AUGUST 22, 2017

By Debasish Bandyopadhyay

THE whole country has been pinning their hopes on the successful implementation of the biggest tax reform since independence i.e. GST, which is supposed to bring forth unprecedented transformation on the economic landscape by helping to consolidate, rationalize and make simpler and more effective process of indirect taxation system in the country. All reforms have its own challenges. However, the main challenge is to implement them in a consistent way without promoting undesirable disputes.

However, there are provisions in the GST laws that can defeat the intent and purpose of such big-ticket reform in the country. This article aims to discuss one such area as prescribed under Section 8 of CGST Act, 2017 "Taxability on composite and mixed supply", which may spawn huge confusion leading to unnecessary disputes in the GST regime.

A new concept of composite supply and mixed supply have been introduced in the GST law similar to the concept of “Bundled Service” that existed earlier in the Service Tax laws. However, in the GST regime, the method has been extended to goods as well.

For the present discussion, section 8 of CGST Act, extracted below:

“Tax liability on composite and mixed supplies. - The tax liability on a composite or a mixed supply shall be determined in the following manner, namely:-

(a) a composite supply comprising two or more supplies, one of which is a principal supply , shall be treated as a supply of such principal supply; and

(b) a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.”

Composite supply:

For the ease of understanding, let us have a look at the meaning of composite supply as defined under the GST Act:

“Section 2 (30) "composite supply" 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 ;”

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;

Therefore, from the plain reading of the above-mentioned provision, one can conclude that ‘composite supply' means the goods and services that are bundled due to natural requirements . The determining elements in a composite supply of goods and services are dependent on the ‘ principal supply' of such goods or services. This led us to delve into the meaning of ‘principal supply' as defined under the GST law and Section 2(90) of the Act, stated as under:

“Section 2(90) “principal supply" 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;”

It is pertinent to note that supply of goods or services or both is to be classified under composite supply based on two major determinants i.e. the concept of Principal Supply and the bundling nature of such supply. At this stage, it is important to discuss the concept of p rincipal supply and element of bundling nature to comprehend the taxability of the transaction under composite supply.

Principal Supply - Predominant E lement

Principal supply would be that supply which is predominant over other supplies. It is important for businesses to look at the types of supplies made by them and re-assess them in order to achieve the intended objective of appropriate classification. The test for deciding whether a contract falls into one category or the other is to decide as what is the substance of the transaction or such particular economic activity. The dominant nature test may come into play again to decide the predominant element of a composite supply.

Literally, ‘predominant' means "present as the strongest or main element". Now, there may be certain transactions where elements of goods and services are equally important or incomprehensible to arrive at the clear dominance. Moreover, it is not clear that such predominance is to be tested based on the involvement of value, weight, purpose of such particular transaction or any other factors, as the case may be. It is also important to classify a composite supply as a supply of ‘service' or supply of ‘goods' as a whole. At this point, it is relevant to refer to SCHEDULE II of the CGST Act, wherein it is clearly mentioned that following composite supplies shall be treated as a supply of services as under:

++ Works contract as defined in clause (119) of section 2; and

++ Supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.

Therefore, whether the supply is composite supply and taxability based on the p rincipal supply will be dependent on facts and circumstances of a specific case after passing through such gruelling test of predominance. In absence of required clarity in the said area, there may be confusion in the trade in respect of proper classification for supply consisting of two or more taxable supplies of goods or services or both.

Element of Natural Bundling

Another important factor in determining and classifying the composite supply is the element of bundling nature. In terms of definition of composite supply, goods, services, or both, or any combination thereof, must be naturally bundled. The word ‘ bundle ' has been used for the first time in the Service Tax law and under the erstwhile service tax law, ‘ Bundled service ' meant a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services. In a bundled service, where various elements of service are naturally bundled in ordinary course of business, it will be treated as a single service that gives such bundled service its essential character.

Accordingly, CBEC has earlier clarified some of the indicators to determine whether the services are bundled in the ordinary course of business:

++ The perception or expectation of the consumer/recipient of the service;

++ The general practice of service providers in a particular area of business;

++ The nature of various services in the bundle of services will also help in determining whether the services are bundled in the ordinary course of business;

++ The elements are normally advertised as a package;

++ The different elements are not available separately;

++ The different elements are integral to one overall supply – if one or more is removed, the nature of the supply would be affected.

It has also explained by the board that "no straitjacket formula can be laid down to determine whether a service is naturally bundled in the ordinary course of business. Each case has to be individually examined in the backdrop of several factors some of which are outlined above ."

The services that do not meet the criteria as explained supra will be considered as un-bundled services and such classification would result as a provision of single service that results in highest liability of service tax.

It is important to note that under the GST regime, the said criteria for classification has been extended to supply of goods also. Thus, the act of classifying goods or service or combination thereof in a supply has become a nightmarish exercise for the small businesses. Likewise, an assesse has to analyze and consider many factors as explained above including the element of bundling nature. Where admittedly, no straitjacket formula is available, how does the government expect the unfortunate small assesse to comply with such stringent provision of invoicing and adhere to recording of correct tax rates, HSN/SAC codes and other requisite particulars. There are many transactions or economic activities such as repairing or maintenance, installation jobs, comprehensive AMCs, on-shop signage & in-shop branding activities for retail and departmental stores, pest control activity etc. that are carried out by the small players who are facing huge hardship in dealing with such provisions mandated under the GST laws in respect of composite and mixed supply. It is suggested that government must step up and widen the outreach and awareness initiatives across the country to shed the light of clarity on such transactions.

Mixed Supply:

Now, let us have a look at the meaning of mixed supplies as defined under the GST Act:

"Section 2 (74)“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.”

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;

In terms of the above definition, mixed supply under GST regime means, two or more distinct supplies of goods or services or any combination thereof, made together with each other by a taxable person for a single price . Each of these items can be supplied separately and is not dependent on any other and further, it is mentioned that such supply does not construe to be a composite supply. The following are the key determinants of a mixed supply:

++ There are two or more individual supplies of goods or services, or any combination thereof

++ The supply is for a single price

++ Each goods or service can be supplied separately or independently

++ The supply is not a composite supply.

Now, again the poor assesse is to look into so many factors before raising an invoice under GST regime. The above-noted provisions will unquestionably churn out disputes and litigations as to whether the supply is composite or mixed; will be dependent on facts and circumstances of a particular case, since department can challenge any transaction of composite or mixed supply according to the tax criteria beneficial to the revenue.

The hope that GST regime would do away with the classification disputes by following HSN and SAC codes does not hold water at all and factually, what is turning out now is that the situation may be spiralling out of control leading to opening up of Pandora's box of litigation in the coming days. It has already been observed that many automobile dealers of reputed car manufacturers, restaurants, reputed five star hotels etc. leave aside the small players, are charging various GST rates on their invoices against a single transaction of composite supply such as servicing of car along with auto parts, accommodation charges for stay in hotel along with breakfast etc.

In the light of the above discussion, it is hoped that the GST council pays attention to the issue of such confusion and release a suitable clarification for making life easier under the GST regime.

(The views expressed are strictly personal.)