New Concepts of Supply in GST law
1. New concepts of supply under GST
The concept of supply under GST gives us an introduction to three types of supplies under GST which is discussed as below :
- Composite Supply : The composite supply under GST section means a supply made by a taxable person to a recipient comprising two or more supplies of goods or services, or supplied in a combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.
An example of composite supply in GST could help in better understanding of the concept.
Say Mr. X goes to a sports shop and buys a carrom board, now if Mr. X only buys carrom board and doesn’t buys carrom coins along with it, then the principal item “Carrom board” in the given case has no life.
And if Mr. X buys only carrom coins but doesn’t buys the board then in this case too the product has no meaning to it as carrom cannot be played without the board.
So going by the definition we can say that carrom board and carrom coins forms into an composite supply where in one product has two or more supplies attached to it which are naturally bundled board-coins) and supplied in conjunction with each other one of which is a principal supply (Carrom board)
- GST Mixed Supply : A mixed supply's definition under GST is very clear once we understand about composite supply under GST. In the former we learnt about composite supply now let us learn about GST mixed supply.
A mixed supply definition under GST is similar to composite supply where two or more individual supplies of goods or services, or any combination thereof, is made together by a taxable person for a single price.
The only major difference between composite supply and mixed supply is that any of the items involved in such supply can be supplied separately and is not dependent on any other as in the case of composite supply.
An example of mixed supply in GST could help us in differentiating GST mixed supply to a composite supply in GST. A pack of festival sweets containing candies as well as chocolates, which attracts different GST rates supplied as one package for one single price.
- Principal Supply : Well the above two discussion on types of supplies under GST leads us to a third type of supply in GST called Principal Supply.
Principal supply is one which involves supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is auxiliary to and does not constitute, for the recipient an aim in itself, but a means for better enjoyment of the principal supply.
There is no example given in the GST Law for principal supply. However, principal supply will be that supply which is predominant over other supplies. Say for example free Wi-Fi services provided during stay in hotel. In this case, the predominant supply is accommodation services and Wi-Fi services are provided only for better enjoyment of the principal supply of service.
2. Single supply but various interpretations – Why ?
Take a case of Air conditioning unit repair service. Mr. Y called up the AC service provider for servicing of his AC cabinet unit which was making noise. The service provider opens up the unit and replaces a part and bills Mr. Y raising a material invoice for the part replaced and also for the part of service done on the unit.
How to name this supply whether it is a composite or mixed supply, or is it a segregated supply of goods and services? One can get the answers for all these questions by simply questioning back in most of the cases.
|Interpreting as||Analysis and Result|
|Taking a stand that – The supply constitutes of service and it is a composite supply.||Mr. Y received the services of service provider to repair the AC unit which was not functioning. In the first place, Mr. Y entered into transaction with the service provider with the soul motive of making the noise go from the AC unit.
Mr. Y didn’t cared if he replaced a major part or simply struck the outdoor unit with his hammer to stop the noise.
So what answer does this leads to. Here the motive leads us to a answer about the type of supply. Since Mr. Y wanted service as supply, we can say that service constituted as principal supply in the whole transaction.
|Taking a stand that – The supply constitutes of goods and it is a composite supply||The bill contained two elements, one of which was the replaced part accounting for about 70 percent of the bill.
In this case, substance leads us to answer as to type of supply. As principal supply in terms of value was definitely goods and that the supply of this good should be taxed at the rate that the part attracts.
|Taking a stand that – The supply is a GST mixed supply||What If there was a single amount on the bill.
Here the reasoning gives us a answer that since both the supply of the service and the supply of the goods are equally important and offered together without a principal supply.
And as supply of goods is not depended on the supply of service as Mr. Y could have bought the machinery part from the shop directly by himself and supplied the same to service provider and could have just availed the services alone and paid for the services alone.
Being a GST mixed supply, the vendor should apply the highest rate of the constituent supply.
3. Deadlock situations and handling
For identifying whether a supply constitutes mixed supply or a composite supply a five point principle could be followed which is as follows
|Principle No. 1 : Value||Just because the value of goods in the supply accounts for more than 51% doesn’t satisfy definition of principal supply.
And also it is difficult to find out the value of constituent supplies and more over it is even difficult to substantiate it to a tax officer.
|Principle No. 2 : Intention||This could be a better test as it would reveal what the supplier intended to supply, and what the buyer intended to buy.
This test explains the economic rationale behind the supply. Basic rule of this principle is that the supply should not be artificially split or combined if the economic rationale does not warrant that.
|Principle No. 3 : Description||The invoice may throw some light on the nature of the transaction. A GST mixed supply will always have a single value, while a composite supply may or may not.
A segregated supply on the other hand will always have a separate value for each constituent.
|Principle No. 4 : Common Practice – Industry wide||One may also look at different practices followed in the industry to reach a conclusion:
One public transport bus service provider may include the cost of food in the price of the ticket (composite supply with bus transportation as a principal supply). The other may charge separately for the food (segregated supply of bus transportation and food).
|Principle No. 5 Breaking down the nucleus||Splitting the transaction into separate parts to see if it offers any clues.
Let’s take an example of an artisan making tanjore painting out of gold leaf foil made from 22 carat gold provided by the recipient of service (say he is a trader and he deals in supply of Tanjore paintings) on job-work-charges basis.
This is simply a service. However, in the course of making the tanjore painting, the artisan required some additional gold leaf foil that he selected from his own inventory.
While the principal supply appears to be that of service, the value of gold leaf foil would always be substantially higher than the value of service. Would this make gold the principal supply?
Splitting the transaction into two parts gives us the type of supply :