The Theory of Supply

The only thing that can cheer you up on a gloomy Monday morning is a travel package to the breath taking Andaman and Nicobar islands. Six days and five nights in a five-star hotel, promises of three-steaming hot and scrumptious meals and a personal tour guide seemed inviting to say the least. The carrier of this tempting offer was a text message along with the words ‘especially for you’. I felt confident that there was some karma at work. The happiness didn’t last long when someone explained to me that the tour guide wasn’t a reward but a sales strategy.

Quite often, two or more goods or a combination of goods and services are sold together, either as a marketing strategy or because of the nature of the goods and/or services. For instance, a pen and a refill are sold together because one can’t work without the other. On the other hand, a DSLR and a tripod would be sold together to gain more customers. Under Service Tax, this concept is termed as Bundled Services. In simple terms it means providing two or more goods or services together. In the new tax regime these Bundled Services have been classified into Mixed Supply and Composite Supply.

When two or more goods or services or a combination of goods and services are supplied together by a taxable person for a single price, this supply will be termed as a Mixed Supply. The goods or services are independent of each other and can be sold separately. It is not necessary to sell these goods or services together. They are combined as a marketing or sales strategy. Consider a meal containing namkeen, pastry and aerated drinks. These three edibles are supplied together at a single price. It is not compulsory to sell them together at a single price but it is done so to increase the sales of the above mentioned products. This is an example of a mixed supply. The individual tax rates for the products are 12%, 18% and 28% respectively. But since they are being supplied together, they will also be taxed together.



For the purpose of taxation as a mixed supply, the tax rate applicable on the goods or services attracting the highest rate of tax within the combination of goods and services will be considered. In the example, since the highest tax rate is 28%, the meal will be taxed at 28%. Remember to avoid that carbonated, sugar loaded drink the next time. It’s unhealthy and expensive!

After more research, I realised that the travel package to the Islands was a Composite Supply (well, at least the hotel stay and the meals). Composite supply refers to a supply comprising two or more goods/services which are naturally bundled and supplied with each other in the ordinary course of business, one of which is a principal supply. The items cannot be supplied separately. The package of accommodation facilities and the meals is a natural combination in the ordinary course of business for a hotel. A supply will be considered as a Composite supply if the following two conditions are satisfied:

  1. Supply of 2 or more goods or services together,

  2. The goods or services supplied together cannot be separated i.e. they form a natural bundle and are usually provided together in the ordinary course of business.


A few examples of Composite Supply are tea and sugar, sale of laptop with a charger. When you order for tea it is natural for the sugar to be provided – it will be a composite supply irrespective of whether you use the sugar or not. A laptop charger is a natural requisite to charge the laptop and hence this supply will also be categorized as composite. The composite supply is taxed at the rate applicable to the principal supply. The goods/services may be available separately but are often bundled together. Under GST, principal supply refers to the supply of goods or services that constitute the predominant element of supply. Simply put, the primary product that is purchased like the tea or the laptop is the principal supply. Therefore, the tax rate applicable on the laptop or the tea will be charged on the entire supply of tea + sugar and laptop + charger. Similarly, in the above given example the GST on the accommodation would be considered as the tax on the entire supply. Which means that if the tax on accommodation would be 18% and the restaurant service would be taxed at 12%, the total tax to be paid would be 18% on the total bill value.

With these taxes, the cost of the trip would have burned a hole in my pocket. Good thing I work for a GST based company.