What is Composite Supply? Key Concepts, Examples, and TaxBuddy's Compliance Assistance
Updated: Jan 21
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:Â 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.Â
Illustration 2:Â 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 SupplyÂ
A composite supply under GST refers to a combination of two or more goods or services that are naturally bundled and sold together. The important feature of a composite supply is that one of the items is the main supply, while the other items are needed to support it.
For example, if you buy a flight ticket, the main supply is the transportation service, and the meal provided during the flight is an additional service. The tax rate for composite supply is based on the main item that the buyer primarily wants.
Here are the key features of composite supply:
Bundled Goods or Services: The goods or services are naturally bundled together and sold as a single package.
Main Supply: One item is the primary supply, while the others are additional or secondary to it.
Single Tax Rate: The tax rate applied is based on the main supply item.
Understanding composite supply helps businesses correctly apply the GST rate and stay compliant with tax rules.
Tax Implications of Composite Supply
When looking at composite supply, it is important to understand tax implications. Tax implications help make accounting easier. The GST rate for a composite supply is based on the main item being sold. This makes it simpler to calculate taxes and avoids confusion with different rates. For example, if someone buys a hotel package that includes a room and breakfast, the tax rate for the room applies to the whole package.
Here is a simple chart to explain tax implications in composite supply:
Aspect | Description | Example |
Tax Rate | Based on the main item | Room in a hotel |
Accounting Simplification | One tax rate for the whole package | Hotel stay with breakfast |
Supply Classification | Grouped by the main item | Car with insurance and services |
With this information, anyone can easily sort their supplies and use the right GST rate. This method helps them follow the rules and makes tax reporting easier. Knowing these tax implications helps manage business transactions better, leading to correct tax amounts.
Principal Supply in Composite Supply
Understanding the principal supply in a composite supply is important for figuring out the GST rate. The principal supply is the main item that defines the whole package. For example, if someone buys a smartphone with accessories and a warranty, the smartphone is the principal supply. The GST rate for the smartphone decides the tax for the entire bundle.
Identifying the principal supply is crucial because it affects how tax is calculated. When someone correctly identifies the principal supply, they follow the GST rules and avoid fines. The tax rate for composite supplies relies only on the principal item. This makes tax calculations easier and clearer.
To find out the principal supply, look at what the main reason for the purchase is. If the main item can be used on its own and the other items just add extra value, it's probably the principal supply. Knowing this helps with accurate tax calculations and makes following GST rules simpler.
Examples of Composite Supply
Composite supply is when a main item comes with extra services or products. It is important to understand how composite supply works under GST, the Goods and Services Tax. Knowing these examples can help simplify how GST is calculated.
Here are some simple examples of composite supply:
Example | Principal Supply |
A gift-wrapped box of chocolates | Chocolates |
A new car purchase with insurance | Car |
A hotel booking with breakfast | Accommodation |
In the first example, the chocolates are the main item. The gift wrapping adds value but does not change the GST rate. In the second example, when buying a car, the insurance is an extra service. The car's GST rate decides the total tax. In the last example, when booking a hotel room that includes breakfast, the room is the main item, and its GST rate applies.
These examples show how composite supplies make it easier to handle tax payments. Businesses can calculate GST based on the main item. By understanding these bundled goods and services, people can follow GST rules better. This helps ensure that they pay the right amount of tax and benefit from a clear tax system.
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 SupplyÂ
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.Â
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.Â
Difference Between Composite Supply and Mixed Supply
Composite supply and mixed supply are two important concepts in GST that everyone should understand.
Composite supply is when goods or services are naturally grouped together. In this case, the main item decides the GST rate. For example, if someone buys a car that comes with insurance and maintenance, the car is the main item. Its GST rate will apply to the whole purchase.
On the other hand, mixed supply is when different items are sold together but they don't really relate to each other. For example, a gift basket with chocolates, wine, and cheese is a mixed supply. Each item stands on its own. Here, the item with the highest GST rate will apply to the entire basket.
To sum up, in composite supply, the GST rate comes from the main item. In mixed supply, the highest GST rate from all items is used.
Knowing these differences helps people calculate their taxes correctly. By understanding if a purchase is a composite or mixed supply, one can make sure to use the right GST rates and keep their taxes in order.
How to decide whether a supply is composite or mixed?
To decide whether a supply is composite or mixed, it’s important to understand how the goods or services are related to each other.
A composite supply is when two or more goods or services are bundled together naturally, and one of them is the main supply. The other items support the main supply. The tax rate applied is based on the main supply. For example, buying a car and getting free servicing is a composite supply, as the car is the main item, and the service supports it.
A mixed supply, on the other hand, involves two or more goods or services that are sold together but are not naturally related. Each item in a mixed supply can be sold separately, and the highest tax rate among the items is applied. For example, a gift basket containing chocolates and toys is a mixed supply because these items are unrelated and could be bought separately.
To decide if a supply is composite or mixed, ask:
Are the items naturally bundled? If yes, it’s composite.
Is one item the main supply? If yes, it’s composite.
Can the items be sold separately? If yes, it’s mixed.
Understanding these differences helps in applying the correct GST rates and staying compliant with tax rules.
Conclusion: How TaxBuddy Can Help with Composite Supply GST Compliance
Understanding GST compliance can be tough, especially when it comes to composite supply. Composite supply means a group of goods or services sold together. It's important to know which part is the main supply and to use the right GST rate. If you get this wrong, you could face fines or pay more tax than necessary. That's why understanding the rules is so important.
TaxBuddy helps with composite supply GST compliance. They offer special plans to make it easier for businesses to follow the rules. With TaxBuddy's help, you can correctly identify your supplies. This ensures that you follow GST laws.
They also assist you in reviewing your transactions, whether they involve composite or mixed supplies, so you can concentrate on running your business. TaxBuddy makes GST processes simpler. They provide tools and resources to help with compliance.
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.
FAQ
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:Â
TransferÂ
SaleÂ
ExchangeÂ
LicenceÂ
BarterÂ
Rental
LeaseÂ
DisposalÂ
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).
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