Why India's popcorn tax is a recipe for a three-tiered mess

Summary
Critics say government’s efforts to simplify system and cut red tape are going in reverse; ‘popcorn is popcorn’A seemingly routine ruling by India’s top tax officials went off like metal in a microwave.
The government laid out a three-tiered system for taxing popcorn depending on if it is packaged or sold loose, carries a brand name or is generic, and is salted or sweet. Caramel popcorn, the government said in December, would be taxed at 18%—nearly akin to tax on a luxury product.
The people weren’t pleased. An explanation from India’s finance minister, chair of the tax council, didn’t help.
“I want to explain the whole background of the popcorn taxes to you: Salted popcorn, caramelized popcorn, plain popcorn," said Nirmala Sitharaman at a news conference in late December. “When it comes to popcorn’s tax treatment, as long as it is salty, whether it is with salt, spiced, tangy, chilli powder, that’s all 5%. But when it has added caramelized sugar, it is no longer salty."
In an accompanying press note, the council explained further that caramel popcorn had effectively transformed into a confectionery and thus merited a correspondingly higher tax rate. The finance minister’s office didn’t respond to a request for comment.
As for popcorn sans the caramel, the 5% tax will apply only if it is sold loose. Put it in a sealed plastic packet and slap a label on it and the rate jumps to 12%.
The popcorn tax structure unleashed a flood of mocking memes, heated television debates and frustrated comments from prominent economists, including former advisers to the government. One called the ruling a “national tragedy". A cartoon showed Mahatma Gandhi, famous for his march against the British colonial monopoly on the sale of salt, which was heavily taxed, marching against popcorn taxes instead.
For critics, the multiplicity of rates on the humble snack was emblematic of why India, despite ongoing efforts to cut red tape, remains a difficult place to do business.
Packaged popcorn sold by brands is subject to a higher tax rate than popcorn sold loose.
“Popcorn is popcorn," said Mohandas Pai, chairman of investment firm Aarin Capital Partners and former chief financial officer of Infosys Ltd, one of India’s biggest technology services firms. “This shows the attitude that prevails among officials who try to nitpick and to create complications despite the need for simplicity."
Pai said tax officials were making a mockery of a 2017 landmark tax reform—the Goods and Services Tax—aimed at simplifying a system in which sales and other taxes varied by state and knit India into a single market. Its backers had hoped for just two tax rates.
But the system was introduced with about half a dozen rates, as well as a compensation tax to make up for shortfalls. At regular meetings, the tax council deliberates on how to slot goods and services into these brackets.
But the GST structure at times complicates matters.
For example, if moviegoers buy salted popcorn at the concession stand—independent of their ticket—they’ll pay 5%, said Nitin Datar, who heads an association for independent cinema operators. But theaters sometimes sell movie tickets and popcorn as a bundle, in which case the tax rate will depend on the type of ticket.
“So if you are selling popcorn along with tickets, then 18% or 12% will apply," he said, adding that some cinema operators were experiencing confusion.
Popcorn is far from the only product that India has carved up into tax brackets. In December, India’s Supreme Court laid to rest a 15-year-tax dispute over whether small packages of coconut oil—widely used in Indian cooking—should be taxed at the low tax rate of 5% as a food product or at a double-digit rate as a beauty product, given many Indian women also apply it to their hair.
The dispute arose after tax officials started levying a higher tax rate on small pouches of the oil, reasoning that the oil sold in small quantities could be used on hair and not only in frying pans. But the top court ruled that packaging size alone couldn’t be used as a justification for levying a different tax rate.
Defenders of the government say the differing rates are an effort to keep the indirect tax progressive, by taxing products likely to be purchased by the poor (like loose popcorn) differently than those likely to be purchased by affluent individuals. India has a per capita income of around $2,500, but is also among the world’s top creators of millionaires and billionaires.
Some popcorn manufacturers said they were relieved at the clarification.
“There was always confusion in this popcorn matter," said Sanjay Vasoya, who co-founded his Oceyan Funfoods business in 2016 to make and sell packaged popcorn. He also sells fox nuts—a popular snack with a texture similar to popcorn that is made from the seeds of an aquatic plant. Vasoya said when he was a child popcorn was only available at movies or fairs, and he wanted to make it more widely available.
After the rough patch of the pandemic, the business has been flourishing, he said. He offers 19 varieties of popcorn, including peri peri popcorn, sour cream and onion popcorn and strawberry popcorn.
However, he had mistakenly thought all his popcorn products fell under the 18% rate. Tax officials in his state had never told him that a lower rate applied to most of his products, which were largely salted.
Sitharaman’s announcement has cleared things up, he said. “Whatever madam has said is good in my opinion."
The government, for its part, has noted it hasn’t imposed new taxes, and was merely laying out the status quo in response to a request for clarity from an Indian state.
Pai, the investor, said he wished the government had used the opportunity to replace the various rates with one rate.
“Putting it like that in the first place itself was wrong," he said. “Now when you got a chance to clarify, you reiterate that—that’s even worse."
Write to Tripti Lahiri at tripti.lahiri@wsj.com