GST is payable on individual goods and services or both at notified rates. GST is being charged at the notified rates on individual goods or services or both. The would not be any problem with the applicability of rates if the supply of individual goods or individual services is being clearly identifiable.
However, in certain cases, supplies are not such simple and clearly identifiable supplies. Some of the supplies are a combination of goods or a combination of services or a combination of goods and services both and each individual component of such supplies may attract a different rate of tax.
In such a case, the rate of tax to be levied on such supplies may be a challenge. This is the reason that it is essential to identify the composite supplies and mixed supplies which provides certainty in the rate of treatment under GST.
As we will proceed further, you will come to know that to determine whether a supply is ‘composite supplies’ or ‘mixed supplies’, then it is necessary to determine whether the particular supply is naturally bundled or not naturally bundled in the ordinary course of business.
It means a supply which has been made by the supplier to the recipient and
- It comprises of 2 or more supplies in conjunction with each other
- Which are naturally bundled in the ordinary course of business
- Out of which, one of them is a principal supply
Note: A principal supply means a supply that has a predominant element of composite supply.
Now, the question arises that how will we determine that a particular supply is a composite supply or not. Well, there is no specific formula that gives you the list of supplies stated that which supply is a composite supply and which is not. You have to apply all the points given in the definition.
In simple words, if you are providing the 2 or more supplies and one of them is a principal supply then it will be your composite supply. Let me explain it with some examples for better understanding:
Example 1: Mr. Nikhil (A service provider) entered into a contract with AKT Associates for the supply of Legal books packed in the boxes. Further, Mr. Nikhil would also get them insured during transit. In this case supply of goods, transport & insurance, packing materials is called composite supply wherein supply of goods will be the principal supply.
Example 2: When a consumer buys a washing machine and he also gets a warranty and the other maintenance contract with the washing machine then such supply shall be called composite supply. In this example, the supply of washing supplies is the principal supply, warranty, and maintenance services are incidental.
Example 3: A travel ticket from Mumbai to Delhi may include service of food being served on board, free insurance, and the use of airport lounge. In this case, the transportation of passengers constitutes the predominant element of the composite supply and is treated as the principal supply and all other supplies are ancillary.
Reason for Identification of Principal Supply
The above example may give more clarity regarding the composite supply but you may think that why do we need to identify the principal supply. The answer to this question is very easy since it is possible that the supplies which are providing in conjunction with each other, may have different rates under GST. So, the GST rate on composite supply shall be taken, at which the rate on principal supply is applicable.
For Example, ABC electronics are selling the HP laptops along with free laptop bags. The GST Rate for Laptop bags is 18% and the Laptop is 12%. In this case, Laptop and laptop bags are providing in conjunction with each other and these are naturally bundled in the ordinary course of business in which we all know that the principal supply is a supply of laptop and not the laptop bags. So, although, both are the supply of goods the GST rate of principal supply will be applicable which is Laptop i.e. 12% and not 18%.
In the earlier service Tax laws, there was a lot of confusion in the works contract, because, in works contract, there are a certain amount of material has been supplied along with the labor services at a single price. Since at that time there were 2 laws regarding the taxability of goods as VAT/CST and taxability of service as service tax law hence there were different methods for determining the portion of goods and portion of services.
But GST law has made it simple and works contracts are now considered as supply of services.
The same thing has done with Restaurant services and now it is considered as a supply of services under the GST Act.
Now, the next question arises that how we determine that the particular supply is bundled in the ordinary course of business.
To determine, whether the goods or services or both are bundled in the ordinary course of business, it is necessary to know that whether such supply would depend upon the frequent or normal practices followed in the area of business to which services relate. There are several factors in which such normal and frequent practices can be adopted in business. We have listed some most common indicators:
- Perception of the consumer: If a large number of service recipients 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.
- Similar bundle of service in a particular area: For example, a bundle of catering on board and transport by air is a bundle offered by a majority of airlines.
- Nature of the services: The nature of the service will also help in determining whether the services are a composite supply or mixed supply. This can be known where the service is being provided with another service so we will have to determine the main nature of the service and the other service which is provided in a combination with the main supply as incidental and ancillary. Hence it will help in better enjoyment of the main service.
For example Service of stay in a hotel is often combined with the provision of breakfast and dinner provided free of cost during the stay. 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.
Note: As we discussed above that there is a 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.
For Example servicing of cars involving the supply of both goods (spare parts) and services (labor) where the value of goods and services are shown separately, CBIC has clarified that the goods and services would be liable to tax at the rates as applicable to such goods and services separately.
Now you have understood the concept of composite supply and the next step is mixed supply. Do not mix both concepts. I’ll explain the difference between them but first, understand the meaning of mixed supply.
Mixed Supply means
- 2 or more supplies of goods or services, or any combination thereof, are provided in conjunction with each other by the taxable person
- At a single price where such supply would not be considered as a composite supply.
You may find the definition is much similar to the composite supply, but there is one major difference that is naturally bundled. When 2 or more supplies are not naturally bundled providing at a single price then such supply is called mixed supply. In simple words, the individual supplies are independent of each other and are not naturally bundled.
Why do we need to identify this:
Like composite supply, here we also need to identify that whether a particular supply is a mixed supply or not because under mixed supply, the rate of GST shall be taken of the article which has the highest rate. You will understand this with a single example but first, it is important to understand how to determine that a particular supply is a mixed supply.
How to determine that a particular supply is a mixed supply:
To determine whether the particular supply is a mixed supply or not, we have to first check the conditions of composite supply.
Simply, the supply can be called a mixed supply only if it is not fulfilling the conditions of being a composite supply. In other words, it can be said that if the transaction consists of supplies that are not naturally bundled in the ordinary course of business then it shall be called a mixed supply.
However, if the conditions of being composite supply are being satisfied then such a transaction shall be called a composite supply. In case, if it is a mixed supply, then the rate of tax shall be applicable which has the highest rate of the supplies in a transaction.
Now let’s understand the concept of mixed supply with some examples:
Example 1: A supply of a food package consists of canned foods, cakes, chocolates, dry fruits, and fruit juices, etc. which are supplied for a single price then it is a mixed supply. If each of these items is supplied separately then it shall not dependent on any other and it will not constitute a mixed supply.
Example 2: A shopkeeper selling storage water bottles along with a refrigerator. Bottles and the refrigerator can easily be priced and sold independently and are not naturally bundled. So, such supplies are mixed supplies.
Example 3: A house is given on rent through a single rent deed – one floor of which is to be used as a residence and the other for housing a printing press, at a lump sum rent amount. In this case, the use of the house is for different purposes which are not naturally bundled in the ordinary course of the business hence the supplies covered in renting services are mixed supply.
Through this summary, you will be easily bifurcate and determine whether a 2 or more supply at a single price, is a composite supply or mixed supply:
Difference between composite and mixed supply
|Particulars||Composite Supply||Mixed supply|
|Supplies||Which are naturally bundled||Which are not naturally bundled|
|Jointly||Supply in conjunction with each other||Although, the supply can be made independently, still supplied together|
|Principal Supply||Here, one of them is a principal supply||Principal supply cannot be identifiable|
|Rate of GST||GST shall be charged at the rate, as applicable on the principal supply||GST shall be charged at the rate applicable to the supply, which attracts the highest rate|
|Example||Charger supplies with Mobile Phone||Gift of Chocolates and sweets|