Bizarre pizza taxes make case for GST reform

Photo: AFP
Photo: AFP

Summary

  • When GST was introduced, it was intended to replace India’s unbelievably complex system of indirect taxes

Pizza case reveals the messy GST we made

Most Indians laughed at the memes and carried on, but a recent ruling by the Haryana Appellate Authority for Advance Ruling on pizza toppings shows just how far the Goods and Services Tax – enthusiastically welcomed as the ‘Good and Simple Tax’ when it was rolled out in 2016 – has drifted from its original stated intention of being, well, good for all and simple to use.

The Khera Trading Company will agree. The Panipat-based foods manufacturer makes something it calls ‘pizza topping’. The concoction is made of equal parts of mozzarella cheese, milk solids and skimmed milk powder (15% each), 22% of edible oil and other flavours and additives. Since it looks like a block of pizza cheese and behaves as such when it is cooked, the company wanted the product, for GST purposes, to be classified under Chapter 0406, and taxed as 'Cheese'.

It had applied to the Haryana Authority of Advance Ruling – a body specifically set up to clarify such knotty issues for manufacturers – to be taxed at the rate for cheese. The AAR ruled otherwise, whereupon the case went on appeal to the Appellate Authority, who held that since the product was one-fifth vegetable oil, and that the process of heating and blending mozzarella cheese with all the other ingredients resulted in something which definitely could not be called “processed cheese", it should be treated as “food preparation otherwise not specified or included", and taxed at 18%.

So far, so good. Even logical, one might argue. But the ruling on “pizza topping" shows just how far the Indian babu can go in pursuit of revenue and in exercise of his almost unlimited discretionary powers. Because, with “pizza topping" to be taxed at 18% GST, we now have three different tax slabs not only for various parts of the pizza, but where it is bought or eaten! That’s because a pizza made, bought and consumed in a restaurant attracts 5% GST. If you order the same pizza to be delivered at home, it is treated as a service and attracts 18% GST. If you say ‘the heck with taxes, I’ll make my own’ and buy a pizza base, you will pay 12% GST on the base, 18% GST on the topping and 12% GST (the applicable rate on meat, offal, blood and food preparations made from them) on the sausages you put on them!

Classification disputes are, of course, as old as taxes themselves. We have had celebrated cases which went into the difference between parottas and chappatis, between chappals and sandals, and whether ice cream sold in a parlour is different from one sold in a restaurant (apparently the former is a good and the latter a service and so taxed separately).

In a celebrated case in the Uttarakhand High Court (Sarva Shri Neeraj Misthan Bhandar Vs The Commissioner, Commercial Tax), the Hon’ble Court dwelt at length on whether samosa was a cooked food or a ready-to-eat preparation like chips or bhujiya. “We have noticed that samosa is certainly cooked food and since it satisfies requirement of cooked food otherwise in a broad sense, and since the other alternative is to tax it under namkeen which does not appeal to us," the court observed, overturning the taxman’s plea for samosas to be treated as a manufactured item for tax purposes!

When GST was introduced, it was intended to replace India’s unbelievably complex system of indirect taxes. A single tax (combining central and state taxes) and offering credit for taxes paid on inputs, thus removing multiple taxation, was supposed to transform the ease of doing business and add at least 1 to 2 per cent to GDP straight away. But getting the states to give up their sovereign powers to tax and vest them with a sovereign federal entity called the GST Council where the Centre and States sat on a level platform (in theory at least) was a major change.

To get the states to agree, then finance minister Arun Jaitley did two things – one, the existing state tax structure – both the taxes and the collection infrastructure – was simply subsumed into GST. And second, a complex system of multiple slabs, exempt categories and a separate “sin tax" system was created to various constituencies and interests.

Due to the compulsive political need to kowtow at the altar of “poverty", hundreds of items of everyday consumption, accounting for over half the weightage in the Consumer Price Index, remain exempted. Meanwhile, the equally compelling political imperative to be seen as punishing the rich (the reality may be otherwise) also means that all kinds of things considered “luxurious" and hence a sin are taxed at high rates, and has led to vacuum cleaners, dishwashers and paint getting classified on par with “aircraft for personal use"!

There are also deep fissures in the GST council, with states collecting a greater share of taxes (and hence accounting for more production) calling for greater share of voice compared to others. The growing trust deficit between centre and states has reached a level where the West Bengal Chief Minister accused the Council of “authoritarianism and majoritarianism" and termed the proceedings as “toxic". Clearly, GST reforms cannot wait.

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