GST on Composite and Mixed Supplies: What’s the Difference?

Understanding the nuances of supply types under the Goods and Services Tax (GST) regime is essential for businesses to remain compliant and avoid unnecessary tax burdens. Two key concepts that often create confusion are composite supply under GST and mixed supply. While they may appear similar at first glance—both involving multiple goods or services bundled together—their tax treatment under GST differs significantly. This blog delves into the definitions, differences, and implications of these supply types, focusing primarily on composite supply under GST.

What Is Composite Supply Under GST?

A composite supply under GST refers to a supply consisting of two or more taxable goods or services that are naturally bundled and supplied together in the ordinary course of business. One of these supplies is considered the principal supply, and the entire bundle is taxed at the rate applicable to that principal supply.

For instance, when you purchase a mobile phone along with a charger, the primary item (the mobile phone) determines the tax rate. The charger is considered incidental, and the whole package is treated as a composite supply under GST.

Legal Definition

As per Section 2(30) of the CGST Act, a composite supply under GST means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, where one of them is a principal supply.

Examples of Composite Supply Under GST

To better understand the application of composite supply under GST, consider the following examples:

• Hotel accommodation with breakfast included: The accommodation is the principal supply, and breakfast is incidental. The entire supply is taxed at the rate applicable to hotel accommodation.

• Purchase of goods with transportation and insurance: When a seller arranges transportation and insurance as part of the sale, the principal supply is the sale of goods. Thus, the total package is taxed as per the rate applicable to the goods.

• Educational institutions providing books and tuition: Here, tuition services are the principal supply, and books are bundled naturally. The whole service is considered a composite supply under GST.

These examples illustrate how determining the principal supply is crucial in classifying a transaction as a composite supply under GST.

What Is Mixed Supply?

A mixed supply consists of two or more individual supplies of goods or services made together for a single price, where the items are not naturally bundled and do not depend on each other. Unlike a composite supply under GST, a mixed supply is taxed at the highest applicable rate among the individual items in the bundle.

Example of Mixed Supply

A gift basket sold for a single price containing chocolates, wine, and cosmetics is a classic example. These items are not naturally bundled and can be sold independently. Since this is a mixed supply, it will be taxed at the highest rate applicable to any item in the basket—say, cosmetics at 28%.

Key Differences Between Composite and Mixed Supplies

Understanding these differences is crucial because misclassifying a composite supply under GST as a mixed supply—or vice versa—can lead to incorrect tax filings and penalties.

Why Correct Classification Matters

Correctly identifying a composite supply under GST versus a mixed supply is essential for the following reasons:

1. Accurate Tax Rate Application: Misclassification could result in underpayment or overpayment of tax.

2. Avoidance of Penalties: Wrong classification can attract scrutiny from tax authorities and result in interest or penalties.

3. ITC (Input Tax Credit) Implications: The eligibility of ITC could vary depending on how the supply is classified.

4. Business Planning: Knowing whether you’re making a composite supply under GST helps with pricing strategies and compliance planning.

GST on Composite Supply in Services Sector

The concept of composite supply under GST is particularly important in the services sector. For example, in logistics, if transportation is provided along with packaging and insurance, the entire service is taxed based on the principal supply—transportation.

Similarly, in construction contracts, services involving material, labor, and design may be considered a composite supply under GST, with tax determined by the primary supply component.

Clarifications from GST Council and Advance Rulings

The GST Council and various Advance Ruling Authorities have clarified many disputes related to composite supply under GST. In one notable case, a solar power company bundled solar panels with installation services. The ruling considered this a composite supply under GST, making the entire supply taxable at 5%, the rate applicable to solar equipment.

These rulings reinforce the importance of demonstrating that supplies are naturally bundled and part of the ordinary course of business to qualify as composite supply under GST.

Practical Tips to Determine Composite Supply Under GST

1. Evaluate Natural Bundling: Are the goods or services typically sold together in your industry?

2. Identify Principal Supply: Which supply gives the bundle its essential character?

3. Review Contract Terms: Ensure your invoices and contracts clearly reflect the nature of the bundle.

4. Check Precedents: Review Advance Rulings for similar industry examples.

By following these steps, businesses can ensure they correctly classify a composite supply under GST, avoiding unnecessary tax risks.

Conclusion

The distinction between composite and mixed supplies is more than a technicality—it significantly impacts your GST liability. A composite supply under GST allows for a more streamlined tax process by applying the tax rate of the principal supply across the entire transaction. Mixed supplies, on the other hand, often attract higher taxes due to the application of the highest rate among the bundled items.

For businesses, especially those offering bundled products or services, understanding the rules around composite supply under GST is crucial. It ensures compliance, accurate tax calculation, and potential cost savings. Whether you’re in retail, services, or manufacturing, correctly applying this concept can have a direct impact on your profitability and legal compliance.