- The determination of taxability of transactions, involving multiple goods or services or a combination of goods and services has always been a challenging aspect under the indirect taxes. As far as the Pre-GST regime was concerned, the taxable events like” Manufacture” and “Sale” in respect of “Goods” were liable to tax under the provisions of Central Excise Act and State VAT/CST Acts respectively. As far as rendering of Services was concerned, the same was taxed under the provisions of Finance Act (Service tax). There have always been issues in determining appropriate rate of tax, especially when the industry has offered multiple goods or services or a combination thereof as a consumer product (goods/services). Although Central Excise Classification rules provided the basis for determining rate of tax in such case, also under the Service Tax there was a concept of Bundled services. Issues still persisted with not very conclusive classifications. Thereafter the major problem area was taxation of composite contracts specifically in case of works contract.
- The concept of “Deemed Sales” under the Sales tax laws and the concept of “Declared Services” under the Service Tax were the driving forces which brought the composite contracts under dual taxation net. After a series of litigations, somewhere it got settled as a principle that in case of composite contracts consisting goods and services, there would be a levy of “Sales tax” on the deemed value of goods and there would be a levy of “Service tax” on the deemed value of services.
- With the introduction of Goods and Services Tax, the long drawn issues under the pre-GST regime in respect of supply of multiple goods/services and a combination of goods and services has been given a dedicated resolution with the introduction of concepts of “Composite supply” and “Mixed supply”. More over vide the introduction of Schedule II to the CGST Act 2017, it has also been clarified as to “Which supplies would be treated as supply of goods and which supplies would be treated as supply of services”. Thus, under the GST regime the legal position, in respect of composite contracts involving multiple goods/services or a combination thereof will be more settled.
- As per the definition u/s 2(30) of the CGST Act 2017, “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.
- As per Section 8 of the CGST Act 2017, the taxability of 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.
- Based on the above provisions it can be understood that composite supplies means supply of two or more goods or services or any combination thereof. In today’s era, such combination of supplies consisting of goods or services or both, is very much a common feature. Thus what is important in these cases is determining a definite tax rate which would be considered as appropriate in the eyes of law. In determining the taxability as composite supplies, firstly the supplies are supposed to qualify as composite supply.
- In the definition above, there are some parts highlighted. The highlighted parts are the characteristics of a supply being a “composite supply”. Thus, for a supply to qualify as a composite supply, there has to be a supply of “two or more taxable supplies of goods/services or both. Where such supplies are naturally bundled, meaning thereby, in the ordinary course of business such supplies can be made in conjunction with each other. It is quite a subjective matter to say if goods and services are naturally bundled. That is to say, the word “naturally bundled” as such has not been defined in the act, but the same needs to be understood in terms of facts of each case. Besides, in such a combination, one of the goods or services must constitute as a “principal supply”. The taxability as per section 8, concludes to be that of the “principal supply”. Principal supply means that supply which draws the buyer into buying the product which may be offered as a combination of multiple goods/services. That is to say, even if goods/services are offered in a combination, those goods/services which proves to be a driving force in the minds of the buyer is to be understood as a “principal supply”.
Eg: Supply of a Mobile Phone
In case of mobile phones, the manufacturer/seller supplies the product along with a charger, earphones. Will supply of mobile phone amount to a Composite supply?
If we check the characteristics of being a composite supply, there is a supply of two or more taxable goods. The said supply can be considered as naturally bundled because the charger and the earphones are having definite usage along with mobile phone and it would not make a heterogeneous combination to offer these two products along with the mobile phone. The principal supply will be the mobile phone, as the buyer would be inclined to buy the whole set with the intention to buy the mobile phone and not the charger/earphones. That is to say, “mobile phone” makes the buyer buy the product but not the charger/earphones. Thus this can be said to be a composite supply, where the principal supply will be “Mobile Phone” and accordingly the rate of tax for this combination will be that of the mobile phone, however the value of charger and earphone will be included to ascertain the taxable value of mobile phone.
Eg: Event management services for a wedding reception:
The Event organizer provides services of managing a wedding reception with services including arrangement of premises, food, decoration, photographer, DJ etc. Will such supply amount to a composite supply?
Applying the test of being composite supply, there is a supply of two or more taxable goods or services. As all the supplies are in conjunction with each other in the ordinary course of business, they can also be said to be naturally bundled. The intention of the recipient in this case will necessarily be to avail an event management services for a wedding reception, which will inherently cover all the ancillary activities. Thus “Event management services” will be considered as a principal supply in this case and the tax rate applicable to such service will be applicable on the full value which will inherently cover the value of services such as (food supply, decoration, DJ, renting of premises).
Under the composite supply, once the principal supply is identified, rate for the combination is ascertainable, however in order to determine the value of supply, as per Section 15 of the CGST Act 2017, the value of incidental or ancillary supplies will also be included in the value of supply.
Mixed Supply :
- As per Section 2(74) of the CGST Act 2017, “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.
- As per Section 8 of the CGST Act 2017, the taxability of mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.
- Mixed supply refers to supply of goods or services or both in a combination where, such combination is not naturally bundled, however a combination is made by artificially arranging goods/services or a combination together and sold for a single price. Where it can be seen that two or more goods or services or a combination of goods or services, which are not supplied or used in the ordinary course of business together, but for the purpose of sale are being put together for a single price. In such case the buyer’s intention is not to buy any specific product but to buy a combination of goods or services or both as the same is available to him for a single price may be as a package. Thus nothing as such is a principal supply in this case. The purpose more often in these cases is to make a marketable recognition for the combined set of product.
Eg: Sale of toolkit:
A tool kit, consist of following goods with applicable GST rates. Spanner (12%), screw driver (12%), tester (28%), driller (18%). Although all these equipment may not be necessarily usable together, they are sold together as a toolkit. The toolkit as such does not have an identity as it is merely a collection of multiple goods, packed together for the purpose of sale for a single price. Nothing amongst the toolkit constitutes a principal supply, nor are the goods therein naturally bundled. Thus such an artificially bundled set, sold for a single price will be considered as a mixed supply. In such case rate of tax adopted would be the highest rate amongst the goods in the set. Thus the entire tool kit would be taxable at the rate of 28%.
Eg: Sale of a cosmetic set:
A cosmetic set, sold for a single price consist of following products with applicable GST rates. Shaving foam (12%), After-shave lotion (18%), Deodorant (12%), Perfume (18%) and Body wash (28%). Applying the test of mixed supply, there are multiple goods sold. The goods are not naturally bundled, but sold for a single price. Thus this can be considered as a case of mixed supply. The rate of tax applicable in this case would be the highest rate and thus the cosmetic set would be taxable at 28%.
Neither composite nor mixed supplies:
- In case of supply of multiple goods/services or combination thereof there is a possibility that it may neither constitute to be a composite supply nor a mixed supply. In such case the taxability is thus determined separately for each product on the basis of its rate and value.
Eg: Goods purchased in a departmental store:
In case of multiple goods purchased from a departmental store, it would be pertinent to note that neither the goods are naturally bundled nor there is any principal supply, so also there is no package of goods sold for a single price. In such a case the goods will be supplied as assorted supplies. Each of such supply would be having an identified rate of tax and value.
- Disclaimer: The views expressed by us in the above note on Composite and Mixed supplies is on the basis of our understanding of the GST Laws, Rules and regulations. The adjudicating or the judicial authorities may or may not be in agreement to this view.