Pencil sold with sharpener will attract higher GST than a pencil sold alone - Mixed Supply - Gujarat AAR (GAAR)

M/s. Doms Industries based in Umbergaon (Gujarat), are engaged in the business of three products. 

First pencils along with sharpener and eraser; 

Second a colouring book, pencil, colour pencils, oil pastels, plastic crayons, wax crayons, eraser, scale and sharpener, and Third pencils, erasers, scale and sharpener. 

Looking back In July 2022, based on the recommendation of GST Council, the Finance Ministry notified 18% GST for sharpeners, and that changed the equation completely for them with far reaching impact.

Accordingly, the above referred company moved GAAR to seek advance rulings on three questions.

(1) Whether the supply of pencil sharpeners along with pencils, being the principal supply, will be considered “Composite Supply” or “Mixed Supply”?. 

(2) The HSN code to be used. 

(3) Whether the supply of a sharpener along with the kit having a nominal value will have an impact on the rate of tax. If yes, what will the rate of tax ?

GAAR said each of the items in the products cannot be naturally bundled or supplied in conjunction with each other in the ordinary course of business. Also, each one can be sold independently.  This means that the supply of pencils sharpeners along with pencils is covered under the category of ‘Mixed Supply’. 

Also, the supply of sharpeners along with the kit having a nominal value will have an impact on rate of tax, GAAR ruled.

It is a general practice that businesses either supply goods or services alone, or bundle goods and/ or services.

Under GST, bundled supplies are categorised into two – mixed and composite supply. While mixed supply refers to supply of two or more goods and/ or supplies together at a single price and each of them can be supplied separately, composite supply refers to supply of two or more goods or services or both, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

The tax liability in case of mixed supply is fixed on the basis of goods or services that have the highest rate. 

In case of composite supply, one good or service is taken as a principal supply, the tax rate for which will apply to the entire supply.

Classification of supply as composite or mixed continues to be an item of perennial dispute between authorities and the industry. This is because there is no one-size-fits-all logic/ principle that can be applied. 

In the instant case, generally, pencils are sold along with sharpener, and hence the view that the same is a composite supply.

Alternatively, can a pencil be sold without a sharpener or vice-versa, the answer is affirmative and hence the alternative view that both are not naturally bundled and thereby becomes a Mixed Supply.

Finally, GAAR ruled that Pencil sold with sharpener will attract higher GST i.e. 18% on the value of combo selling price, than a pencil sold alone as it shall be categorised only as a Mixed Supply.

Well.......

As long as the question of  subjectivity is involved, leading to varied interpretations disputes are a consequence.

SRIVATSAN.R.

GST-CHENNAI