Composite supply under GST

The taxable event under GST regime is supply of goods or services or both made for a consideration in the course of or furtherance of business. Under the GST framework, all forms of supply of goods or services or both are taxable unless exempted otherwise. There are some supplies which are a combination of goods or combination of services or combination of goods and services both, where each individual component attracts different rate of tax. This may create problem in determining which rate of tax would be applicable to the entire bundle of supply. To overcome this problem, GST law identifies composite supply and mixed supply. It is important to identify the nature of supply as taxability of the entire bundle is dependent on it. Section 2(30) of the CGST Act, 2017 defines ‘composite supply’ and section 8 of the CGST Act, 2017 prescribes the provisions regarding taxability of ‘composite supply’. Composite supply consists of two or more supplies of goods or services or both which are naturally bundled and supplied in conjunction with each other and one of which is a principal supply.

What is Composite Supply

The term ‘composite supply’ has been defined under section 2(30) of the CGST Act, 2017 as below: –

‘(30) “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.

Illustration: Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;‘

Further, the CGST Act, 2017 has defined principal supply under section 2(90) as below: –

“(90) “principal supply” means the 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;”

Therefore, for a supply to qualify as composite supply the following conditions should be fulfilled-

• The supply consists of two or more taxable supplies of goods or services or both, or any combination thereof.
• The said supplies are naturally bundled and supplied in conjunction with each other in the ordinary course of business.
• One of such supply is a principal supply.

It may be noted that a supply can be characterized as composite supply if all the aforesaid conditions are met simultaneously in respect of that supply. Fulfilment of one or two conditions would not entitle a supply to be labelled as composite supply. In case of composite supply all the individual supplies are naturally bundled and one of such supply is a principal supply. If the individual elements of a supply are not naturally bundled then such supply can not be characterized as a composite supply. Principal supply constitutes the predominant element of a composite supply which gives the bundle its essential characteristics.

To constitute a composite supply individual supplies should be naturally bundled. Therefore, it is necessary to determine whether a supply is naturally bundled and supplied in the ordinary course of business. In the Education Guide issued by the CBEC in the year 2012, the concept of ‘naturally bundled services’ was explained as below which may be helpful in understanding what is naturally bundled supply:-

“9.2 Taxability of ‘bundled services’-

‘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.

9.2.1 Services which are naturally bundled in the ordinary course of business-

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’

9.2.4 Manner of determining if the services are bundled in the ordinary course of business-

Whether 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 of 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.

• Other illustrative indicators, not determinative but indicative of bundling of services in ordinary course of business are –

• There is a single price or the customer pays the same amount, no matter how much of the package they actually receive or use.
• 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.”

Tax Liability on Composite Supply

As per Section 8 (a) of the CGST Act, 2017, the rate of tax applicable to a composite supply would be the rate of tax applicable to the principal supply. Section 8(a) reads as below: –

“8. The tax liability on a composite or a mixed supply shall be determined in the following manner, namely:-

(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;”

On reading of the aforesaid provisions, it emerges that a composite supply is to be treated as composite supply of the principal supply. Accordingly, the entire price received for the bundle would be liable to be taxed at the rate leviable to the principal supply.

Example

XYZ Hospitals supplies food to the in patients as advised by the doctors in the hospital. It is treated as composite supply of healthcare services.

Taxability of Composite Supply where Principal Supply is Exempt Supply

As there is a specific mention of ‘taxable supply’ in the definition of composite supply, the same should be read with the definition of taxable supply and exempt supply.

Taxable supply has been defined under sub-section (108) of section 2 of the CGST Act, 2017 as below: –

‘(108) “taxable supply” means a supply of goods or services or both which is leviable to tax under this Act;’

Exempt supply has been defined under sub-section (47) of section 2 of the CGST Act, 2017 as below: –

‘(47) “exempt supply” means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply;’

Section 11 of the CGST Act, 2017 as well as section 6 of the IGST Act, 2017 empowers the Central Government to exempt goods or services or both of any specified description from the levy of GST. However, such exemption does not entitle such goods or services to remain outside the ambit of GST. They are still within the purview of GST and would be liable to be taxed once the exemption is withdrawn. The Hon’ble Authority for Advanced Ruling, Karnataka in the case of Columbia Asia Hospitals (P.) Ltd., observed the following: –

“But the definition of taxable supplies includes those supplies of goods which are leviable to tax and chosen to be exempted under section 11 and hence the exempt supplies also fall under the category of taxable supplies.”

Therefore, in case of a composite supply in which the principal supply is exempt and others are taxable, then such composite supply would be treated as a exempt composite supply.

The Hon’ble Authority for Advanced Ruling, Karnataka in the case of Columbia Asia Hospitals (P.) Ltd., concluded as below: –

“The two or more supplies of goods or services or both which are naturally bundled in which the principal supply is exempt and others are taxable can be treated as a composite supply of the principal supply if such principal supply is not a non-taxable supply as per sub-section (78) of section 2 of the Central Goods and Services Tax Act, 2017 and such composite supply with the principal supply being exempt supply would be treated as an exempt composite supply.”

Conclusion

Composite supply involves 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. All the individual supplies are naturally bundled and one of such supply is a principal supply. Composite supplies are taxed at the rate applicable to the principal supply. Identification of principal supply is important to determine the right classification and rate of tax applicable to the composite supply.

Also read Mixed Supply under GST