Composite Supply and Mixed Supply: EximGuru.com

Composite Supply and Mixed Supply

Introduction

A taxable event under GST is supply of goods or services or both. GST will be payable on every supply of goods or servicesor both unless otherwise exempted. The rates at which GSTis payable for individual goods or services or both is alsoseparately notified Classification of supply (whether as goodsor services, the category of goods and services) is essentialto charge applicable rate of GST on the particular supply. Theapplication of rates will pose no problem if the supply is ofindividual goods or services, which is clearly identifiable andthe goods or services are subject to a particular rate of tax.
But not all supplies will be such simple and clearly identifiable supplies. Some of the supplies will be a combination ofgoods or combination of services or combination of goodsand services both. Each individual component in a given supply may attract different rate of tax. The rate of tax tobe levied on such supplies may pose a problem in respect ofclassification of such supplies. It is for this reason, that the GST Law identifies composite supplies and mixed suppliesand provides certainty in respect of tax treatment under GST for such supplies.

Composite Supply under GST

Under GST, a composite supply would mean a supply madeby a taxable person to a recipient consisting of two ormore taxable supplies of goods or services or both, or anycombination thereof, which are naturally bundled andsupplied in conjunction with each other in the ordinarycourse of business, one of which is a principal supply:Illustration: Where goods are packed and transported withinsurance, the supply of goods, packing materials, transportand insurance is a composite supply and supply of goods is aprincipal supply.
A works contract and restaurant services are classic examplesof composite supplies, however the GST Act identifies bothas supply of services and chargeable to specific rate oftax mentioned against such services (works contract andrestaurants)
In respect of composite supplies (other than the twocategories mentioned above), the need to determine thesupply as a composite one, will arise, so as to determine theappropriate classification. It will be necessary to determineas to whether a particular supply is naturally bundled in theordinary course of business and what constitutes principalsupply in such composite supplies.
The concept of composite supply under GST is identical tothe concept of naturally bundled services prevailing in theexisting service tax regime. This concept has been explainedin the Education Guide issued by CBEC in the year 2012as under:
“Bundled service means a bundle of provision of variousservices wherein an element of provision of one service iscombined with an element or elements of provision of anyother service or services. An example of ‘bundled service’would be air transport services provided by airlines whereinan element of transportation of passenger by air is combinedwith an element of provision of catering service on board.Each service involves differential treatment as a manner ofdetermination of value of two services for the purpose ofcharging service tax is different.”
The rule is – ‘If various elements of a bundled service arenaturally bundled in the ordinary course of business, it shallbe treated as provision of a single service which gives suchbundle its essential character’

Illustrations :

• A hotel provides a 4-D/3-N package with the facilityof breakfast. This is a natural bundling of services inthe ordinary course of business. The service of hotelaccommodation gives the bundle the essential characterand would, therefore, be treated as service of providinghotel accommodation.
• A 5 star hotel is booked for a conference of 100 delegateson 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 is evident, a bouquet of services is being provided, manyof them chargeable to different effective rates of tax. Noneof the individual constituents are able to provide the essentialcharacter of the service. However, if the service is describedas convention service, it is able to capture the entireessence of the package. Thus, the service may be judgedas convention service and chargeable to full rate. However,it will be fully justifiable for the hotel to charge individuallyfor the services as long as there is no attempt to offload thevalue of one service on to another service that is chargeableat a concessional rate.
Whether the services are bundled in the ordinary course ofbusiness, would depend upon the normal or frequent practicesfollowed in the area of business to which services relate. Suchnormal and frequent practices adopted in a business can beascertained from several indicators some of which are listedbelow :

• The perception of the consumer or the service receiver- If large number of service receivers of such bundle ofservices reasonably expect such services to be providedas a package, then such a package could be treated asnaturally bundled in the ordinary course of business.
• Majority of service providers in a particular area ofbusiness provide similar bundle of services. For example,bundle of catering on board and transport by air is abundle offered by a majority of airlines.
• The nature of the various services in a bundle of serviceswill also help in determining whether the services arebundled in the ordinary course of business. If the natureof services is such that one of the services is the mainservice and the other services combined with such serviceare in the nature of incidental or ancillary services whichhelp in better enjoyment of a main service. For example,service of stay in a hotel is often combined with a serviceor laundering of 3-4 items of clothing free of cost perday. Such service is an ancillary service to the provision ofhotel accommodation and the resultant package wouldbe treated as services naturally bundled in the ordinarycourse of business.
• Other illustrative indicators, not determinative butindicative of bundling of servicesin the ordinary course ofbusiness are:
  • There is a single price or the customer pays the sameamount, no matter how much package they actuallyreceive or use
  • The elements are normally advertised as a package
  • The different elements are not available separately
  • The different elements are integral to one overallsupply. If one or more is removed, the nature of thesupply would be affected

No straight jacket formula can be laid down to determinewhether a service is naturally bundled in the ordinary courseof business. Each case has to be individually examined in thebackdrop of several factors some of which are outlined above.
The above principles explained in the light of what constitutes anaturally bundled service can be gainfully adopted to determinewhether a particular supply constitutes a composite supplyunder GST and if so what constitutes the principal supply soas to determine the right classification and rate of tax of suchcomposite supply.

Mixed Supply

Under GST, a mixed supply means two or more individualsupplies of goods or services, or any combination thereof, madein conjunction with each other by a taxable person for a singleprice 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 fruitjuices when supplied for a single, price is a mixed supply. Eachof these items can be supplied separately and is not dependenton any other. It shall not be a mixed supply if these items aresupplied separately.
In order to identify if the particular supply is a mixed supply,the first requisite is to rule out that the supply is a compositesupply. A supply can be a mixed supply only if it is not acomposite supply. As a corollary it can be said that if thetransaction consists of supplies not naturally bundled in theordinary course of business then it would be a mixed supply.Once the amenability of the transaction as a composite supplyis ruledout, it would be a mixed supply, classified in terms ofsupply of goods or services attracting highest rate of tax.
The following illustration given in the Education Guide ofCBEC referred above can be a pointer towards a mixed supplyof services:
A house is given on rent one floor of which is to be used asresidence and the other for housing a printing press. Suchrenting for two different purposes is not naturally bundled inthe ordinary course of business. Therefore, if a single rent deedis executed it will be treated as a service comprising entirelyof such service which attracts highest liability of service tax. Inthis case, renting for use as residence is a negative list servicewhile renting for non-residence use is chargeable to tax.Since the latter category attracts highest liability of servicetax amongst the two services bundled together, the entirebundle would be treated as renting of commercial property.

Determination of tax liability of composite andmixed supplies

The tax liability on a composite or a mixed supply shall bedetermined in the following manner:
(a) A composite supply comprising two or more supplies,one of which is a principal supply, shall be treated as asupply of such principal supply
(b) A mixed supply comprising two or more supplies shallbe treated as a supply of that particular supply whichattracts the highest rate of tax

Time of supply in case of composite supply

If the composite supply involves supply of services as principalsupply, such composite supply would qualify as supply ofservices and accordingly the provisions relating to timeof supply of services would be applicable. Alternatively, ifcomposite supply involves supply of goods as principal supply,such composite supply would qualify as supply of goods andaccordingly, the provisions relating to time of supply of goodswould be applicable.

Time of supply in case of mixed supplies

The mixed supply, involving supply of a service liable to tax athigher rates than any other constituent supplies, would qualifyas supply of services and accordingly the provisions relating totime of supply of services would be applicable. Alternatively, themixed supply, involving supply of goods liable to tax at higherrates than any other constituent supplies, would qualify assupply of goods and accordingly the provisions relating to timeof supply of services would be applicable.