Introduction
A taxable event under GST
is supply of goods or services or both. GST will be payable on every supply of
goods or services or both unless otherwise exempted. The rates at which GST is
payable for individual goods or services or both is also separately notified
Classification of supply (whether as goods or services, the category of goods
and services) is essential to charge applicable rate of GST on the particular
supply. The application of rates will pose no problem if the supply is of
individual goods or services, which is clearly identifiable and the 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 of goods or combination of services or combination of goods and
services both. Each individual component in a given supply may attract
different rate of tax. The rate of tax to be levied on such supplies may pose a
problem in respect of classification of such supplies. It is for this reason,
that the GST Law identifies composite supplies and mixed supplies and 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 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:
In respect of composite
supplies (other than the two categories mentioned above), 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.
The concept of composite
supply under GST is identical to the concept of naturally bundled services
prevailing in the existing service tax regime. This concept has been explained
in the Education Guide issued by CBEC in the year 2012 as under:
“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. An example of ‘bundled service’ would be air transport
services provided by airlines wherein an element of transportation of passenger
by air is combined with an element of provision of catering service on board.
Each service involves differential treatment as a manner of determination of
value of two services for the purpose of charging service tax is different.”
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’
Illustrations :• A hotel provides a 4-D/3-N 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.
• 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 is 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.
However, it will be fully justifiable for the hotel to charge individually for
the services as long as there is no attempt to offload the value of one service
on to another service that is chargeable at a concessional rate.
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.
- 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
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.
The above principles
explained in the light of what constitutes a naturally bundled service can be
gainfully adopted to determine whether a particular supply constitutes a
composite supply under GST and if so what constitutes the principal supply so
as to determine the right classification and rate of tax of such composite
supply.
Mixed Supply
Under GST, a 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.
In order
to identify if the 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. Once the amenability of the
transaction as a composite supply is ruledout, it would be a mixed supply,
classified in terms of supply of goods or services attracting highest rate of
tax.
The
following illustration given in the Education Guide of CBEC referred above can
be a pointer towards a mixed supply of services:
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 service tax. 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 amongst the two services bundled together, the
entire bundle would be treated as renting of commercial property.
Determination of tax liability of composite and mixed supplies
The tax
liability on a composite or a mixed supply shall be determined in the following
manner:
(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
(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
Time of supply in case of
composite supply
If the
composite supply involves supply of services as principal supply, such
composite supply would qualify as supply of services and accordingly the
provisions relating to time of supply of services would be applicable.
Alternatively, if composite supply involves supply of goods as principal
supply, such composite supply would qualify as supply of goods and accordingly,
the provisions relating to time of supply of goods would be applicable.
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