Classification of Supply



With the introduction of GST, there are no longer different levies on goods and services.  Thus, every supply is taxable unless excluded or exempt.  And thus, under this vast regime of taxation, determination of rate of tax becomes an important aspect.  Rate of tax is to be determined in the following manner.

The first step of determination of goods / services and concept of deemed supply of goods or deemed supply of services has already been discussed in earlier chapter.  Thus, the entire universe has been devided between goods and services.  It is important to understand that proper classification of a supply as goods and services and thereafter in proper category of goods or services is an imperative part of paying proper taxes. Any error in classification can lead to a demand of tax at a later stage.We shall focus on the later two concepts of bundled supplies and HSN / SAC.

Classification of Bundled Supplies

While most of the supplies usually constitute supply of a particular Good or service, there can be a situation where there are more than one goods / services in a single supply.  In such cases it becomes difficult to determine the rate of supply as different constituents may have different rates.  Accrodingly, we have to refer to the classification provisions provided in the law. Section 8 of the CGST Act has divided the bundled supplies into two categories – composite supply and mixed supply.  The two categories are defined as under:

Composite Supply
Composite supply has been defined in section 2(30) of CGST Act to mean a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any 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.</br/>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;
Thus, the intent of this provision is to exclude the application of a provision to all related and sub services to a particular supply and restrict the application of such provision to the main supply only. Thus, if a supply has been specified in the negative list of exempted, such benefit would not extend to all services used in provision of such service. Thus, if schools have been specified in the negative list, services provided to schools would not per se become non taxable. However, if even the outsourced supply in its own capacity falls under the designated entry, the benefit shall be available to it in the same manner as that if the main service. This is so as the sub – supply or input supply in its generic nature falls within the entry without deriving reference from the main entry. However, any supply which aims to provide better enjoyment of principal supply would fall in the purview of main supply only as it is no independent supply in its own existence.
Accordingly, since the Composite Supply classification is to be determined in line with the principal supply. Section 2 (90) of CGST defines “principal supply” to mean the 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 ancillary.

Mixed Supply
Section 2(74) of CGST Act defines “mixed supply” to mean two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.
Illustration : A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately;

Taxability of Composite Supply

A composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply.  Thus, we shall look for the rate as shall be applicable for the principal supply and charge the said rate on the entire consideration.  For eg. A Hotel charges 10,000 for a room night and provides free breakfast.  This is a case of composite supply and the rate of GST as appliocable to Accomodation services shall be applicablw on entire 10,000 irrespective of the fact that the restaurant services may be exigible to a different rate under GST.

Taxability of Mixed Supply

A composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply.  All the supplies should be treated as one and the highest rate as applicable on any supply  in that bundle will be the rate at which the total bundle will be taxable. In this if a supply  which comes under negative list or exemption list is there, in bundle, it would also be liable to be taxed.  In such a case, all supplies as included in the arrangement would be examined and the highest rate as applicable to any of the supplies shall be applied to the entire transaction.

The above position can be summarised as under:


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