Pizza Topping Tax: Bibek Debroy decodes the curious case of tax on pizza toppings – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-commentary/bibek-debroy-decodes-the-curious-case-of-tax-on-pizza-toppings/articleshow/90340593.cms

Synopsis

What is the GST rate on pizzas? There isn’t one. That’s the point. The GST rate on pizza bread – note the expression – is 5%. But if it is not pizza bread, the rate will be 12%. With that background, there is nothing wrong in what the Haryana AAAR has said. It has decided that pizza topping will be taxed at 12%, since pizza topping isn’t pizza bread.

Bibek Debroy

Bibek Debroy

Chairman, Economic Advisory Council to Prime Minister, GoI

How many products are there? Perhaps an infinite number. Under the harmonised system of nomenclature (HSN) used for the goods and service tax (GST), the more the number of digits, the finer the description. At a six-digit level, there will be 5,000-odd items, many more as one disaggregates digits further.

Take something like HSN 62. This represents ‘articles of apparel and clothing accessories, not knitted or crocheted’. Should all 62-headed items be taxed at the same rate? How can one possibly do that? 62-headed items can be consumed by the relatively rich, as well as the poor. The same rate will make the system regressive. In the interest of equity, there must be variation between the consumption of the rich and the poor.

This is best done in terms of value. Hence, 62 will be taxed at 5% if the value is less than ₹1,000 per piece, and at 12% if value is more than ₹1,000 per piece. In the parlance of GST debates, we may gravitate towards three rates – merit, standard and demerit. This usage of merit goods is quite unlike what Richard Musgrave, in his Theory of Public Finance, originally had in mind, as is the expression demerit goods. It’s suffice to say, we want people to consume merit goods and don’t want them to consume demerit goods. This must be encouraged or discouraged through indirect taxes.

Let’s take another example to illustrate self-inflicted complications. Fresh milk and pasteurised milk (0401) and curd, lassi and buttermilk (0403) are consumed by the poor, and their consumption must be incentivised. Therefore, their GST rate is 0%. But the moment milk is concentrated, or has sugar, or is skimmed milk powder or baby food (0402), the rate becomes 5%. If it is butter (0405) or condensed milk (this has no HSN code), the rate becomes 12%.

Milky Way
What happens if the product happens to be flavoured milk or flavoured lassi? Notice, there is no distinct HSN code for either. There might have been, if we had taken this down to a 10-digit level, with separate GST rates for each of 1,200-odd items. In the absence of this, it is for the Authority for Advance Ruling (AAR), or the Appellate Authority for Advance Ruling (AAAR), to decide. These are state-level bodies and they have the discretion to decide, including on classification.

People often exhibit surprise at some instances of such use of discretion. For instance, as per AAR decisions, flavoured lassi is exempt from GST, but flavoured milk is taxed at 12%. The latest example of this is the AAAR decision on pizzas.

What is the GST rate on pizzas? There isn’t one. That’s the point. The GST rate on pizza bread – note the expression – is 5%. But if it is not pizza bread, the rate will be 12%. With that background, there is nothing wrong in what the Haryana AAAR has said. It has decided that pizza topping will be taxed at 12%, since pizza topping isn’t pizza bread.

There are additional complications. Under the composition scheme, if I eat pizza at a restaurant, the rate will be 5%. So, if I don’t eat it in a restaurant, but have it home-delivered, the rate will be 18%. The classification needn’t follow our understanding of common sense and ordinary usage.

Tripod Problem
Take the pizza saver – the little tripod in the centre of the pizza. Many consumers might think it is a natural part of a pizza. It isn’t. If it is made out of undesirable materials, there may even be a sin rate of 28%. When any AAR or AAAR decides, common usage of a term isn’t the only criterion. Ingredients and end-use are equally relevant. At the moment, the pizza decision has become the butt of jokes, as was the earlier one of ‘paratha (18%) versus roti (5%).’ Because of discretion, AAR/AAAR rulings can also differ from state to state, though rulings are binding only on the applicant and jurisdiction.

GST was meant to be a simple tax. It may be simpler, compared to the maze of indirect taxes earlier. But it is still anything but simple. AARs/AAARs possess discretion, because we have made GST rates subject to discretion. Discretion leads to subjectivity, and sometimes, abuse. As the history of indirect taxes reveals, discretion leads to high compliance costs, disputes and litigation. There is a mindset issue of letting go of discretion. That’s what reforms are about.

Take the recommended template of three rates – merit, standard and demerit. Everyone seems to accept this as a given. This is reportedly the template towards which the GST Council will proceed, and there is a group of ministers that will submit a report on simplifying GST. Who decides which item is merit, standard or demerit? There is discretion and value judgement in that identification too.

Think of the pizza. We should all eat pizza bread (or pizza dough). Good for us – rate of 6% (say, merit rate). Pizza topping? Full of cheese – perhaps not good for us – rate of 12% (standard). A pizza saver made of plastic? Terrible – demerit rate of 18%. Discretion set the path for a simple tax to become complicated and muddied. Three rates may make it less complex, but it will still be complex. Thinking otherwise takes us to the realm of the imaginary. Which is what complex numbers are made of.

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