Understanding Combined Supplies in GST: Composite vs. Mixed

The Goods and Services Tax (GST) framework introduces a novel concept for situations where multiple goods or services are provided together. These combined offerings fall into two main categories: composite supply or mixed supply. While composite supply shares similarities with the "naturally bundled services" previously recognized under Service Tax Law, the notion of mixed supply is a fresh addition to the indirect tax system.

What Constitutes a Supply Under GST?

In the context of GST, the term "supply" broadly refers to all transactions involving goods or services. For a transaction to be classified as a supply, it typically involves a consideration and occurs during the regular course of business. This encompasses various forms, such as:

• Sale
• Transfer
• Barter
• Exchange
• License agreements
• Rental arrangements
• Lease agreements
• Disposal of assets
• Import of services for a fee, even if not directly for business purposes

Additionally, certain activities outlined in Schedule I of the GST Act are also recognized as supplies, regardless of consideration.

Significance of Mixed and Composite Supplies

The Goods and Services Tax Council has established distinct rates for various goods and services under GST law, simplifying tax identification for individual supplies. However, challenges arise when goods and services are supplied in combination, whether inherently linked or not. For instance, if an air conditioner is sold with accompanying installation services, the GST Act provides guidelines for taxing such bundled transactions. This is precisely why understanding composite and mixed supplies is crucial: it ensures accurate GST rate application and promotes consistent tax treatment for these combined offerings.

What is a Bundled Supply?

A bundled supply refers to the provision of multiple goods, services, or both, as a single package. This concept was primarily recognized under the previous service tax regime, where it specifically denoted two or more services offered together.

Identifying Naturally Bundled Supplies

Determining whether a supply is naturally bundled and inseparable typically involves assessing standard industry practices. Several factors can help in this identification:

1. Customer Expectations: If consumers commonly anticipate services to be delivered as a single package, that package is likely a naturally bundled supply. For example, business conferences frequently expect a combination of hotel accommodation, event space, and catering.
2. Industry Norms: When most service providers within an industry offer a set of services together, it suggests natural bundling. A common illustration is air travel, where airlines often provide in-flight meals as part of the ticket. The core service's nature and its auxiliary components also play a role; if one service is primary and others are supplementary, it forms a bundled service. For instance, premium hotels often include complimentary laundry services for guests. Room rental is the main service, while laundry is secondary, only accessible to hotel residents.

Additional indicators of natural bundling in the regular course of business, though not definitive, include:

• A single price for the entire package, even if fewer components are utilized.
• The components are typically marketed as a unified package.
• Individual components are not offered for sale independently.

Defining Composite Supply under GST

A composite supply under GST involves two or more goods or services that are naturally provided together in the usual course of business, with one designated as the principal supply. Essentially, these items are customarily sold as a combination and cannot be acquired individually.

Criteria for Determining Composite Supply

For a transaction involving goods, services, or both to be classified as a composite supply, it must satisfy these conditions:

• The transaction includes two or more goods or services supplied concurrently.
• It represents a natural bundle, meaning the goods or services are typically offered together in standard business practices.
• The individual components of the supply cannot be separated and sold independently.

Applicable Tax Rate for Composite Supplies

For a composite supply, the tax rate of the principal supply is applied to the entire bundled transaction.

Example: Consider a scenario where goods are sold, then packed, transported, and insured. This entire package—goods, packaging, transport, and insurance—constitutes a composite supply. Since insurance and transportation services are dependent on the existence of the goods, the supply of goods is the primary component. Therefore, the tax liability for the whole bundle will be determined by the GST rate applicable to the goods, as they represent the principal supply. If the conditions for a composite supply are not met, the transaction may instead be classified as a mixed supply.

Defining Mixed Supply under GST

A mixed supply under GST refers to the provision of two or more distinct goods or services together for a single price. Crucially, each item within this combination can be supplied independently and is not reliant on any other component.

For mixed supplies under GST, the tax rate applied to the entire bundle is that of the item bearing the highest individual tax rate. For instance, a festive gift hamper containing canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks, and fruit juices, sold at a single price, is considered a mixed supply. All these items are also available for separate purchase. If aerated drinks have the highest GST rate at 28%, then this 28% rate will be levied on the entire gift hamper.

Differentiating Between Mixed and Composite Supplies

To determine if a transaction is a mixed supply or a composite supply, one must first ascertain if it meets the criteria for a composite supply. A supply qualifies as mixed only if it fails to meet the definition of a composite supply. If the individual items within a bundle can be sold separately—meaning they are not naturally combined in the regular course of business—then it is classified as a mixed supply. For example, if someone purchases canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks, and fruit juices individually, rather than as a pre-packaged festive box, these would be taxed as separate items, not as a mixed supply.

Key Distinctions Between Mixed and Composite Supplies

Determining the Time of Supply

For Composite Supplies

If the principal component of a composite supply is a service—such as air travel that includes in-flight meals—then the entire composite supply is categorized as a supply of services. Consequently, the regulations governing the time of supply for services will be applicable. Conversely, if the principal supply involves goods, like the procurement and transportation of products, the composite supply is treated as a supply of goods, and the relevant time of supply rules for goods will apply.

For Mixed Supplies

In the case of mixed supplies, if the item with the highest tax rate is a service, the entire mixed supply is considered a supply of services, and the corresponding time of supply provisions for services will be applied. Likewise, if the item with the highest tax rate is a good, the mixed supply is treated as a supply of goods, and the regulations for the time of supply of goods become applicable. Further information on the time of supply for goods and services can be found in related resources.

Illustrative Examples

Example 1: Train Ticket Booking

When you book a Rajdhani train ticket that includes a meal, this constitutes a bundle of supplies. It is categorized as a composite supply because the meal cannot be purchased independently of the train journey. Passenger transportation is therefore the principal supply. The tax rate applicable to this principal supply will be charged to the entire composite package. Consequently, the 5% GST rate applicable to rail passenger transportation will be levied by IRCTC on the Rajdhani ticket booking.

Example 2: Detergent with a Free Bucket

Many retailers offer a complimentary bucket with the purchase of detergent. This is considered a mixed supply because it fails to meet the "naturally bundled" condition; both the bucket and the detergent can be acquired separately. In such cases, the highest GST rate among the items will apply. If detergent carries a higher rate, such as 28%, this rate will be applied to the entire combined purchase.

Example 3: Works Contract

A works contract combines both services and the transfer of goods. For instance, constructing a new building involves materials like bricks, cement, and sand, along with services from laborers, engineers, and architects, all contributing to the creation of the building. While this is a classic instance of a composite supply, to streamline taxation and avoid past ambiguities, the GST Act explicitly classifies a works contract as a supply of service with its own specific tax rates.

Example 4: Restaurant Services

The restaurant business provides a bundled offering encompassing food preparation and serving. This is another archetypal example of a composite supply. However, similar to works contracts, to resolve previous tax law confusion, the GST Act clearly designates restaurant services as a supply of service, subject to specific GST rates.