Article on Bundled Supplies Under GST: Composite or Mixed?

Bundled Supplies Under GST: Composite or Mixed?

Imagine booking a flight ticket that comes with an in-flight meal. You’re paying one price, but should GST treat the meal as part of the travel service or as a separate taxable item? The answer depends on whether this is a composite supply or a mixed supply, and that classification can change the tax rate.

This issue isn’t just limited to airlines-businesses across industries, from telecom providers bundling internet and streaming services to retail stores, often grapple with this classification, and the difference isn’t always obvious. In this article, we’ll explore the legal framework and key distinctions to help you understand the GST implications of composite and mixed supplies-without the confusion.

Understanding Composite and Mixed Supplies Under GST

GST is fairly straightforward when applied to individual goods or services. But what happens when multiple items are supplied together? That’s where things get tricky! Imagine a package deal-say, a hotel stay with complimentary breakfast or a phone sold with accessories. Do you pay separate GST rates for each item, or does a single rate apply?

To clear up such confusion, the GST law classifies these bundled supplies as either composite supplies or mixed supplies-each with its own tax treatment. Getting this classification right is crucial, as it directly affects the GST rate applicable to the entire transaction and helps businesses avoid tax disputes.

Decoding the Definitions: Composite vs. Mixed Supply

The CGST Act, 2017, defines these terms under Section 2:

“(30) "composite supply" means 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.

(74) "mixed supply" means 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”.

The key to identifying a composite supply is determining the principal supply-the predominant element that defines the transaction. Section 2(90) of the CGST Act clarifies that:

"Principal supply" means 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.”

Why does this matter? Because the GST rate applicable to the principal supply dictates the rate for the entire transaction!

Tax Implications: Composite vs. Mixed Supply

The tax treatment of these supplies is governed by Section 8 of the CGST Act:

Composite Supply → Taxed at the GST rate of the principal supply.
Mixed Supply → Taxed at the highest applicable GST rate among all items in the combination.

Let’s break it down with examples:

Composite Supply Examples

Example 1: A seller provides a laptop with a warranty and a carry case as part of a single package.

Principal Supply: Laptop
Ancillary Supply: Warranty and carry case
GST Rate: The rate applicable to laptops will apply to the entire supply.

Example 2: A customer purchasing a television set also receives a warranty and a maintenance contract. This constitutes a composite supply.

Principal Supply: Television
Ancillary Supply: Warranty and maintenance services
GST Rate: The rate applicable to televisions will apply to the entire supply.

Example 3: A travel ticket from Mumbai to Delhi includes onboard meals, complimentary insurance, and access to the airport lounge.

Principal Supply: Passenger transportation, being the dominant element, is considered the principal supply.
Ancillary Supply: Meals, insurance, and airport lounge access
GST Rate: The rate applicable to air freight will apply to the entire supply.

Mixed Supply Examples

Example 1: A festive gift hamper contains chocolates, soft drinks, dry fruits, and fruit juices, all sold together for a single price. Since these items can be bought separately and are not naturally bundled, it qualifies as a mixed supply.

GST Rate: The highest applicable tax rate among the items will apply to the entire bundle.

Example 2: A shopkeeper sells a refrigerator along with storage water bottles. Since both items can be priced and sold independently and are not naturally bundled, this is a mixed supply.

Tax Implication: The refrigerator attracts 18% GST, while the bottles attract 12%. Since it is a mixed supply, the highest applicable rate (18%) will apply to the entire supply.

How to Distinguish Between Composite and Mixed Supplies?

While the definitions in the CGST Act provide a legal foundation, applying them in real-world scenarios can be challenging. The key factors to consider when distinguishing between composite and mixed supplies include:

1. Natural Bundling in the Ordinary Course of Business

A supply is likely to be composite if its components are naturally bundled-meaning they are commonly provided together, and customers expect them as a package rather than as separate purchases.

Example: A hospital provides a health check-up package that includes consultation, and diagnostic tests. Since these services are naturally bundled in the healthcare sector, they qualify as a composite supply, with medical consultation being the principal supply.

2. Principal Supply Dominance

A composite supply must have a principal supply-the dominant component that gives the transaction its essential character. The other elements merely support or enhance the principal supply.

Example: A hotel offers a stay package with complimentary breakfast. Since the customer’s primary intent is to avail lodging, and breakfast is incidental, the entire transaction qualifies as a composite supply, taxed at the rate applicable to hotel accommodation.

In a mixed supply, no single component dominates; all items are equally independent.

3. Independent vs. Dependent Components

A supply qualifies as mixed if its components are independent and can be sold separately, with no necessity to provide them together.

Example: A retailer runs a “buy one, get one free” offer on chocolates and soft drinks. Since chocolates and soft drinks do not depend on each other and are sold independently, the offer constitutes a mixed supply, attracting the GST rate of the item with the highest tax rate.

4. Single Price for Multiple Items

Charging a single price for unrelated items is a strong indicator of a mixed supply. If no principal supply exists and the items do not form a natural bundle, the entire supply is taxed at the highest applicable GST rate among the items.

Thus, if a single price is charged for items that do not have a natural connection, it leans towards mixed supply classification.

Example: A festive gift hamper containing chocolates, cosmetics, and a bottle of juice is sold for a single price. Since these items have no inherent connection and can be purchased separately, the transaction is a mixed supply.

CBIC Circulars on Principal Supply and Composite Supplies

CBIC has issued several clarifications reinforcing the significance of principal supply in determining tax treatment under GST. These clarifications ensure uniform GST application across industries by establishing whether a transaction constitutes a supply of goods or services based on its dominant component.

1. Printing Contracts: Principal Supply Classification (Circular No. 11/11/2017-GST, dated 20.10.2017)

The classification of a supply as either goods or services under GST is often determined by identifying the principal supply in a composite transaction. A notable example of this can be seen in CBIC’s clarification on printing contracts, which addresses whether printed materials such as books, pamphlets, cartons, and envelopes - customized with design, logo, name, address, or other contents provided by the recipient should be treated as supply of goods or services.

The circular concludes that these transactions constitute composite supplies, with their classification depending on the predominant element:

Supply of Services (Heading 9989) – If the recipient provides only the content (such as text for books or reports) while the printer supplies the physical inputs (such as paper), the principal supply is printing services rather than the tangible product itself.
Supply of Goods (Chapter 48 or 49) – If the printer supplies the physical product (such as envelopes, boxes, or wallpaper) and merely prints the design, logo, name, or address provided by the recipient, the predominant element is the supply of goods, with printing being merely incidental.

This classification method aligns with the concept of composite supply, where the principal component dictates the GST treatment. It highlights how determining the principal supply is essential not only for distinguishing between goods and services but also for applying the correct tax rate and compliance requirements.

2. Bus Body Building and Tyre Retreading (Circular No. 34/8/2018-GST, dated 01.03.2018)

CBIC clarified the GST classification for:

Bus Body Building – This activity involves both goods (the body structure) and services (fabrication & assembly). Since it is a composite supply, whether it is taxed as goods or services depends on the principal supply, which must be assessed based on facts and circumstances of each case.
Tyre Retreading – Here, the retreading process itself is the dominant element, making it a supply of services under GST. The rubber used is merely an ancillary component. However, if the supplier sells retreaded tyres (where the old tyres belong to them), then it is considered a supply of goods, falling under Heading 4012 of the Customs Tariff (taxable at 28%).

3. Software & Chip Design: Tax Treatment (Circular No. 118/37/2019-GST, dated 11.10.2019)

The CBIC has clarified that where software development and chip design services are provided to a foreign customer using prototype hardware/test kits, the entire supply must be treated as a composite supply, with the principal supply being software/design services.

Key takeaways from the clarification:

Principal vs. Ancillary Supply – The core service in such contracts is software development and design for integrated circuits, while testing on prototype hardware is merely ancillary.
No Artificial Splitting of Supply – Since the contract is for a composite supply, it must be taxed as a whole rather than being artificially divided into separate components.

4. Incidental Services in GTA (Circular No. 234/28/2024-GST, dated 11.10.2024)

CBIC addressed concerns regarding whether incidental services-such as loading, unloading, packing, unpacking, transshipment, and temporary warehousing-provided by a Goods Transport Agency (GTA) should be taxed separately.

Clarification: These incidental services will be treated as part of the composite supply of transportation, irrespective of how they are mentioned in the invoice. The principal supply remains transportation, and the applicable GST rate for GTA services will apply.
Exception: If such services are provided independently (not as part of transportation) and invoiced separately, they will be treated as distinct taxable supplies, subject to applicable GST rates.

These clarifications reinforce the significance of principal supply in determining tax treatment and ensure uniform GST application across industries.

Clearing Misconceptions: Myth vs. Reality

Many taxpayers misinterpret composite and mixed supplies, leading to incorrect tax calculations. Let's clarify some common myths:

Myth ☑	Reality☒
Any two goods sold together form a composite supply	Not necessarily. If they aren’t naturally bundled, it’s a mixed supply.
If a service is provided along with goods, it’s always a composite supply	Only if the service is naturally bundled and incidental to the main supply.
If items are billed together, it automatically becomes a composite supply.	Billing method does not determine the classification. The nature of bundling is the key factor.
A principal supply must always be the more expensive component.	No, the principal supply is determined by its dominance in the transaction, not the price.
Composite supply and mixed supply classifications are at the supplier’s discretion. If a supplier declares a supply as composite, it cannot be treated as mixed.	Incorrect. The classification depends on facts and legal principles, not the supplier’s declaration.
Any bundled supply must always be classified as composite or mixed.	Some supplies may not fall into either category and may need individual tax treatment.
Discounts or promotions change the classification of supply.	The classification is based on the nature of supply, not on pricing strategies.
Mixed supply means the supplier can choose which GST rate to apply.	No, the highest applicable GST rate among the supplied items applies to the entire transaction.
Mixed supply is only relevant for promotional or combo offers.	No, mixed supply can arise in any situation where items are artificially bundled and can be sold separately.
If an invoice separately mentions different tax rates for items, it can still be considered a mixed supply.	No, if different tax rates are applied separately to individual items, they are taxed independently, and the supply is not mixed.

Practical Checklist for Businesses

✓ Are the goods/services naturally provided together? (If yes, composite supply)

✓ Is there a dominant (principal) supply? (If yes, composite supply)

✓ Can the items be sold separately without affecting their essence? (If yes, mixed supply)

✓ Are the tax rates different? (If yes and in case of mixed supply, it will attract the highest rate)

✓ Review Contract & Invoice Structure – Does the contract or invoice correctly reflect the supply classification

✓ Refer to Judicial Rulings & CBIC Circulars – Look at past case laws and government clarifications for guidance.

✓ Consult GST Experts –Uncertain? Seek professional advice to ensure compliance and avoid disputes.

Key Differences Between Composite and Mixed Supplies

Basis	Composite supply	Mixed supply
Definition	A supply of two or more goods/services that are naturally bundled and supplied together in the ordinary course of business.	A supply of two or more goods/services that are not naturally bundled and can be supplied separately.
Principal Supply	Has a dominant/principal supply that determines the tax rate.	No principal supply-each item in the supply is independent.
Tax rate	The GST rate of the principal supply applies to the entire transaction.	The highest GST rate among the supplied items applies.
Example	Sale of an air conditioner with installation services-installation is incidental to the AC.	A gift hamper containing chocolates, soft drinks, and cosmetics-each item is independent.
Bundling Nature	Naturally bundled as they are usually provided together.	Artificially bundled for convenience or promotional purposes.
Taxability Decision	Based on the nature of the principal supply.	Based on the highest tax rate of the supplied goods/services.

Conclusion: Getting It Right!

Understanding the difference between composite and mixed supplies is crucial for accurate GST compliance. The key takeaway? If the supplies are naturally bundled, apply the tax rate of the principal supply (composite supply). If not, the highest tax rate applies (mixed supply). Businesses should carefully analyze their transactions to avoid costly errors and ensure smooth compliance.

By keeping these principles in mind, taxpayers can confidently navigate GST classifications and avoid unnecessary disputes with tax authorities.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.