As a principle, exemptions are extended in tax statues to grant relief or ease the burden of consumers keeping in view the interest of the general public at large. Thus inclusion of an exempted supply under the tax net by combining the same with a taxable supply under the notion of them being composite supply tends to defeat the objective of public welfare.
Section 2(30) of CGST Act defines composite supply as 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;
Further “principal supply” has been defined in Section 2(90) as 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
If we look closely at the above definitions it emerges that the intent of the law is to integrate two taxable supplies into one principal supply for the ease of classification and thereby the whole concept of composite supply appears for the benefit of the taxpayers. However, the department while dealing with intricacies of composite supply in cases where one of the elements involved in an exempt supply has overlooked this vital factor and has sought to impose a tax on an otherwise exempt supply on the pretext of principal supply being taxable.
A reverse case scenario i.e. principal supply being an exempt supply was dealt with in Columbia Asia Hospitals Private Limited (GST AAR Karnataka) wherein it was held that ancillary supply would also be exempted by virtue of being a composite supply and it was ruled out that:
“The definition of taxable supplies includes those supplies of goods which are leviable to tax and chosen to be exempted under section 11 and hence the exempt supplies also fall under the category of taxable supplies and hence the supply of goods and services supplied by the applicant company in conjunction with the healthcare services fall under the definition of “composite supply”
The issue here would lose its significance as in the above case the impact of the overall ruling has extended the coverage of exemption but if the principles laid down in this ruling is followed in cases where ancillary supply to a taxable principal supply is exempt, particularly more so when both have been separately billed and charged, it will result in curtailment of assistance that government seeks to provide to consumers via taxpayers.
A contrary observation was made in M/s Keysight Technologies International India Pvt. Ltd.while dealing with the question of exempt supply in the context of composite supply as below:-
“In the instant case, the supply is made by a taxable person and the number of supplies is also multiple. But as discussed earlier, the supply of electricity to the extent of it being supplied through the grid is exempt from GST and, therefore, the condition of two or more taxable supplies is not satisfied”
The concept of “Composite Supply” is as complex as it is in absence of lack of clarity in the underlying principle of what constitutes as “Naturally bundled and supplied in conjunction with each other” therefore to add another controversy to same by treating exempt supply at par with a taxable supply would serve no purpose.
The situation calls for the department to distinguish the treatment of exempt supply from the composite supply in the wake of injustice it causes to the ultimate consumers and issues a relevant clarification to put an end to up surging debacle & litigation in the matter.
The author is a Chartered Accountant offering GST advisory & consultancy and can be reached at firstname.lastname@example.org. The views are strictly personal.