the other supplies. Sale of juice is independent of the fact that sale of chocolates take place or not. The supplier has just created an artificial bundle to attract his customers. Therefore, we can finally say that the said supply is a mixed supply as it is given at a single price and it is not naturally bundled in the ordinary course of business.

Step 4: As section 8 clearly states that the supply of mixed supply shall be treated as the supply of that particular supply which attracts the highest rate of tax.

Say, Chocolates attract 18% of tax whereas the rest fall in the 5% or 12% category, the entire consideration charged for the supply shall be taxed at the rate of 18%.

Example: A house is given on rent one floor of which is to be used as residence and the other for housing a printing press. A single rent deed is executed for the entire house. The amount of rent as per the rent deed for the entire house amounts to Rupees 100,000 per month.

Step 1: Yes, there are two supplies being made simultaneously. Renting of one floor for residence and another for commercial purposes are two different supplies attracting different rates of taxes.

Step 2: Yes, a single consideration is charged for both the supplies.

Step 3: No, the said supply cannot be held to be a composite supply as there is no principal supply and neither of the two supplies are dependent on each other. A single floor can be rented for the purpose of printing irrespective of the fact that the other floor is let out for residential purposes or not. Hence, it is an artificial bundle.

Step 4: Here, section 8 states that the entire consideration received for the mixed supply shall be charged to tax at the highest slab of tax applicable on any of the supply. As renting of a property for residential purpose is exempted from GST and renting of property for commercial purpose is chargeable to tax at 18%, the entire consideration of 100,000 Rupee shall be charged to tax at the rate of 18%.

10. Whether the services are bundled in the ordinary course of business? How to Know?

Whether the 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. Such normal and frequent practices adopted in a business can be ascertained from several indicators some of which are listed below:

♦ 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. For example, 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.

For example, 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.

Other illustrative indicators, not determinative but indicative of bundling of services in the ordinary course of business are:

♦ There is a single price or the customer pays the same amount, no matter how much package they actually receive or use

♦ The elements are normally advertised as a package.

♦ The different elements are not available separately.

♦ The different elements are integral to one overall supply. If one or more is removed, the nature of the supply would be affected.

CRUX:

Particulars	Composite Supply	Mixed Supply
Naturally Bundle	Yes	No
Supplied Together	Yes	Yes
Can be supplied separately	No	Yes
One is a pre-dominant supply	Yes	No
Other supply is not an aim in itself	Yes	No
Separate Pricing	Generally, No (However for the sake of convenience, it can be shown separately)	Mandatorily No.
Goods + Goods	Yes	Yes
Goods + Services	Yes	Yes
Services + Services	Yes	Yes

No straight jacket formula can be laid down to determine whether a supply of services and goods are naturally bundled in the ordinary course of business. Each case has to be individually examined in the backdrop of several factors some of which have been outlined above. There is a lot of subjectivity involved while determining whether a combination is that of a composite supply or that of a mixed supply.

In majority of the cases, we all might have the same opinion but, in some cases, some might consider a supply as a composite supply and some might think of it as a mixed supply and in these cases would one need to knock the doors of judiciary!

Note: Sincere efforts have been made to make this article without any error. In case of any errors that you may want to bring to the notice of the author, queries or suggestions, the author may be reached at the following mail address:

The author can also be reached at sahiljain02.sj@gmail.com or aasangst@gmail.com.