In order to eliminate certain legacy issues and setbacks under the erstwhile indirect taxation regime, the goods and services tax (GST) was implemented in our country with effective from 01st July, 17. The GST laws have tried to remove certain legacy issues but have introduced new issues which will take years of litigation to obtain clarity on such aspects. The drafting of the law was not up to the mark in certain areas which will make sure the tax payers approach the judiciary to get the appropriate relief. In this article, we tried to address certain issues which are prominent from the day of the inception but not being answered by the authorities.

The area of such confusion is the concept of composite supply and mixed supply. By this time, the reader knows that the term ‘supply’is the backbone of the entire GST legislation. Section 7 of Central Goods & Services Tax Act, 2017 (CGST Act) details the term ‘supply’ and please note that there would be a tax under GST only if there was a ‘supply’ as detailed in Section 7 ibid. But in a transaction, there would be multiple supplies and in such a situation, the taxation of transaction is guided by Section 8 of CGST Act, which deals with the determination of tax liability of composite and mixed supplies.

If there is a composite supply comprising of two or more supplies, one of which is a principal supply, then such a composite supply shall be treated as transaction of principal supply and the tax treatment applicable for principal supply shall be applicable for the entire transaction consisting two or more supplies.

However, if there is a mixed supply comprising two or more supplies, then the transaction shall be treated as that supply which is attracting the highest rate of tax.

To put it in simple words, if the transaction is treated as composite supply, the tax treatment of principal supply shall be applicable to the entire transaction and if the transaction is treated as mixed supply, then the supply with the highest rate shall be applicable for the entire transaction. Let us take few examples (as provided in the GST laws) to understand the concept of composite supply and mixed supply before we proceed to analyse the issues relating to these concepts.

The example provided for composite supply under the GST laws is as under:

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.

That is to say, if the goods are subjected to 12% rate of tax and transportation is subjected to 5% rate of tax and insurance is subjected to 18% rate of tax, since the supply of goods is the principal supply, then the entire transaction would be subjected to rate of tax at 12% and not 5% or 18%.

7 | P a g e

SBS Wiki                                                                                                                                                       www.sbsandco.com/wiki

The example provided for mixed supply under the GST laws is as under:

Illustration: A 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. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately.

Hence, the entire transaction shall be subjected at the rate of tax which is highest among all the products. Suppose if aerated drinks are subject to tax @ 40%, the entire transaction shall be subject to 40% irrespective of the fact, there are products which are chargeable to rate of tax lower than 40% in the transaction.

Hence, it is very important to categorise a transaction as to whether it becomes a composite supply or mixed supply as the taxation is completely different. Now, the challenge before the tax payer is how to decide whether a transaction is a composite supply or mixed supply.

The phrase ‘composite supply’ has been defined vide Section 2(30) of CGST Act as ‘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’.

The phrase ‘principal supply’ is defined under section 2(90) of CGST Act, 2017 as— ‘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’.

The phrase ‘mixed supply’ has been defined vide Section 2(74) of CGST Act as ‘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’.

From the above, it is evident that a transaction shall become a mixed supply only if it is not a composite supply in the first place. Hence, we have to examine whether a transaction becomes a composite supply and if not, then we have to conclude such transaction is mixed supply. Let us take certain issues now and proceed to analyse them.

Issue 1:

A Hotel has entered contract with a customer for provision of accommodation services. The declared tariff of such accommodation is Rs 9,500/-. The Hotel has agreed to give such room along with complimentary meal and pick and drop to airport for a single price of Rs 8,500/-. The rate of tax applicable for accommodation, complimentary meal and transport facility is 28%, 18% and 5%. In such a case, what rate of tax should the hotel charge the customer for the entire Rs 8,500/-?

Will the answer change, if the accommodation is given for Rs 7,000/-, meal is given for Rs 1,000/- and transport facility is given for Rs 500/- and separately disclosed and charged from the customer, instead of single price?

8 | P a g e

SBS Wiki                                                                                                                                                       www.sbsandco.com/wiki

Response:

The question before the hotel is whether the transaction of supply of accommodation services, complimentary meal and transport facility is a composite supply or not. If it is a composite supply, then the tax rate of principal supply shall be applicable to the entire transaction.

Here, the principal supply is the accommodation services because it is the predominant element of the composite supply and hence, the rate applicable for accommodation that is 28%, has to be charged on the amount of Rs 8,500/-.

Now, the question is can the hotel charge 28% on Rs 7,000/- (Rs 1,960), 18% on Rs 1,000/- (Rs 180) and 5% on Rs 500/- (Rs 25), or is it mandatory to charge 28% on entire Rs 8,500/- (Rs 2,380). The tax impact would be Rs 215/- (2,380 – 1,960 – 180 – 25) between both the methods.

We are of the opinion that when the hotel discloses and offers the prices of supplies independently to the customer, then there cannot be any determination of tax liability under Section 8 of CGST Act. Since, the definition of ‘composite supply’ envisages that from the inception of the transaction there are two or more taxable supplies flowing with the main supply.

However, in the instant case, the accommodation services are provided at initial instance and the meal service and transportation service were given at a separate instance at the request of the customer. In such a scenario, the department cannot say that the transaction is a composite supply and the entire amount has to be subjected to 28% rate of tax. At the same time, the hotel cannot split the transactions into different supplies when offered for a single price to gain the tax advantage.

Hence, an important take away from the above issue is, when there are two or more supplies, we have to see whether each supply is an independent in nature or an ancillary to the main supply. Now, the challenge is how to determine whether each service is an independent or ancillary to the main supply. What we understand is, a service shall be in ancillary if it does not constitute for the buyer an aim in itself, but a means of better enjoying the principal/main service supplied ¹.

Now let us look at the example laid out in CGST Act for the ‘composite supply’ to understand the intention of legislature. In the example, there are 3 supplies, namely supply of goods, supply of transportation services and supply of insurance services. Now, the question is whether the supply of transportation and insurance services constitute an independent supply or ancillary to the main supply that is supply of goods.

In order to answer the above, we have to apply the test as laid above, whether the transportation and insurance services are constituting an aim in themselves for the recipient or whether such services are provided for a better enjoyment of the main service that is supply of goods. It is very clear that the buyer is not interested in the transportation and insurance services per se and hence we can conclude such services are ancillary to the main supply and hence the tax treatment of the main/principal supply shall be applicable to the entire transaction.

¹Customs and Excise Commissioners v. Madgett and Baldwin (trading as Howden Court Hotel) (Joined Cases C-308/96 and 94/97) [1998] STC 1189, 1206, para 24." (p 627.)

9 | P a g e

SBS Wiki                                                                                                                                                       www.sbsandco.com/wiki

Accordingly, when the hotel provides accommodation services and after the guest walks in and orders for a meal and transportation to airport, the meal and transportation services constitute an aim in themselves and does not in any way can be called as for better enjoyment of accommodation services. However, if the hotel offers all the three services as a single supply for a single price, then there is no option left for the hotel except to charge the tax rate applicable for the accommodation to the entire transaction.

Issue 2:

A school is engaged in provision of educational services which are exempt from GST. Along with such educational services, the school is also selling the uniforms and other essentials. Now, whether the school is required to pay GST on such sale of uniforms and other essentials?

Response:

On application of the theory of ‘composite supply’, the above issue becomes clear. Here, there are two or more supplies and undoubtedly, the supply of educational services are the principal supply and tax treatment applicable to the principal supply shall become applicable to the entire transaction, since the supplies are ancillary to the main supply.

However, the issue here is, when applying the concept of ‘composite supply’ under the GST laws, it is necessary that the two or more supplies should be taxable supplies since the definition of ‘composite supply’ as laid down under Section 2(30) uses the phrase ‘consisting of two or more taxable supplies of goods or services…….’or can there be one supply which is taxable and other supply which is exempted as stated in the issue.

The educational services are exempted and supply of uniform is taxable, hence, can we use the concept of composite supply in such an instance and not pay tax on supply of uniform because of the tax treatment to the educational services? or should we say that since the definition of ‘composite supply’ deals only with taxable supplies and since the supply of educational services is not a taxable supply, accordingly the concept of ‘composite supply’ shall not be applicable and hence the supply of uniforms becomes taxable? Hence, in order to resolve the issue, one has to look into the definition of ‘taxable supply’, which is being used in the definition of ‘composite supply’. As per Section 2(108) of CGST Act, ‘taxable supply’‘means a supply of goods or services or both which is leviable to tax under this act’. The phrase ‘leviable’ assumes significance in this context.

‘Levy’ means ‘to impose or assess (a fine or tax) by legal authority’ as per Black’s Legal Dictionary. In order to exempt a supply from tax, firstly the same has to be subjected to tax. Without a supply being subjected to tax, there is no question of exemption. The same has been upheld by the Supreme Court in the case of CCE v Smithkline Beecham Consumer Health Care Limited [2003] 151 ELT 5.

10 | P a g e

SBS Wiki                                                                                                                                                       www.sbsandco.com/wiki

Hence, applying the above rationale, the phrase ‘leviable’ covers not only taxable supplies but also exempted supplies in its ambit. Accordingly, the taxable supplies would mean supplies which are both taxable and exempted. Further, the release issued by Central Board of Excise and Customs on 13th July, 17 regarding the ‘Press Release on Lodging in Hostels’ clarifying that the annual subscription/fee collected by educational institutions as lodging/boarding charges shall not attract GST, also clarifies that concept of ‘composite supply’ can be used even when there is a taxable and exempted supply.

In this article, we have tried to address certain issues in the areas of composite and mixed supply, going forward this is going to be a huge area of litigation if the circulars do not come in time.