18% GST payable on Diesel as part of a Composite Service

The Karnataka Authority for Advance Ruling has determined that 18% GST is applicable to the cost of diesel used in DG rental services. This decision was made because the contract for DG Set rental is considered a composite supply, where the diesel cost is an integral part of the overall service, not a separate supply of goods. Therefore, the reimbursement for diesel is treated as additional consideration for the DG rental service and attracts GST.

In M/s. Goodwill Auto's [Advance Ruling No. KAR ADRG 44/2021 decided on July 30, 2021], M/s. Goodwill Auto's ('the Applicant') has sought an advance ruling on applicability of Goods and Services Tax ('GST') on cost of the diesel incurred in the form of reimbursements for running Diesel Generator ('DG')Set in the course of providing DG Rental Service

The question arose when a client of the Applicant refused to pay GST citing that diesel is a nonGST good hence not liable to tax under Section 9 of the Central Goods and Services Tax Act, 2017 ('CGST Act') and Karnataka Goods and Services Tax Act, 2017 ('KGST Act').

The Hon'ble Karnataka Authority for Advance Ruling ('KAAR')noted that the contract entered between the Applicant and the recipient is for the hiring of DG Set and is a comprehensive contract with the consideration having a fixed component and a variable component. The fixed component is the monthly fixed rent charged in the invoice for the DG Set and the variable charge is the charge for the diesel used. Both are part of the same consideration and is for the contract of supplying DG Set on hire. Though it appears that the Applicant is receiving the reimbursement of diesel cost, the recipient is not paying for the diesel but for the services of DG Set, which is an integral part of the supply of DG Set rental service. There is no separate contract for supply of diesel and the invoice issued for the reimbursement of diesel cost isnothing but a supplementary invoice issued for the supply of rental service of DG Set

Hence, the reimbursement charges for running DG Setis an additional consideration for the supply of DG Set on rent as per Section 15 of the CGST/KGST Act.

Therefore, the same attracts 18% GST implying that in a case where diesel is included in a composite service and charges are applicable, the fuel irrespective of the exemption would attract GST on the invoice value.