Kerala imposes fat tax on burgers, pizzas in budget

Bengaluru: Kerala’s newly elected Left Democratic Front (LDF) government’s maiden budget says a lot about what its priorities are.

Finance minister Thomas Isaac, who presented the revised budget for 2016-17 on Friday, said the government will raise tax revenues through nine schemes, which include introduction of a 14% “fat tax” on burgers, pizzas, tacos, doughnuts, sandwiches, burger patties, pasta and bread-fillings. The budget expects the tax to add an additional ₹ 10 crore to the state coffers.

The revenue impact of the tax is modest, but it could have a big impact on the food industry if other states follow suit, analysts said.

“The direct impact of this decision...will not be that high. But it will have to be seen whether other states would (do) something similar. If that happens, it will make a big impact,” said Abneesh Roy, associate director of institutional equities and research analyst at Mumbai-based Edelweiss Securities Ltd.

“Also, the companies will pass on this increase partially or fully to the customer..., which may make the customer cut back on pizzas and burgers. In that sense, this will have an impact on the volume of such food products sold,” he said.

Shares of Jubilant FoodWorks Ltd, which runs Domino’s Pizza, and Westlife Development Ltd, parent company of the west and south India franchisees of McDonald’s, fell 2.56% and 4.65%, respectively, on BSE on a day the benchmark Sensex lost 0.27%.

To be sure, the companies’ Kerala operations make up a small part of their overall business.

According to Edelweiss, Jubilant FoodWorks has nine stores in Kerala out of 1,026 stores, and Westlife has seven stores in Kerala out of 236 stores countrywide.

A spokesperson for Jubilant FoodWorks declined to comment on the Kerala government’s proposal.

“We will need to study the details of the budget proposals made by the honourable finance minister in the Kerala legislative assembly today before commenting,” McDonald’s India said in a statement.

Kerala isn’t the first state to pick on so-called junk food to beef up tax revenue.

In January, Nitish Kumar-led Bihar government decided to impose a 13.5% value-added tax on items such as samosas, salted peanuts, sweets and a few branded snacks to make up for the loss stemming from a ban on liquor sales from 1 April.

The “fat tax” is concerned with issues related to public heath more than revenue generation, said P. Mara Pandiyan, additional chief secretary at Kerala’s tax department.

“During the pre-budget discussions, we had asked the public for suggestions. They have been sending us mails to do something about fast foods, especially those run by branded multinational restaurants,” he added.

The government acted on the suggestions, said Pandiyan. The idea was that if the government can’t force someone to stop selling pizzas or burgers in the state, why not introduce a disincentive in the form of a tax, he added.

People of Kerala are confronting huge health risks stemming from lifestyle changes, so the “fat tax” is timely, said B. Iqbal, a Kerala-based health activist.

“Kerala has one of the highest number of patients in the country when it comes to diabetes or hypertension. Many of these are related to lifestyle changes. Many of them (patients) are young. The seeds of such lifestyle habits are sown at a very young age,” he said.

Apart from the “fat tax”, the government slapped a “green tax” on vehicles that are more than 10 years old. Owners of such vehicles will need to pay an additional amount between ₹ 200 and ₹ 400 while re-registering their automobiles in the state.

According to the Kerala budget document, the government expects to earn 25% more revenue through various tax measures announced on Friday.

“Being a new government which has been voted to power on a popular sentiment against inflation and corruption, we can’t really increase taxes for anything, except marginally increasing taxes on items that are unlikely to hurt the party’s constituencies,” said a senior leader of the Communist Party of India (Marxist), the party which leads the LDF government, on condition of anonymity.

Public policy experts are sceptical about the budget.

The budget doesn’t contain any great measures for generating more income or to reduce expenditure, said D. Dhanuraj of the Centre for Public Policy Research, a Kerala-based think tank.

One notable measure is a commitment not to create any new government post in the next two years, he added.

The promoters of HT Media Ltd, which publishes Mint, and Jubilant FoodWorks are closely related. There are, however, no promoter cross-holdings.