Fat Tax, Slim Evidence

It works on paper, its effectiveness is yet to be tested on the ground.

Written by Sukrit R. Kapoor , Shubhang S. Setlur | Published:September 7, 2016 12:04 am
kerala budget, GST, GST bill, GST bill pass, tax, taxation, fat tax, heavy taxes, tax practice, gst kerala, why do we pay tax, need of tax, right to food, good and services tax, food tax, tax on food, kerala fat tax, Kerala Value Added Tax, kerala food tax, Kerala’s Department of Commercial Taxes, commercial tax, doctrine of ejusdem generis, Kerala government, indian express opinion, indian express news Tax statutes are to be interpreted with regard to the strict letter of law with the provision not being construed on presumptions, assumptions or equitable considerations.

India is known to assimilate the best from every culture, be it religion, philosophy or art. Taxation seems to be the latest beneficiary of this trend. As a precursor to the passage of the GST bill, also based on the best tax practices the world over, the fat tax proposed in the Kerala budget is an interesting import in line with this assimilative trend. While public discourse on this move has been quite robust, the rationale vis a vis its application is debatable.

Governments the world over have attempted to impose taxes to promote healthy lifestyles while subserving the larger purpose of revenue collection. Price disincentives are key to this and certain experts like Olivier DeSchutter, former United Nations Special Rapporteur on the Right to Food, favour such measures. DeSchutter’s 2011 UN report reads: “The introduction of food taxes and subsidies to promote a healthy diet constitutes a cost-effective and low-cost population-wide intervention that can have a significant impact”. He explains the working theory behind such a tax and justifies that it can work well for markets with high demand elasticity for outside snacks and drinks.
This high demand is essential to generate considerable tax revenue, which should then be used to finance initiatives like advocating and subsidising access for healthier options; an ostensibly ideal socio-economic zero-sum.

Whether Kerala’s fat tax is in tandem with this theory can be assessed from two angles: One, what is the scope of this tax; and two, how will it be used.

The fat tax is being levied under the Kerala Value Added Tax, 2005, at the rate of 14.5 per cent and is applicable to “burgers, pizza, tacos, doughnuts, sandwiches, burger-patties, pasta, bread-filling and other cooked food items sold by restaurants having a brand name or trade mark registered under the Trade Marks Act, 1999”. Tax statutes are to be interpreted with regard to the strict letter of law with the provision not being construed on presumptions, assumptions or equitable considerations. Therefore, while a burger, pizza or a taco could be taxed per se, the “term other cooked food items” could open a pandora’s box to ascertain what could be considered as a “food item”.
According to an April 2016 Clarification Order of Kerala’s Department of Commercial Taxes, for an item to qualify as “cooked food”, “it should be a food, taken during the meal hours; and it should be prepared by heating, boiling etc.”

As per the doctrine of ejusdem generis, which essentially ascribes the same interpretation to similarly placed items, “cooked food” would include something like French fries even though it doesn’t find express mention in the provision. But it is unclear as to whether the fat tax will apply to chicken soup, for instance, served at such a branded restaurant regardless of its nutritious value. Technically, the answer should be no, but legally, it appears otherwise.

To complicate this interpretation further, the Kerala government intends to use this tax as a disincentive against junk food. According to state Finance Minister Thomas Isaac, people are eating more of junk food while rejecting traditional food. So, does non-traditional nutritional food also constitute junk food? Herein, Denmark, which introduced the fat tax in 2011, and subsequently withdrew it in less than a year, had attempted levying it on butter, milk, cheese, pizza, meat, oil and processed food if the item contained more than 2.3 per cent saturated fat. It failed since it failed to induce people to take up healthier eating habits. This further complicates the fat tax levy, as there’s no prescribed viable medium to determine the qualitative nature of the item. Revenue wise, the government expects an additional Rs 10 crore through the fat tax. This on its own certainly does not seem sufficient to make healthier options more accessible.

Gujarat too is reportedly planning to follow suit based on the Kerala model. It will be interesting to see whether the system of “one nation-one tax” on which the GST is based, would also find place for the fat tax since the GST by itself faces challenges to ensure uniformity amongst states, both for levy and assessment.

Given the responsibility associated with governmental action and legislative authority, it is to be principally presumed that the fat tax is reasonable and in public interest, and hence, hopefully, a calculated and well-studied measure. However, similar to Delhi government’s odd-even drives, the measure of its effectiveness is something that can only be determined in the longer run.

Kapoor and Setlur practice law in New Delhi and Bangalore respectively

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