Composite Supply in GST

 

CA Madhukar N Hiregange & CA Mahadev R

 

Tax payers in India are now forced to understand the concepts of GST law which was introduced recently. Unlike earlier law, the levy of GST is not on the act of manufacturing, sale or provision of service but it's levied on the act of supply. Understanding the concept of supply would be critical to determine the taxability of goods or services to GST. To understand the concept of supply understanding the terms such as 'composite supply' and 'mixed supply' would be important. In case of composite supply, GST rate to be applied after identifying the principal supply. Wrong treatment could lead to excess or short payment of GST. In this article, we have discussed few important aspects of 'composite supply' which could be useful in deciding the tax rates applicable.

 

Service providers providing services involving multiple elements would be aware of 'bundled' service concept in service tax. In service tax law, when various elements of a bundled service are naturally bundled in the ordinary course of business, it was being treated as provision of a single service which gives such bundle its essential character. Similar to this concept, we have 'composite supply' in GST.

 

If various elements of a bundled service are not naturally bundled in the ordinary course of business, it was to be treated as provision of a service which attracts the highest amount of service tax. Similarly, we have 'mixed supply' concept in GST. For those who are dealing in goods, the composite or mixed supply concept is completely new. Exception which could be thought of is packing materials which suffered VAT / sales tax same as of main goods which are packed. For example, if mobiles were packed and sent in carton box, even carton box suffered VAT rate of mobile.

 

Concept of composite supply in GST:

In terms of Section 2(30) of CGST Act 2017, 'composite supply' would include following elements:

 

1. Should consist two or more taxable supplies.
2. Supplies may be of goods or services or both.
3. Supplies should be naturally bundled.
4. Supply should be in conjunction with each other in ordinary course of business.
5. One of the supplies should be a principal supply.

 

'Principal supply' for this purpose has been defined in Section 2(90) to mean supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary.

 

Differentiating the composite supply, non composite and mixed supply:

It is important to differentiate the composite supply from non composite and mixed supply. When a supply is a composite supply, then it cannot be either a non composite or a mixed supply. This could be understood with an example of laptop sold with a bag of same brand. It is clear that principal supply is laptop. Supply of bag is naturally bundled and it is supplied in conjunction with each other in ordinary course of business.

 

Taking same example, if there is a supply of printer in and laptop. It may not be a composite supply. If there is a single price for this then it would be a mixed supply with tax at the higher of the rates applicable. If there are separate prices for each then it would be non-composite supply with tax being applicable at rates as applicable to laptop and printer.

 

Accommodation with breakfast included for Rs. 2500/-could also be another example of composite supply. Tax would be rate of accommodation.

 

Accommodation with facility of wi-fi, telephone, laundry, massage and room service based on consumption/ usage would be a non-composite service applicable at different rates. The same for an overall single price of Rs.3,500/- would make it a mixed supply liable at the highest rate.

 

Analysis of composite supply

To determine if a particular supply is a composite supply or not, it is relevant to understand the terms such as naturally bundled, in conjunction with each other and principal supply. Unfortunately, only 'principal supply' is defined in GST law and other two terms should be understood in common parlance.

 

Here it could be appropriate to understand the concept of bundled service which was explained in education guide issued by CBEC in the year 2012. This explanation is referred even in CBEC note prepared on Composite and Mixed supply in GST. As per the education guide, 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. To determine if a supply is naturally bundled or not, following indicators could be useful:

 

1. Perception of the customers. For example, normally the customers expect the television supplier to install the television.
2. General business practice in supply. It is general practice to deliver the goods to customers wherein transportation becomes integral part of supply of goods. Even how the business is promoted could also be a factor.
3. Nature of business. In a building construction activity, it is natural to expect supply of goods as well which is naturally bundled.
4. Pricing for supply. Generally single price is charged for the supply. Example could be a contract for supply and installation of machine for Rs.10 lakh. It is relevant to note that splitting of price does mean that it is not composite supply. Pricing could be just an indicator.

 

Above is the indicative list which needs to be considered in case separately to determine if a supply is naturally bundled to constitute a composite supply. In conjunction could mean supply in combination or in aggregation.

 

From the definition of 'principal supply' it is very clear that there should be supply of goods or services which forms predominant element. Other supplies can only be ancillary to such principal supply. Question arises as to factors to be considered such as volume and value for identifying the principal supply. Here it is essential to consider the goods or services in which the customer is interested. When bag is supplied along with laptop, it is laptop in which customer would be interested and therefore, laptop needs to be treated as principal supply. When printer is also bought along with laptop, then identifying principal supply which forms predominant element may not be possible as customer may be interested in both printer as well as laptop. There could be a section of people who could even argue that printer is still an ancillary to laptop and laptop continues to be principal supply.

 

Decisions of European Courts

When a supply is treated as mixed supply, for all the supplies made in an invoice, GST rate to be applied is highest rate applicable in the lot. For example, if agricultural tillers are supplied charging 12% GST along with transportation facility, even transportation charges would suffer 12% GST and not 18%. If this supply is held to be a mixed supply, then even on tiller 18% GST should be discharged.

 

Tax payer and revenue department could always try to interpret the provisions considering their own advantage. We may have to wait for clarifications or decisions of the courts in case of disputes and to understand the principles clearly. Till such time, the decisions of the European courts could be of some use. Following are few important theories generated from few decisions of European court of Justice (ECJ):

 

1. In Card Protection Plan (CPP) Ltd v C & E Commrs [1994] BVC 20,the ECJ held that every supply of services must normally be regarded as distinct and independent. A supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system. It also held that several ancillary services merely constitute mere enjoyment of principal service.
2. In case of C & E Commrs v Plantiflor Ltd [2002] BVC 572, Plantiflor sold plants by mail order. Customers had the option of collecting them or getting them through delivery arranged by Plantiflor for which separate charges were collected. ECJ held that such charges collected is for delivery which is ancillary to supply of plants. Therefore, no VAT attracted on such charges.
3. In Levob case, ECJ held that where two or more elements or acts supplied by a taxable person to a customer are so closely linked that they form objectively, from an economic point of view, a whole transaction, which it would be artificial to split, all those elements or acts constitute a single supply for the purposes of application of VAT.
4. In case of Tumble Tots (UK) Ltd v R & C Commrs [2007] BVC 179, it was held that a service would be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but is a means of better enjoying the principal service supplied.

 

Conclusion:

Though GST law is expected to bring down the litigation numbers in the long run, we could expect few litigations in treatment of supplies as composite, no composite or mixed supplies as this would definitely would have impact on revenue. Professionals could refer to decisions and clarifications of European VAT to get a reasonable idea of supply concepts. In case of uncertainties, advance ruling can be preferred to mitigate the risk. It is also necessary to intimate the tax department about the understanding and treatment of supplies being made which could avoid higher penalties in future. Tax payers could also prefer a onetime compliance up to date and regular compliance reviews thereafter conducted by professionals.

 

(The views expressed are strictly personal)