Taxability of Composite and Mixed Supply
Introduction: After determining that transaction is treated as supply as per definition prescribe under section 7 of CGST Act, 2017; In case where there is supply of two or more taxable product it is important to determine that whether such transaction falls withing the definition of composite supply or mixed supply; if yes then what will the rate that will be levied for taxability of product and what are the other compliance in this regard.
Composite Supply: As per section 2(30) of CGST Act, 2017; Composite supply means a supply made by a taxable person to 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. A composite supply means supply comprising two or more supplies, one of which is a principal supply, and in such case, it will be treated as a supply of such principal supply.
- The goods or services or both shall be naturally bundled and they are supplied together in ordinary course of business;
- It is necessary that one of them must be principle supply.
- In case of composite supply, it will be treated as transaction of principle supply and rate of principle supply will be relevant for taxability of transaction.
How to determine principle supply in the transaction?
As per section 2(90) it has been determined that principle supply means a supply of goods or services which constitutes the predominant element when it is supplied with other product and to which any other supply forming part of that composite supply is ancillary.
Simply, though two or more products are supplied but principle supply is the main reason for entire supply. In case of transaction being supply of two or more products the other products other than principle supply are ancillary in nature it has just been supplied so that there is proper execution of principle supply.
How to determine whether the transaction is case of naturally bundled supply?
Naturally bundled means a bundle of two or more supplies wherein all the supplies forming part of the main supply are a natural necessity; and customer expects in ordinary course to be supplied with principle supply; without supply of such ancillary products main products cannot be consumed effectively.
How to determine whether supply is bundled in ordinary course of business or not?
There is no specific guideline for determining that whether it is bundled in ordinary course of business or not. However, some of the illustrative indicators are as follows:
- Consumers perception: If consumer reasonably expects that supply of goods or services or combination is to be made along with ancillary supply then such a package could be treated as naturally bundled in the ordinary course of business.
- Ancillary products are required to effectively consume the main product.
- Generally, majority of supplier are providing such goods or service or combination thereof in bunch.
Mixed Supply : As per section 2(74) of CGST Act, 2017; mixed supply 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.
It implies that even when supply is not required to be supplied in bunch but it has been supplied as a bunch and single consideration is charged then in that case rate of tax that will be applied on such single consideration will be highest rate amongst the individual product supplied in such bunch.
Therefore, if two or more products or services or combination thereof is supplied, and single consideration has been charged, the transaction does not fall under the definition of composite supply then such will be treated as transaction of mixed supply.
Illustration : Mr. Raja sales tubes and tyre for motor vehicle; the rate which levied on tube is 12% while on tyre it is 18%; Mr. Raja has supplies both the product at single consideration and he is of the opinion that as he does not sells the products individually this is the case of composite supply and therefore it will attract an average rate of 15%. Determine whether the contention of Mr. Raja is valid?
In the given case contention of Mr. Raja is not valid. It has been clearly stated in definition of composite supply that product shall be naturally bundled and one of them shall be identifiable as principle supply; In the above transaction been tyre and tube both having separate identity and also has individual market in common parlance it cannot be termed as supply which is naturally bundled; Therefore, it is clear that such transaction will not fall under the definition of composite supply rather it will be treated as mixed supply. In case of mixed supply rate of tax that will be applicable to transaction will be higher of individual rates of products and it will be 18%. (i.e. higher of 12% and 18%).
Illustration : Mr. Solo is engaged in business of sarees. He has many designed sarees in which it has attached petty-coats. Mr. Solo, during the year has supplied such sarees which has attached petty-coats for a single consideration and he is of the opinion that the transaction will be treated as composite supply. Determine whether contention of Mr. Solo is valid?
The contention of Mr. Solo is valid as the said supply will be covered as composite supply. The supply of saree is principle supply and petty-coat attached to it is an ancillary product which is provided for effective consumption of principle supply.
Illustration : Mr. Das has supplied a Bunch of 5-Product under the name 5-Pro; The packet consists 5 products having different rate of tax. In the invoice single consideration is charged. Whether such supply will be treated as composite supply or mixed supply?
In the given case as single consideration is charged for bunch of product which has been supplied and further all the products are also not naturally bundled; therefore, it will be treated as transaction of Mixed supply and as per section 8 of CGST Act, 2017; It will be tax at highest rate of individual product in the bunch.
What if in the above case products are supplied individually by showing separate items in bill?
In that case it will neither be treated as Mixed supply nor be treated as Composite supply as products are not supplied for single consideration as provision is only attracted when two or more goods or services or combination thereof has been supplied for a single consideration