As per GST law, tax is payable on the supply of goods or services or both for consideration during the course of business, unless exempted. The rate of tax applicable for the supply of goods and services is also separately notified under the law, depending on the category to which they belong. Classification of the goods and services is essential to knowing the applicable GST rates, and it is easy to identify the rate when the supplies are clearly categorized. But not all supplies can be clearly classified. Some of them will be a combination of services or a combination of both goods and services. Identifying the rate of tax on such supplies is difficult. Because of this, GST law defines composite supplies and mixed supplies and provides the procedure for the treatment of tax rates on such supplies. So, let’s discuss the concepts of composite and mixed supplies and the difference between them in GST.
Composite Supply under GST
Composite supply is defined under Section 2(30) of the CGST Act as follows: “A composite supply is a supply that is made up of two or more taxable supplies of goods or services or both or any combination that are naturally bundled and supplied together in the ordinary course of business by a supplier to a recipient”. So, we can say the essential characteristics of a composite supply are as follows:
- A composite supply consists of two or more taxable supplies of goods or services, or both, or any combination thereof.
- Such supplies are naturally bundled and supplied together in the ordinary course of business.
- One of the supplies in the bundle is a principal supply. Section 2(90) of the CGST Act defines the principal supply as the supply that is the main element of a composite supply, and other supplies are ancillary. The concept of composite supply in GST is similar to the naturally bundled services under service tax laws. But the concept of mixed supply is new. So, we come to the question of what a naturally bundled supply is. Let us go over it in detail.
Naturally Bundled Supplies
The rule states as follows: “If various components of a bundled service are bundled together in the ordinary course of business, it shall be treated as the supply of a single service that gives the bundle its vital character.”
For example, a hotel provides breakfast along with accommodation as a package deal. This is a natural bundling of services in the ordinary course of business. The service of accommodation is the principal service, and both services are charged different rates of tax. The services bundled in the ordinary course of business depend on the normal or frequent practices adopted in the industry. Another example is air transport, and food on board is a bundle offered by various airlines. The nature of the services in the bundle will help to identify whether the services are bundled in the ordinary course of business. Usually, there is a single price for the package, even when customers opt for lesser services. The customer has to avail of the package and cannot opt for the components separately. For example, luxury hotels provide laundry services along with their accommodations. Here, accommodation is the primary service, and laundry is the ancillary service.
Criteria for Determining Whether a Supply is a Composite Supply
A supply of goods and/or services is considered a composite supply when the following criteria are satisfied:
- The supply involves two or more goods or services together.
- The supply is a natural bundle, which means the goods and services are provided together in the normal course of business.
- The nature of the service is such that one of the services is the main service, and the other services combined with it are ancillary or incidental services, which help in the enjoyment of the main service.
- They usually come in bundles and cannot be purchased separately.
- They are usually advertised as a package.
- It is provided as a bundle by the majority of suppliers in the particular area of business.
- If consumers reasonably expect such services to be provided as a package, then such a package can be treated as naturally bundled in the ordinary course of business.
Tax Rates for Composite Supplies
As per GST law, the tax rate of the principal supply will apply to the full supply.
For example, when goods are packed and transported with insurance, the supply of goods, packaging materials, transport, and insurance is a composite supply, while the supply of goods is the principal supply, and the tax on the principal supply is the tax liability on the full supply.
Mixed Supply under GST
As per Section 2(74) of the CGST Act, 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 particular price where such supply does not constitute a composite supply.
Example: The 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. These items can be supplied separately and are not dependent on each other. It is not considered a mixed supply if the items are supplied separately.
How to Identify if the Supply is a Mixed Supply
To identify if a supply is a mixed supply, the first requisite is to rule out that it is a composite supply. A supply can be identified as a mixed supply only if it is not a composite supply. Or we can also say that if the supplies are not naturally bundled in the ordinary course of business, then it is a mixed supply.
Example: Suppose a house is rented, one floor of which is used as a residence by the tenant and the other as the law firm of the advocate. Such renting for two different purposes is not naturally bundled into the ordinary course of the business. In this case, renting for use as a residence does not attract GST, while renting for the firm attracts tax. So the entire bundle would be treated as renting commercial property, and applicable GST would be applied to the whole transaction.
Time of Supply in the Case of Composite Supply
When the composite supply involves the supply of goods as the principal supply, the time of supply of goods is considered the time of supply of the composite supply. If the supply involves the supply of services as the principal supply, then the time of the supply of services is considered the time of the supply of the composite supply.
Time of Supply in the Case of Mixed Supplies
If the highest rate of tax belongs to a service, then the time of supply of the service is taken as the applicable time. Likewise, if the highest rate of interest belongs to goods, then the time of the mixed supplies will be treated as the time of supplies. Also, if the highest tax rate belongs to goods, then the time of supply of goods will be considered the time of supply of mixed supplies.
Frequently Asked Questions
- Why is determining mixed supply and composite supply important in GST?
Answer: The concept of mixed supply and composite supply is important under GST because it helps determine the applicable tax rates on the supply. In a composite supply, the tax rate is the rate of the principal supply, while in a mixed supply, the tax rate is the highest applicable tax rate of the individual supplies.
- Why is the time of supply of mixed and composite supplies important?
Answer: The taxpayer is liable to pay tax on supplies at the time of the supply of goods and services. Sections 12 and 13 of the CGST Act prescribe the provisions related to the time of supply of goods and services, respectively. The taxpayer has to determine the date of supply as specified in the act, issue tax invoices, and pay tax in the relevant tax period by filing the returns.
Any supply of goods or services, or both, is taxable under GST, and tax is payable on every supply unless exempted under the GST Act. The rates of tax applicable for supplies are notified by the government. Classification of supply is essential to charging the applicable rate of interest on the supplies. When the supply of individual goods or services is clearly identifiable, there is no problem in applying the relevant rate of interest. But when supplies are a combination of goods, services, or both, it is difficult to categorize and apply the correct rate of interest. For this reason, the GST Act defines composite and mixed supplies and states the procedure for the application of tax on both types of supplies. Therefore, it is important for taxpayers to understand thoroughly the concept of mixed and composite supplies, as the rate of tax is determined in different ways for both types of supplies. And for the taxpayer to determine the tax to be collected from the recipient and the payment in due course by the taxpayer in GST.