GST Composite Supply Classification: Accommodation Dominates Health Services

Introduction

In the case of Oswal Industries Ltd., In Re, the Authority for Advance Rulings (AAR), GST rendered a pivotal judgment on July 9, 2020. This case centered around the classification of services provided by M/s Oswal Industries Ltd. through its unit, Nimba Nature Cure Village. The applicant sought an exemption under Entry No. 74 of Notification No. 12/2017-Central Tax (Rate) by claiming eligibility for health care services. The AAR's decision delved into the nuances of composite supply, ultimately determining the primary supply to be accommodation services, thereby disqualifying the applicant from the sought exemption.

Summary of the Judgment

M/s Oswal Industries Ltd., operating Nimba Nature Cure Village, applied for an Advance Ruling seeking exemption from GST under health care services. The applicant argued that their services, which include naturopathy, Ayurveda, yoga, meditation, and physiotherapy, fall under health care services as defined in the GST notifications. They further contended that their services are rendered by qualified professionals and align with recognized systems of medicine in India, thereby qualifying for the exemption. However, the AAR examined the nature of the services provided, especially focusing on the package deals that combined accommodation, food, and therapy services. The AAR concluded that these services constitute a composite supply with accommodation as the principal supply. Consequently, the exemption under Entry No. 74 for health care services was deemed inapplicable, leading to the denial of the applicant's request for exemption.

Analysis

Precedents Cited

The judgment referenced several key precedents and circulars to substantiate the decision:

AAR-GOA Alcon Resort Holdings (P.) Ltd. in Re: Reinforced the concept of composite supply where services are naturally bundled and subject to exemption.
CCE v. Coconut Lagoon Kumarakom: Clarified that Ayurvedic centers providing therapeutic treatments by qualified professionals qualify for exemptions.
Advance Ruling Authority in Sayre Therapeutics Pvt. Ltd.: Highlighted that services under recognized systems of medicine, when provided by qualified practitioners, are eligible for exemption.
Department Circular No. 32/06/2018-GST: Emphasized that composite supplies such as accommodation and medical services should be treated based on the principal supply.

These precedents collectively underscored the importance of identifying the principal supply within a bundle of services to determine eligibility for GST exemptions.

Legal Reasoning

The crux of the AAR's legal reasoning hinged on the definitions and classifications under the CGST Act, 2017. The applicant's services were dissected into three main components:

Accommodation: Lodging services provided through various room types.
Food: Meals and beverages supplied during the stay.
Therapy: Health services including naturopathy, Ayurveda, and physiotherapy.

The AAR determined that these services formed a composite supply, as defined under Section 2(30) of the CGST Act, 2017. Within this composite supply, accommodation was identified as the principal supply because the entire package hinged on the provision of lodging. According to Section 8(a) of the CGST Act, the tax treatment of composite supplies is determined by the principal supply. Since accommodation services fall under Heading 9963, Subheading 996311, they dictate the GST applicability, rendering the health care services ancillary and thus not qualifying for the exemption sought under Heading 9993.

Impact

This judgment has significant implications for businesses that offer bundled services combining accommodation with other services, including health care. It clarifies that when determining the applicability of GST exemptions, the principal supply within a composite bundle will govern the tax treatment. As a result, entities similar to Nimba Nature Cure Village must meticulously assess the nature of their primary services to ascertain eligibility for tax exemptions. This ruling encourages clearer structuring of service offerings and reinforces the necessity of aligning with GST classifications to optimize tax liabilities.

Complex Concepts Simplified

To comprehensively understand the judgment, it is essential to demystify a few legal concepts:

Composite Supply

Defined under Section 2(30) of the CGST Act, a composite supply refers to a combination of two or more services that are naturally bundled and supplied together in the ordinary course of business. Importantly, one of these services must be a principal supply that governs the tax treatment of the entire bundle.

Principal Supply

Within a composite supply, the principal supply is the primary service that holds the most significant value or importance in the bundle. The GST rate applicable to this principal supply determines the tax rate for the entire composite bundle.

Heading and Sub-Heading

GST classifications categorize services into various headings and sub-headings. Each heading/Sub-heading has associated GST rates. Accurate classification under the correct heading is crucial for determining tax liabilities and eligibility for exemptions.

Conclusion

The AAR's decision in Oswal Industries Ltd., In Re serves as a critical reference for businesses offering bundled services encompassing accommodation and health care. By establishing that accommodation services take precedence in determining the nature of a composite supply, the ruling underscores the necessity for precise service classification under the GST framework. Entities must evaluate their service offerings meticulously to ensure compliance and optimal tax positioning. This judgment not only clarifies the application of GST exemptions but also reinforces the broader legal principle that the principal supply within a composite bundle dictates the tax treatment of the entire package.