MAY 11, 2020

By K Srinivasan

A preface to Composite supply from the GST law

The term 'composite supply' has been defined under Section 2(30) of the Central Goods and Services Tax Act, 2017 ("CGST Act"). As per the definition, the following are the essential characteristics of a composite supply made by a taxable person to a recipient:

+ Consists of two or more taxable supplies of goods or services or both, or any combination thereof;

+ Such supplies are  naturally bundled  and supplied in conjunction with each other in the ordinary course of business;

+ One of the supplies is a 'principal supply'. Section 2(90) of the CGST Act defines 'principal supply' as the supply which constitutes the  predominant element  of a composite supply and to which any other supply forming part of that composite supply is ancillary.

Thus, the principal supply always overshadows the other constituent supplies in a composite supply, is all we need to know for the time being.

On the other hand, as per section 2(74) if two or more individual supplies are combined together in conjunction with each other and offered for a single price, thereby making the identification of principal supply difficult meaning it can't constitute a composite supply, such supplies are termed as a mixed supply.

It is for this reason, that the GST Law identifies composite supplies and mixed supplies and tries to provide some certainty in respect of tax treatment under GST for each such supply.

The Act already premeditated on some of those Composite supplies beforehand under Para 6 of Schedule II to Section 7 of the Act.

Works contracts (Article 366(29A)(f) refers) and restaurant services (Article 366(29A)(f) refers), are classic examples of composite supplies now classified as Services, carried into GST as legacies from the VAT regime known earlier as deemed sale though, of a combination of goods and services vide the 46 th Constitutional Amendment Act, 1982.

For real time taxability of composite/mixed supplies what's the basis to follow?

However the GST Act has identified only two such supplies as Composite supply of services and provided for charging them to a specific rate of tax mentioned against each such supply.

While in all the other cases, it has stopped at pigeon holing them merely in to either as goods or services as the case may be, to let you do the mix and match of them as composite and Mixed Supplies, as per contractual terms.

For real time tax rate of composite/mixed supplies what's the rate of tax to follow?

The tax liability on a composite or a mixed supply shall be determined in the following manner, as Section 8 of the CGST Act 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.

(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.

Therefore, according to the Author these phrases 'naturally bundled' and 'predominant element' though central to the very themes of Composite and Mixed Supply, have been eminently missed to be defined under the GST Acts, on purpose to leave it to the convenience of the contractual terms.

Time of supply in case of Composite/Mixed supply

If the composite supply involves supply of goods/services as the case may be, as principal supply, such composite supply would qualify as supply of goods/services and accordingly the provisions relating to time of supply of goods/ services would be applicable.

The mixed supply, if involves supply of goods/services, as the case may be, liable to tax at higher rates than any other constituent supplies, such mixed supply would qualify as supply of good/services and accordingly the provisions relating to time of supply of goods/services would be applicable.

In re Columbia Asia Hospitals Private Limited - 2018-TIOL-113-AAR-GST [- 2018-TIOL-31-AAAR-GST] questions arose as to;

(a) Whether two or more supplies of goods or services which are naturally bundled in which principal supply is exempt and others are taxable, can be treated as composite supply and if yes, principal supply being exempt supply, can the said composite supply be treated as exempt supply or the same cannot be treated as composite supply?

The answers were as follows -

The two or more supplies of goods or services or both which are naturally bundled in which the principal supply is exempt and others are taxable can be treated as a composite supply of the principal supply.

If such principal supply is a non-taxable supply as per sub-section (78) of section 2 of the  Central Goods and Service Tax Act, 2017  and the other supplies which are naturally bundled, then such composite supply with the principal supply being a non-taxable supply, would not be treated as a non-taxable composite supply.

The next question that arose was concerning eligibility of credit, in the stated facts of the case as below;

(b) If not treated as composite supply, is registered person allowed to claim input tax credit of tax paid on procurement of capital goods, inputs and input services related to both taxable supply and exempted supply?

The answer was as follows;

The applicant is eligible to claim credit of input tax credit only on for such taxes paid on the inputs, input services and capital goods which are attributable to the supplies of goods or services which are taxable under the provisions of the Central Goods and Services Tax Act, 2017 and not attributable to exempt supplies of goods or services under the  Central Goods and Services Tax Act, 2017.

Fair enough and a fairly straight forward answer and can be had for an answer for the first proposition that if the Composite supply is exempted from tax in view of the Principal supply being exempt supply, no ITC of any kind would be allowed, as the output supply is not going to be exempted/ not going to be subject to any tax under the Act.

In re M/s Keysight Technologies International India Pvt. Ltd. (Advance Ruling No. HAR/HAAR/R/2018-19/39 in Application No. 39/2018-19) [2019-TIOL-500-AAR-GST] had a totally contrasting end.

Let's turn to the queries of the Applicant now;

(a) Whether the supply of electricity is a supply of goods or services?

(b) Whether the supply of electricity and supply of utilities/ leasing are separate supplies or composite supplies?

(c) If supply of electricity and supply of utilities/ leasing are separate supplies, what is the classification of supply of electricity for the purpose of payment of GST?

(d) Whether the Applicant Is eligible to take credit of input tax charged on such supply of renting services and electricity, if any?

The ruling goes as below -

In the instant case, the supply is made by a taxable person and the number of supplies are also multiple. But as discussed earlier, the supply of electricity to the extent of it being supplied through grid is exempt from GST and, therefore, the condition of two or more  taxable supplies   is not satisfied.

Further, the supply of utilities and supply of electricity are neither naturally bundled together nor are they supplied in conjunction with each other.

Also, neither of the two supplies i.e. utility services and electricity supply can be termed as a principal supply and the other one being a natural ancillary.

The provision of electric supply by way of DG set forms part of the utility services taxable at 18% whereas the supply of electricity by way of grid is exempt from GST.

In this manner, it was held by the AAR that the supply of utility services and electricity supply are separate supplies and not a composite supply.

The position of Taxable/exempt/Nil rated Supply in a Composite Supply and the ultimately tax rate of the Principal Supply becoming that of the Composite supply, explained

Now the question that arises from the above is what happens when out of a bundle of two supplies made, if one is taxable and the other is exempt. Is it still a composite supply or it is not?

One possible answer is that it may be a bundle of supply. But if one is an exempt supply, then it would fall short of a Composite supply, as the definition of Composite supply under Sec 2(30) defines it as a supply consisting of two or more taxable supplies.

The next question that arises from the above is, why do we judge healthcare service which is an exempt supply when supplied in IPD with other taxable supplies such as Medicaments, implants, etc. as an exempt supply, from the angle of composite supply?

Taxable supplies are those leviable to tax, all right. But are exempt supplies also not covered under the scope of taxable supplies?

One always felt that exempt supplies are supplies otherwise leviable to tax but exempt from tax by a notification. Therefore, composite supply can arguably consist of exempt supply also, is another view

Out of the three categories of exempt supply, under definition of Sec 2(47), Nil rated and wholly exempted supplies fall within the definition of 'taxable supply' and the third category 'non-taxable supply' alone is said to fall outside its scope.

So, basically taxable supply includes all taxable supplies charged to Nil tax and wholly exempt, but does not include non-taxable supply.

Section 2(47) which defines exempt supply has three parts to it. The first two parts being Nil rated and exempted supplies can be part of a composite supply. However, the third part being a non-taxable supply cannot form part of a composite supply.

Further, if a supply is non-taxable it would not require exemption u/s 11 by way of a notification, is an explanation.

Some persist with a view that Composite supply can have only taxable supplies as their constituent, meaning supplies on which tax is actually paid alone can qualify as parts of Composite supply, likened to the requirement for availing ITC under Sec 17(2), to drive home the point more clearly.

Sec 2(108) defines taxable supply as a supply of goods or services or both which is leviable to tax under this Act;

The Author supports this view that one or more taxable supply ordinarily means, in the GST Act, unless the context otherwise requires, as could be seen in the opening words of Section 2 of the Act - the repository of all basic definitions of the GST Act, that all of them must be leviable actually to tax that's also paid.

If composite supply is conceded to consist of Nil and exempted supplies in addition to taxable supply, and all of them are so put together, that the exempted or Nil rated supply is made to be the Principal Supply, Government runs the risk of netting no revenue from such a transaction.

But in Mixed Supply this problem doesn't arise, because the highest rated supply in the mixed supply is made to govern the rate of the whole supply and the highest rate gets charged for on the price of the entire basket.

The Department circular on Health care Services (Circular No. 32/06/2018-GST, dated 12-2-2018 F. No. 354/17/2018-TRU) clarified, that Health care being exempted supply and the others like medicaments/implants/equipment/apparatus though basically taxable supplies but when supplied in conjunction with Health care, to be a Composite Supply and hence would be wholly an exempt from any tax.

Another question stems from this is, whether the entire supply including the other taxable supplies made in conjunction with the Main Supply, in view of the Supply of Health Service being exempt, would go scot free?

And the answer is forced to be yes, because it has already been conceded as a Composite supply and the taxability or otherwise of the Principal Supply governs per force the whole supply.

A win-win proposition suggested to the Government and the Taxpayers

The decision to split the bill would help prevent litigations and disputes. The principles governing composite supplies and mixed supplies have certain common elements, while the tax treatment is completely different.

Hence, breaking down composite supplies/Mixed supplies, where feasible, into its constituent elements of taxable and exempt supplies, could be an option to avoid future litigation.

That Government would do well to save itself from being deprived of any revenue in certain cases where the predominant supply in a composite supply which turns out to be an exempted or Nil rated supply, like the Medicaments and Implants supplied with Health care Service going tax free.

Much the same way, it would also be splendid to save the taxpayer from being fleeced at the highest tax rate of the Supply among the competing supplies in a Mixed Supply, like a fruit basket or a Vegetable Salad with a restaurant service attracting vicariously a tax applicable to restaurant service.

The GST Council also wanted more services unbundled. GST Council has decided to extend the unbundling of bills beyond healthcare for all categories of services currently exempt from the tax, such as education, and some more.

Such a move would ideally require a change in definition of composite /Mixed supply so as to keep the exempt/Nil/0/Non-taxable supplies out of the scope of the definition of Composite and Mixed Supply, so as to be free from litigation.

It is possible like the EU VAT to give away certain exemptions in public interest to ancillary supplies to main supply which is exempt like the case of Healthcare service, instead of letting the Revenue and the judiciary split hairs over the classification of Composite and Mixed Supplies to settle disputes.

The ECJ has also held that a service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied, like in the case of Education service and Canteen and other ancillary services which may be naturally bundled but without an aim of a profit or commerce from providing those services of support.

One experiences much confusion from the Department circulars which are often without appreciation of these intricacies of the new taxation and adds unknowingly to the bulk of litigation on the one hand and unsettles the new tax reform from settling even after years from its introduction, is the humble view of the Author, besides many.

(The Author is a former Assistant Commissioner of GST, Chennai and a CBIC Master Trainer, GST and currently a Senior Associate, Indirect & Corporate Taxes, at a Chennai-based Law Firm, RANK Associates. The views of the Author are purely personal.)