If you look at the market today, you will notice very often, two or more goods, or a combination of goods and services, are supplied together. This could be due to either of the following reasons:
- A sales strategy – to attract more customers
- The nature or type of goods or services, which requires them to be bundled or supplied together
Under Service Tax, this mechanism is called Bundled Service – which is the rendering of a service or services with another element of service of services.
Under the revised model draft GST law, supplies which are bundled with two or more supplies of goods or services or combination of goods and services are classified, with distinct characteristics, as:
- Mixed Supply
- Composite Supply
The supply of two or more individual supplies of goods or services, or any combination of goods and services, by a taxable person, for a single price, is called Mixed Supply.
In Mixed Supply, the combination of goods and/or services are not bundled due to natural necessities, and they can be supplied individually in the ordinary course of business.
Determining mixed supply
Let us understand this with an example.
Consider a kit which contains a tie, a watch, a wallet, and a pen, as a combo, for Rs. 4,500
As per the example,
- Tie, watch, wallet, and pen are bundled as a kit
- The supply of a tie does not naturally necessitate the supply of other elements (watch, wallet, pen) and vice versa.
- The kit is supplied for a single price.
Hence, the supply of this kit is a mixed supply.
Tax liability on mixed supply
To calculate the tax liability on mixed supply, the tax rate applicable on the goods or services attracting the highest rate of tax, in the combination of goods and services, will be considered.
Let us consider the example of the kit again.
|Rate of Tax*
In this case, the wallet attracts the highest rate of tax in the mixed supply i.e., 18%. Hence, the mixed supply will be taxed at 18%.
Composite Supply of goods and services is made by a taxable person to a recipient, and:
- It comprises two or more supplies of goods or services, or
- A combination of goods and services, which are naturally bundled and supplied, in the ordinary course of business.
This means that the goods and services are bundled owing to natural necessities. The elements in a composite supply of goods and services are dependent elements on the ‘principal supply’ of goods or services.
What is principal supply?
The pre-dominant element in the supply of goods or services, forming part of composite supply, is principal supply, and any other dependent supply, forming part of composite supplies, are secondary to principal supply.
Determination of Composite Supply
Let us understand this with an example,
1. A 5-star hotel in Mumbai provides a 4 days/3 nights package, with breakfast.
This is a composite supply as the package of accommodation facilities and breakfast is natural combination in the ordinary course of business for a hotel. In this case, the hotel accommodation is the principal supply, and breakfast is ancillary to the hotel accommodation.
2. A 5-star hotel in Mumbai provides a 4 day/3 nights package with the breakfast and one day Mumbai Darshan.
The inclusion of Mumbai Darshan in this package is not a natural requisite to accommodation in the hotel. Hence, this does not amount to composite supply. This is a mixed supply.
3. Sale of laptop with bag -this is a composite supply because laptop bag is natural requisite to carry the laptop. But if the customers opts for a multipurpose bag like backpack bag, it is not a composite supply since it is not naturally bundled.
Tax liability of composite supply
For purpose of calculating tax liability, the rate of tax applicable on the principal supply of such goods and services will be effected on the composite supply. Let us consider the same example,
A 5-star hotel in Mumbai provides a 4 days/3 nights package with the breakfast. Let us assume, the hotel accommodation attracts 18% tax and the restaurant service attracts 12% tax.
As per the example, hotel accommodation is the principal supply, and the entire supply will be taxed at 18%.
It is important for businesses to look at the types of supplies made by them and re-assess them in order to achieve the objectives of bundling the goods and services, in context with the concepts of mixed supply and composite supply.