#GSTCase-54-Supply of Hostel Accommodation with Laundry, Housekeeping and Medical Facilities to Students in different packages
Sarj Educational Centre  102 taxmann.com 448 (AAR-WEST BENGAL)
Query-1: Whether combination of services provided by the applicant to students with lodging facility is a composite supply within the meaning of section 2(30) of the GST Act, and whether supply of such service is eligible for exemption under Sl. No. 14 of Notification No. 12/2017–CT (Rate) dated 28/06/2017 (hereinafter the Exemption Notification).
Query-2: What should be the rate of tax for the combination of services he provides, if it is not considered a composite supply.
The Applicant is providing boarding facility with lodging, housekeeping, laundry, medical assistance and food to the residents. The consideration is a consolidated charge on the individual boarder for the combination of the services.
Applicant provides services to both day boarders and boarders requiring lodging facilities. In FY 2018-19, the annual consideration for the services without lodging facilities are segregated and charged on the day boarders at Rs.71,800/- per head, of which Rs.66,000/- is boarding fees. The boarding fees for those who enjoy lodging facilities is Rs.1,56,000/- per head. These lodgers have to pay an additional amount of Rs.13,600/- per head for housekeeping and laundry services, whereas the day boarders pay only Rs.5,800/- per head for such service.
- Contention of the Applicant
Applicant refers to Circular No. 32/06/2018 dated 12/02/2018 of CBIC wherein it has been clarified that accommodation service to students in a hostel having declared tariff below one thousand rupee per day is exempt under Sl. No. 14 of the Exemption Notification.
- Observation by AAR
Observation-1: Consideration charged by applicant is not for lodging and food only. This is one of the key observations by AAR in the matter.
Observation-2: A flat amount is charged for maintenance, electricity and laundry instead of reimbursement of the actual cost. The consideration is, therefore, a consolidated charge for a combination of all these services.Different Packages are being offered including different facilities from which recipient can chose one of the packages.
Observation-3: Medical assistance extended to the boarders is not usually supplied with lodging and food service in ordinary course of business.
Observation-4: Although services are offered in a bundle, they are not indivisible, and different considerations are paid for different packages of such services offered to the recipients, depending upon their requirement for lodging facility. For example, laundry service is not offered to the day boarders.
Observation-5: These are not, therefore, bundles of taxable supplies that are inseparable and supplied only in conjunction with one another in ordinary course of business. The services the Applicant supplies are not, therefore, composite supply, as defined under Section 2(30) of the GST Act.
Observation-6: Applicant is offering several individual services in two different combinations to the recipients, depending upon their need for lodging facility. Each of the recipients, however, is charged a consolidated amount for the combination of services he wants to enjoy. The combination of services is, therefore, offered as a mixed supply within the meaning of Section 2(74).
Observation 7: Applicable Tax Rate on Individual Services:
- Lodging Facility: Boarders who need lodging facility that such services are offered at a tariff below Rs.1000/- per unit per day. The lodging facility offered is, therefore, exempt under Sl. No. 14 of the Exemption Notification.
- Food: Food served upon these recipients is taxable at 5% rate under Sl. No. 7(i) of Notification No. 11/2017–CT (Rate) dated 28/06/2017 (hereinafter the Rate Notification), as amended from time to time.
- Housekeeping Including Maintenance: Housekeeping, including maintenance, is classifiable under SAC 9987 and taxable at 18% rate under Sl No. 25(ii) of the Rate Notification.
- Laundry Services: Laundry service is classifiable under SAC 9997 and taxable at 18% rate under Sl. No. 35 of the Rate Notification.
Observation-8: In accordance with Section 8(b) of the CGST Act, mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.” As has already been discussed, each of the combinations includes services taxable at 18% rate, which is the highest rate applicable to the services being offered vide Section 8(b) of the GST Act. Being mixed supply, value of the entire combination of services offered is taxable at 18% rate.
Query 1: Applicant is offering several individual services in two different combinations to the recipients, depending upon their need for lodging facility. None of the combinations of services being offered is a composite supply, as defined under section 2(30) of the GST Act.
Query 2: Supplies by the applicant are mixed supplies within the meaning of section 2(74) and taxable in accordance with section 8(b) of the GST Act. Being mixed supply, value of the entire combination of services offered is taxable at the applicable rate.
Let’s first ascertain the clear facts coming out of the case which would help us in analysing the judgement in a better way:
- The consideration charged by the applicant was not for Lodging and Food only.
- AAR also observed that different packages were offered to the students and each of the combinations provided by the applicant included services taxable at 18% rate, which is the highest rate applicable to the services being offered. The students could have chosen from either of the packages.
- AAR observed that although services were offered in a bundle, they are not indivisible, and different considerations are paid for different packages of such services offered to the recipients, depending upon their requirement for lodging facility.
In the above backdrop, following is the analysis
Conclusion 1: GST Flyer on Composite and Mixed Supply issued by CBEC provides following example:
A hotel provides a 4-D/3-N package with the facility of breakfast. This is a natural bundling of services in the ordinary course of business. The service of hotel accommodation gives the bundle the essential character and would, therefore, be treated as service of providing hotel accommodation.
Further Circular No. 32/06/2018-GST Dated 12th February 2018 provides as follows:
Is hostel accommodation provided by Trusts to students covered within the definition of Charitable Activities and thus, exempt under Sl. No. 1 of notification No. 12/2017-CT (Rate).
Answer: Hostel accommodation services do not fall within the ambit of charitable activities as defined in para 2(r) of notification No. 12/2017-CT(Rate). However, services by a hotel, inn, guest house, club or campsite, by whatever name called, for residential or lodging purposes, having declared tariff of a unit of accommodation below one thousand rupees per day or equivalent are exempt. Thus, accommodation service in hostels including by Trusts having declared tariff below one thousand rupees per day is exempt. [Sl. No. 14 of notification No. 12/2017-CT(Rate) refers.
Therefore, if the consideration charged by the applicant would only have been for lodging and food facility only, such supply would have been treated as a composite supply and would have been covered by CBIC Circular No. 32/06/2018 dated 12/02/2018. It is the provision and charging of other facilities in a common package like Laundry , House Keeping and Maintenance Services which has resulted in AAR taking view of Mixed Supply.
Conclusion 2: Would it have made a difference wherein a separate rate would have been provided only for lodging facility only or lodging with food facility. No, still supply would have been covered by CBIC Circular No. 32/06/2018 dated 12/02/2018 and since the principal or the only supply was accommodation service, therefore it would have been exempt from the levy of GST.
The complexities start to develop when other facilities like Housekeeping, Laundry and Medical Services have been provided and charged alongwith the lodging and food facility.
Conclusion 3: The best course available in such situation would be to offer a combined price for lodging and food facility and charge separate rates for other facilities provided at the option of the hotel resident taxable at the rate of 18%. The same is being done in the Hotels wherein a composite rate is charged for stay with breakfast and rest other facilities available at the option of the recipient are taxable at the applicable rates.
Conclusion 4: In this solution lets analyse whether packages offered by the applicant which have been held by the AAR as mixed supply can at all be treated as a bundle services in normal course and therefore a composite supply and taxable at the rate of Principal Supply, which in the given case would be lodging facility. In the above backdrop lets try to throw some light on the concept of composite supply and natural bundling of two or more supplies.
a) As per provisions of Section 2(30) of CGST Act, 2017, there are two important conditions for two or more taxable supplies to be composite supply i.e. they should be naturally bundled and they should be supplied in conjunction with each other in the ordinary course of business. CBEC in para 9.2.4. of Educational Guide issued in June 2012 has laid down criteria for identifying whether two or more services are naturally bundled or not.
b) Now let’s try to decode the definition of “Composite Supply” and term “naturally bundled” based upon the definition of “composite supply” and the Circular issued albeit under service tax regime:
- Whether there are two or more taxable supplies involved or not?
- Whether two or more taxable supplies provided as a single supply is part normal or frequent practices followed in the area of business to which services relate.
- Whether the consumer expect to receive such bundle of supplies as a package and the service providers also provide bundle of supplies as a package.
- Whether ancillary service helps in better enjoyment of the principal service.
Let’s say two supplies are naturally bundled but are also available as separate prices, whether such separate pricing would mean that these are mixed supplies. It is an admitted and widely accepted fact that supply of goods along with freight is a composite supply. Definition of Composite Supply as well refers to the said example. Now say For e.g. a supplier at Jaipur of goods has advertises its product prices as follows:
- Product Price (Ex-Showroom)-Rs 15000/-
- Packing Charges-Rs 1000/- (to be paid Separately)
- Transportation Facility- Rs 2500/- (to be paid Separately)
- Product Price with Transportation and Packing (Door Step Delivery)-Rs 18000/-
The consumer has to chose the package before the delivery of the products. A person can choose any of the packages i.e. Product Price with Packaging, Product Price with only Transportation or a Combo Package of Product, Packing and Transportation. Now if a person chose a combo package, whether that would mean that the supplies are mixed supply since separate prices for packing and transportation are also provided by the supplier. In my view it’s a certain “No” barring specific or exceptional cases. Separate pricing does not make the supply as composite or mixed supply. It’s the nature of supply and how businesses perceive which would make the supply as composite supply or mixed supply.
Therefore for ascertaining whether a supply is a composite supply or mixed supply, nature of Supply has to be ascertained first and if they are naturally bundled even if prices have been advertised separately, still they would fall as a composite supply and taxed at the rate principal supply. The same can be envisaged from the CBEC clarification on natural bundling of services wherein they have clearly provided that following factors might be indicative but not determinative for deciding natural bundling of services :
- There is a single price or the customer pays the same amount, no matter how much of the package they actually receive or use.
- The elements are normally advertised as a package.
- The different elements are not available separately.
- The different elements are integral to one overall supply – if one or more is removed, the nature of the supply would be affected.
There have been many judgements wherein it has been held that merely executing two separate agreements would not be sufficient for making composite supply as two different supplies. If the two supplies are naturally bundled and even if two different agreements have been executed then also the two supplies would not become two different supplies i.e. in cases of Installation, Testing and Commissioning of Solar Energy Equipment, Taxation of Works Contract wherein two separate agreements are executed for supply of material and labour etc. The judgement of Andhra Pradesh High Court in the matter of M/S.Larsen And Toubro Ltd vs 1. State Of Andhra Pradesh Rep. By … on 14 September, 2015 is a very good read for the same. Therefore, primary condition is the natural bundling and separate pricing can be an indicative factor but cannot be the conclusive and determinative factor in such cases.
c) Laundry, Housekeeping and Maintenance services :Let’s analyse whether or not Laundry, Housekeeping and Maintenance services can be treated as services provided in normal course of business to recipients of facility of residential accommodation and therefore treated as part of composite supply.
In this regard it would be apt to highlight CBEC Circular Para No. 9.2.4 which provides that
For example service of stay in a hotel is often combined with a service or laundering of 3-4 items of clothing free of cost per day. Such service is an ancillary service to the provision of hotel accommodation and the resultant package would be treated as services naturally bundled in the ordinary course of business.
Thus, on a similar footing observation of AAR of treating laundry services as mixed supply to students in hostels may have an alternate view. Further, housekeeping services in hotels are part of the room cost charged from the recipient. Therefore, to hold that House Keeping and Maintenance services are not normally provided to the residents may also have an alternate view.
The above contention does not in any way hold that view taken by AAR is not proper but given another situation, the view might differ as the issue is very subjective and if a view is taken that Laundry and House Keeping Services are held to be part of composite supply, it does not matter whether individual or separate prices are charged for the same.