What is Composite Supply? A Complete Overview
Under the Goods and Services Tax (GST), the definition of supplies of goods and services is unambiguous, and the location and rates of supplies for every commodity or service are decided. In the business world, deals frequently contain several products or services that are offered for sale as a bundle. A composite supply is one in which several products or services are provided in tandem to achieve a particular goal or function. Comprehending the definition of a composite supply is crucial for both consumers and businesses, since it affects pricing and tax policies, in addition to consumer rights. In this guide, we will explain the concept of composite supply in detail.
Table of Contents
What is Composite Supply under GST?
Two or more products or services that can only be offered as a set and not separately are referred to as composite supplies. A principal supply is the primary good or service that the customer desires above all others and is present in every composite supply. Supporting components that enhance the value of the main supply make up the remaining supply. The primary supply's GST rate applies to a composite supply.
Illustration 1: A dealer offers four complimentary maintenance services, insurance, tool and first aid kits, registration, and four brand-new cars. This is a composite supply since, as the primary supply, the vehicle is necessary for the provision of free maintenance services, insurance, and registration.
Illustration 2: A chocolate box, gift-wrapped is an example of composite supply. In this case, the chocolates serve as the primary supply, while the box, gift wrapper, message card, and gift-wrapping service that the salesperson provides are supplementary items that would be impossible to provide on their own without the chocolates. The GST rate on this composite supply will be the same as the rate on the chocolates.
Illustration 3: You are purchasing a meal-inclusive Shatabdi Express rail ticket. It is a collection of materials. Since the products cannot be supplied separately, it is a composite supply. You won't purchase the train ticket alone or simply the dinner. Therefore, the primary supplier is passenger transit. The entire composite bundle will be subject to the principal supply's tax rate. Consequently, IRCTC will charge the rate of GST (5%) that applies to passenger rail transit when a Rajdhani ticket is booked.
Features of Composite Supply
If a supply of products and/or services meets the following requirements, it will be considered a composite supply:
Supply of two or more products or services together; AND
It is a natural bundle as, in the regular course of business, products and services are typically offered in tandem.
Tax Implications of Composite Supply
Tax and pricing structures are affected when a transaction is classified as a composite supply. The main component in the bundle determines the tax rate on a composite supply in some nations, such as India. This implies that the entire bundle will be taxed at a higher rate if the major item has a higher tax rate than the subsidiary products. Comprehending composite supply can enable consumers to make well-informed purchasing selections. Customers can assess whether they are paying a reasonable price for the main item and whether they are getting enough value for the ancillary products in a bundle by identifying which items are primary and which are ancillary.
What is Mixed Supply under GST?
Two or more independent goods or services that are bundled together but can also be sold independently make up a mixed supply. Regardless of whether it is the primary component of the bundle or not, the good or service having the highest GST rate is regarded as the principal supply in a mixed supply. The primary supply's GST rate is applied to the mixed supply.
Illustration 1: A mixed supply is a Diwali gift box that includes canned goods, candies, chocolates, cakes, dry fruits, aerated drinks, and fruit juices all for one price.
Illustration 2: Cut flowers, decorative plants, and gardening services are all sold together in a package at a plant nursery. The plants and flowers are subject to 5% GST when sold separately, while the gardening services are subject to 18% GST. If they are sold as a package, the entire package will be subject to GST at the 18% rate.
Illustration 3: Several stores give away a bucket when you buy detergent. Because it doesn't meet the second requirement—that is, that it can be sold separately—this supply is mixed. You can purchase only detergent or just a bucket. Then, the highest GST rate will be in effect. The entire mixed bundle will be subject to this charge because detergents have a higher tariff (28%).
Features of Mixed Supply
A mixed supply, as defined by the GST, is the supply of two or more items or services at the same time for a single cost.
These things are independent of one another and can be supplied individually.
Tax Implications of Mixed Supply
A mixed supply under the GST will be subject to the tax rate of the item with the highest tax rate. An instance of a mixed supply would be a Diwali gift box that costs one price and includes canned goods, candies, cakes, chocolates, dry fruits, aerated drinks, and fruit juices. Additionally, each is offered separately. Given that aerated drinks have the highest GST rate (28%), the complete gift box will be subject to 28% GST since aerated drinks are considered primary supplies.
Difference Between Composite Supply and Mixed Supply
Composite and mixed supply may apparently be similar at first glance. We discuss providing goods and/or services in combination for a single price in both situations. However, why have our tax officials made such a fuss over differentiating them? Let's examine why now:
One product or service is unquestionably the primary component of a composite offering. While the portion with the highest GST rate is considered principal, no single component of a mixed supply is always the main supply.
Selling the supporting components apart from the main supply in a composite supply (such as the towels included in a hotel room) would be absurd. Each component of a mixed supply (like a shopping bundle with a variety of snacks and drinks) can easily be sold separately.
How to decide whether a supply is composite or mixed?
Start by ruling out that the supply is composite.
A supply is only regarded as mixed if it is not composite.
It would be a mixed supply if the products could be sold separately, that is, if the supplies aren't inherently combined in the regular course of business.
When the transaction's suitability as a composite supply is eliminated, it becomes a mixed supply, which is defined as a supply of commodities or services that is subject to the highest tax rate.
Conclusion
In business transactions, composite supply refers to the practice of bundling many items or services together to achieve a single goal. It is crucial for both organisations and customers to comprehend the definition of a composite supply and the ramifications of this categorization. Customers may make well-informed judgments about what to buy by understanding which components of a bundle are fundamental and which are ancillary, and businesses can make sure they are adhering to pricing and tax laws.
Frequently Asked Questions
Q1. What is the primary item in a composite supply?
The main component, sometimes referred to as the principal supply, is what provides the composite supply its fundamental qualities. It is the component that satisfies the bundle's primary function.
Q2. What are ancillary supplies in a composite supply?
Supplies known as ancillary supplies help the main item accomplish its intended function. The fundamental item, also known as the principal supply, is the one that contributes to the essential character of the composite supply. It is the component that satisfies the bundle's primary function.
Q3. What are the tax implications of composite supply?
The main component in the bundle determines the tax rate on a composite supply in some nations, such as India. This implies that the entire bundle will be taxed at a higher rate if the major item has a higher tax rate than the subsidiary products.
Q4. How does the knowledge of composite supply help businesses?
Businesses should understand composite supply since it makes it easier for them to abide by pricing and tax laws. Businesses may make sure they are correctly pricing their goods and services and abiding by applicable tax rules by identifying which components of a bundle are primary and which are supplementary.
Q5. How does the knowledge of composite supply help consumers?
Making educated purchasing decisions can be facilitated by consumers' understanding of composite supply. Customers can assess whether they are paying a reasonable price for the main item and whether they are getting enough value for the ancillary products in a bundle by identifying which items are primary and which are ancillary.
Q6. What are the types of supply under GST?
Simply said, "supply" refers to any kind of supply of commodities or services. It is intended to be taken into account when conducting business and contains the following:
Transfer
Sale
Exchange
Licence
Barter
Rental
Lease
Disposal
Importing services for payment (even if they are not being used to grow business)
Q7. What is the difference between principal and composite supply?
A principal supply is a supply of products or services that is the main component of a composite supply, with all other supplies that are a part of it being supplementary.
Q8. What is the significance of the concept of composite and mixed supply?
The Goods and Services Tax Council has established certain rates. In the GST Law, the rates for several categories of goods and services are specified. Therefore, charges are easy to calculate if you are providing a specific commodity or service. Nonetheless, the provision of a good and a service may occasionally be related, or they may occur concurrently even when unrelated. The ideas of mixed and composite offer consistent tax treatment under GST for these supplies and aid in figuring out the appropriate GST rate.
Q9. What is the GST on composite and mixed supplies?
Under the GST, the notions of mixed and composite supplies are crucial since they aid in figuring out the relevant tax rates for the supply. The tax rate on a mixed supply is the highest applicable tax rate on each of the component supplies; in a composite supply, the tax rate is the rate on the major supply.
Q10. What is the GST rate applicable on the composite supply of works contract?
According to clause (119) of Section 2 of the Central Goods and Services Tax Act of 2017, the GST rate on a composite supply of works contract is 12% (6% CGST + 6% SGST).
