Concept of Mixed Supply and Composite Supply under GST Law

Dear Friends, In today market scenario, we see very often, two or more goods, or a combination of goods and services, are supplied together.

If we think about the reasons of the same we find the following possible reasons:

  • This could be a part of 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 the Draft  Model GST law, the supplies which are bundled with two or more supplies of goods or services or combination of goods and services are classified under following categories, with distinct characteristics, as:

  • Mixed Supply
  • Composite Supply

 

Mixed 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 bundled deliberately and not due to natural necessities, and they can be supplied individually in the ordinary course of business.

Let us understand this with some examples.

Consider a supply of a package consisting of canned foods, sweets, chocolates,

cakes, dry fruits, aerated drink 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.

Further illustrations that may be considered are:

(i) Supply of toothpaste and brush

(ii) Supply of laptop and printer

(iii) Supply of tuition in a coaching centre and board prescribed text books

The Method of billing separately for unrelated supplies or together could be examined

where rates are differing.

How to compute 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 Package again.

Product Rate of Tax*
Canned Foods 18%
Sweets and Dry Fruits 12%
Chocolates and Cakes  8%
Aerated Drinks and Fruit Juices 5%

*These are Indicative rates

In this case, the Canned Foods attracts the highest rate of tax in the mixed supply i.e., 18%. Hence, the mixed supply will be taxed at 18%.

Further illustrations that may be considered are:

(i) Supply of toothpaste and brush

(ii) Supply of laptop and printer

(iii) Supply of tuition in a coaching centre and board prescribed text books

The Method of billing separately for unrelated supplies or together could be examined

where rates are differing.

 

Composite supply

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.
  • One of which is a principal supply and the other is ancillary to the principal supply

 

We also need to understand What is principal supply? to understand the complete meaning of composite supply

Principal supply means the supply which is having the pre-dominant element in the supply of goods or services, forming part of composite supply, and any other dependent supply, forming part of composite supply, are secondary or ancillary to principal supply. If the ancillary supply is offered separately for a price in the ordinary course of business that won’t be accepted by the recipient in absence of principal supply.

 

Let us understand Composite Supply this with an example,

  1. A car manufacturing company provides car warranty say 3 years along with supply of car. This is a composite supply as the car warranty is a natural combination in the ordinary course of business for the company. In this case, the car sale is the principal supply, and warranty is ancillary to the company.
  2. A Car manufacturing company provides a car warranty say 3 years with one year extended warranty with extra charge.
    The inclusion of extended warranty in this package is not a natural requisite to the company. Hence, this does not amount to composite supply. This becomes 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.

How to compute Tax liability on 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 another example,

Mr. X gave his non-functioning Laptop to a repair shop. The repair engineer replaced the damaged parts to make the laptop working. Let us assume, the service charges attracts 18% tax and the replaced parts attracts 12% tax. So, how the tax will be computed or levied in this case.

First we need to check whether this is a case of composite supply or not? We need to apply the end user test according to which we need to check Mr. X’s intention. His intention was to make his laptop working, he was not aware which part is required to be damaged. He only asked the vendor to repair the laptop. So, his pre-dominant intention was to take services but during the delivery of service, replacement of parts becomes ancillary to complete the service and hence this becomes a clear case of composite supply.

As per this example, the entire supply will be taxed at 18%.

It is important for the businesses to look at the types of supplies made by them and re-assess them, re-visit their contracts in order to take the best advantages out of the provisions by doing tax planning. Goods or services which carry same rate of tax should only be bundled rather than bundling the low taxed items with high taxed items in case of mixed supply. The way supplies are bundled should be examined. The two or more supplies must appear natural and hence bundled when presented to the recipient in case of composite supply.

 

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