Introduction
The definition of the ‘chargeable event’ in Tax laws is the most important point of litigation, as it determines whether a transaction would attract levy of taxes in the first place, even though all the other requirements are met. Having briefly understood what constitutes ‘Supply’ from Part I of this Article, in the following paragraphs various types of supply have been discussed.
Article explains about Composite Supply under GST, Principal Supply under GST, Mixed Supply under GST, Mixed Supply v. Composite Supply, Exempt Supply & Non-Taxable Supply, Scope of Non-Taxable Supply and Inward & Outward Supply and Zero rated supply
Page Contents
(i) Composite Supply under GST
Next relevant definition is the definition of ‘composite supply’ under sec.2(30). 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. The definition has also given an illustration which has got statutory value. This definition implies that when supply is made which consists of different forms of supply including goods or services but which are necessarily, naturally and integrally connected to the main supply, then the entire supply should be taken as a single supply which has got essential character of principal supply.
(ii) Principal Supply under GST
The definition of principal supply under sec. 2(90) of the Act states that Principal supply means the supply of goods or services which constitutes the pre-dominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary. In other words, if the composite supply consists various supplies which are bundled and integrally connected to the main supply, the supplies which get bundled in the supply leading to the principal supply will be treated as an ancillary supply. For the purpose of classification, taxability and exemption the entire supply will be treated as a single supply and the principal supply will be relevant factor for such determination.
In this context the latest decision of Hon’ble Gujarat High Court in 2020(34)GSTL 385 (Guj) in the case of Torrent Power Ltd vs. UOI, held that in case of naturally bundled services in the course of business the whole service is to be treated as single service for taxability and exemption. Ex-post discussing principal supply and Composite supply moving to its parallel onto Mixed Supply under GST.
(iii) Mixed Supply under GST
As against composite supply, one has to examine the definition of ‘mixed supply’ as given under sec.2(74) of the Act. Mixed supply refers to 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. The definition has also given an illustration which is part of the act itself.
(iv) Mixed Supply v. Composite Supply
Taking into account the two definitions of supply viz., composite supply and mixed supply, one can understand the essential statutory differences between the two kinds of supply. Under mixed supply reference is made to ‘price factor’ as a condition there must be a ‘single price’ where such supply does not constitute a composite supply. Whereas in the case of composite supply it may be seen from the definition there is no reference to a price factor. In other words, irrespective of manner of pricing or manner of invoicing, in the case of composite supply, once the supply comes under the scope of composite supply, the same has to be assessed for the purpose of classification, taxability and exemption based upon the principal supply only. In the case of mixed supply as per the definition itself, if the supplier does not charge a single price, then it may not fall under the definition and if it does not come under the scope of composite supply also, the whole supply has to be treated on individual basis without referring to composite supply or mixed supply.
In the context of determining the tax liability on composite and mixed supplies, sec.8 of the CGST Act, while referring to composite supply, comprising two or more supplies, one of which is principal supply, the section refers to the whole supply to be treated as supply of such principal supply. For example when a supplier has ordered under a contract or agreement or a purchase order as the case may be, to deliver certain goods and erect and install the same at the sight of the customer, the supply is to be treated as composite supply, where supply of goods and supply of service relating to erection and installation are integrally connected. Since the customer requires the goods and the erection and installation activity is ancillary to the principal activity of supply of goods, the classification, taxability, exemption, valuation and the rate of tax must be related to the principal supply which is a supply of goods.
(v) Exempt Supply & Non-Taxable Supply
Sec.2(47) defines ‘Exempt supply’ referring to supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under sec.11, or under sec.6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply.
Non-taxable supply is defined under sec.2 (78) of the Act as referring to supply of goods or services or both which is not leviable to tax under this Act or under the Integrated Goods and Services Tax Act. The dispute arises as to which supply would constitute a non-taxable supply. It may be seen from the definition of ‘non-taxable supply’ under sec.2 (78) of the Act referred to above that non-taxable supply should essentially be supply, i.e., it should satisfy the ingredients of the supply under the act viz. supplying service or goods for a consideration in the course of furtherance of business. If a supply satisfies these ingredients but yet they are not taxable under this Act, then such supply becomes non-taxable. For example, the Act excludes alcoholic liquor for human consumption and petroleum products for the present, though these transactions may come under the scope of supply under the Act, because the charging section excludes alcoholic liquor for human consumption, the same is not taxable under this Act. Similarly sub-section 2 of section 9 of CGST Act indicates that the tax on the supply of petroleum crude, High Speed Diesel, motor spirit (known as petrol), etc. will be levied with effect from such date as may be notified by the Government. Currently however these products are not chargeable under GST.
(vi) Scope of Non-Taxable Supply
Since supplies of alcoholic liquor for human consumption are not leviable to tax under the Act, though they are supplies, such supplies will come under the scope of non-taxable supply. The question that may arise is which supplies or which transactions may fall outside the scope of non-taxable supply? Since the scope of the Act is clear that only a supply is taxable and since non-taxable supply pre-supposes a supply, the Act does not treat certain transactions as either supply of service or supply of goods, then such transactions cannot be brought under the scope of non-taxable supply even when the supplier is engaged in such transactions. For example., Schedule III of the CGST Act specifically refers to activities of transactions which shall be treated neither as supply of goods nor supply of services. These transactions as given under Schedule III cannot be brought under the scope of nontaxable supply.
(vii) Inward & Outward Supply
Sec.2(67), sec.2(83) relating to inward supply and outward supply should be read together.
While ‘inward supply’ refers to receipt of goods or services or both whether by purchase, acquisition or any other means with or without consideration, the ‘outward supply’ refers to supply of goods or services or both, by any mode, made or agreed to be made by such person in the course or furtherance of business.
(viii) Zero rated supply
At the same time, in IGST Act, zero rated supply has been referred to as under sec.16 of the Act. Sec.16 of the Act refers to Zero rated supply as follows:
sec.16. 1. ‘zero rated supply’ means any of the following supplies of goods or services or both, namely: ––
(a) export of goods or services or both; or
(b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.
2. Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply.
3. A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely: ––
(a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilized input tax credit; or
(b) he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder.
From the above definition it is clear that zero rated supply is confined to two situations. They are
(a) export of goods or services or both; or
(B) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.
In the IGST Act under the provisions it is clearly indicated that the input tax credit is available on zero rated supply also though no tax is paid and the provision also enables a registered person to claim refund in respect of goods and services supplied under bond or letter of undertaking without payment of IGST and also to claim refund of unutilized input tax credit and to claim refund of IGST if it has been paid on supply of goods and services. Since zero rated supply covers export of services also it is useful to find out what exactly is export of service as defined under IGST Act. Sec.2(6) of IGST Act defines export of service as follows which is extracted below:
i. the supplier of service is located in India
ii. the recipient of service is located outside India;
iii. the place of supply of service is outside India
iv. the payment for such service has been received by the supplier of service in convertible foreign exchange; and
v. the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8.
It may be seen that unless all the conditions are satisfied, the supply cannot be treated as export of service. Only when the supply satisfies all the conditions as laid down in the above sections, the supplier can claim the benefit of zero-rated supply.
Conclusion
Unlike the erstwhile tax regimes where indirect taxes were levied in different stages of a good or a service, GST unifies them all and a single term ‘supply’ is used in place of excise duty, VAT, service tax etc. Thus it becomes more important now more than ever to understand the term ‘Supply’ and its nuances in detail in light of the definitions provided under the Act. Major definitions have been the point of litigation before the courts to understand its scope and application. GST being a new era, has its own scope of interpretation by Courts in times to come.
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