India embarked on its tryst with Goods and Services Tax (“GST”) on 1st July, 2017. In this regard, the Union Parliament and the State Legislatures have enacted various laws for the levy and collection of GST (hereinafter collectively known as “GST Acts”). The advent of GST has brought about a paradigm shift in the indirect tax regime in India. However, the Legislature have retained the concept of ‘bundled services’ under the erstwhile Service Tax regime as ‘composite supply’ and broadened its scope to include supply of goods as well under the GST regime. The purpose of this article is to have a preliminary understanding of this concept of composite supply under the GST Acts.
Composite supply as per 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.
In case of a composite supply, GST is payable at the rate of tax applicable on the principal supply. The statute provides the following illustration of a composite 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.”
The above illustration is a bit disconcerting, as such single supply of goods along with freight and insurance may not always be naturally bundled i.e. supplied in conjunction with each other in the ordinary course of business as the same would depend on the contractual obligations agreed between the supplier and recipient. Further, the phrases “naturally bundled” and “predominant element” have not been defined under the GST Acts.
Unbundling the concept of bundling
The concept of ‘composite supply’ under GST is similar to that of ‘bundled services’ under Section 66F of the Finance Act, 1994. As per sub-section (3) of Section 66F, if various elements of a bundled service were naturally bundled in the ordinary course of business, it was to be treated as provision of the single service which gave such bundle its essential character. In this regard, the CBEC Education Guide provided the example of air transport services provided by airlines wherein an element of transportation of passenger by air is combined with an element of provision of catering service on board.
Therefore, we may infer that apart from being naturally bundled in the ordinary course of business, for two or more supplies to be construed as a ‘composite supply’, the principal or predominant supply must give the composite supply its essential character. In other words, such bundling of supplies into a single composite supply must not alter the essential character of the principal supply. In the aforesaid illustration provided under Section 2(30) of the CGST Act, though the supply of goods along with freight and insurance may not always be naturally bundled, however, if such supplies are bundled together into a single composite supply, it will not alter the essential character of the principal supply, which is the supply of goods. As a natural necessity in the ordinary course of business, the supply of goods may be bundled with the supply of freight and insurance. The principal supply overshadows the other supplies in a composite supply.
On the other hand, if two or more supplies when bundled together into a single supply, which alters the essential character of the principal supply, thereby making the identification of principal supply an improbable task, such supplies are termed as “mixed supply” under the GST Acts. Section 2(74) of the CGST Act defines ‘mixed supply’ as two or more individual supplies of goods or services, made in conjunction with each other for a single price where such supply does not constitute a composite supply. In a mixed supply, supply of one good or service does not necessitate the supply of another good or service. For example, a toiletry kit containing a shaving razor, shaving cream, toothbrush, toothpaste and face cream sold for a single price may be considered as a mixed supply. For determining the taxability in case of a mixed supply, it is treated as the supply of that particular supply which attracts the highest rate of tax.
Distinction between composite supply and mixed supply
To understand the distinction between composite supply and mixed supply, let us take the example of an airline operator supplying the service of transportation by air along with the service of catering on board for a single price to its customer. This bundling of supplies constitutes a ‘composite supply’ as the principal supply is the service of transportation by air. The supply of service of catering on board is ancillary to the said principal supply. However, if the airline operator also provides accommodation in a hotel along with the service of transportation by air to its customer for a single price, such bundling of supplies will be construed as a ‘mixed supply’. Each of such supplies can be supplied separately as is not dependent on each other and identification of the principal supply which gives the essential character to such bundle is not possible.
In the absence of Indian jurisprudence on the concept of composite supply, guidance may be derived from the judgments of European Court of Justice (“ECJ”) on the same. ECJ has delivered several judgments on the aspects of composite supplies under European Union Value Added Tax laws (“EU-VAT”). Under the EU-VAT law, Title IX of Council Directive 2006/112/EC, dated 28th November, 2006, provides for exemptions for certain activities in public interest, wherein the supply of goods and services incidental thereto are also exempt. In the case of Card Protection Plan (CPP) [see end note 1], the ECJ 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. In Levob [see end note ii], the ECJ held that where two or more elements or acts supplied by a taxable person to a customer are so closely linked that they form objectively, from an economic point of view, a whole transaction, which it would be artificial to split, all those elements or acts constitute a single supply for the purposes of application of VAT.
Recently, in the case of Brockenhurst College [see end note iii], the issue before the ECJ was whether VAT was applicable on the restaurant and entertainment services provided by the college. The college contended that such services were exempt on the basis that they were ‘closely related’ to the provision of education, which was exempt under Council Directive 2006/112/EC. The ECJ held that such activities could be regarded as supplies 'closely related' to the principal supply of education, provided that those services were essential to the students' education and that their basic purpose was not to obtain additional income for that establishment by carrying out transactions which were in direct competition with those of commercial enterprises liable for VAT. The Court noted that services offered in the present case, as part of the courses taught to its students, to a limited number of third parties, were substantially different from those habitually offered by a commercial theatre or restaurant and were aimed at a different public and the intention was not to generate additional income. Therefore, the ECJ held that the principal supply was that of education and the restaurant and entertainment services provided by the college were ancillary to this principal supply.
In spite of clarifications arising from such judgments, many uncertainties still remain under the EU-VAT law as to whether the supplies at issue must be treated separately or whether they must be considered to constitute a single supply. It would take some time for the courts in India to adjudicate on similar issues.