‘Tax’onomy And Why The Parotta Is Not A RotiBloombergQuintOpinion
Taxation is considered boring by most, and inevitable—as the cliche goes... like death—by all. Yet, every now and then comes a court ruling that takes the mundane out of tax and makes for a story that goes down the ages. In this one, the characters involved are the GST Authority for Advance Ruling in Karnataka and a Bangalore-based company that produces and retails a wide range of ready-to-cook meals including parottas. Remember, parottas, not chapatis or rotis.
The story began when the company, ID Fresh Food (more famous for idli and dosa batter in my city), approached the AAR to seek a ruling on the goods and services tax rate applicable to whole wheat parottas and Malabar parottas (It’s not a typo, they are parottas not paranthas). The AAR held that the parottas would be liable to GST at 18% as the 5% rate was applicable to rotis or chapatis ...but not parottas. Yes, both of them are Indian flat breads...but evidently not for taxation purposes.
This is not the first tax ruling worthy of internet memes and social media headlines. Nor is India the only country to draw a tax chuckle or raise a tax eyebrow.
Classification of a product to fit into specific categories devised by tax laws, GST or VAT or any indirect tax, is always a vexed issue. And sometimes a comedic one.
When Is A Jeep A Car And A Chocolate A Wafer?
Over two decades ago, Nestle India Ltd. and the Excise Department were in court over the issue of the correct rate of excise duty applicable to the famous KitKat chocolate...errm...wafer. The rate of excise duty applicable to chocolates was 20% and the excise duty for wafers/biscuit was 10%. Nestle claimed that KitKat was a wafer with a chocolate coating and the Excise Department claimed that KitKat was a chocolate with a wafer inside it. Wafer won the day.
As a proud Jeeper—we call ourselves that—I would never refer to my Jeep as a car. Not in a hundred years. But tax laws make no provision for my pride. The income tax laws prescribe a rate of depreciation for ‘motor cars’. A Jeep owner claimed depreciation and the income tax department denied the claim to say that a Jeep was not a car (I like the income-tax department!). But, the Madras High Court held that a Jeep was a “sturdy motor car” but a car, nevertheless. The taxpayer got his depreciation claim and the Jeep became a car for tax purposes.
A wealth tax existed a few years ago and it was applicable on motor cars owned. A taxpayer tried his luck by claiming that wealth tax did not apply on the Maruti Omni (Maruti van as most people call it). He argued that a van is not a car and hence not liable to wealth tax. The Mumbai Income Tax Appellate Tribunal held otherwise and the Maruti van joined the Jeep for tax purposes.
Like I said, these stories abound everywhere.
In the U.K., McVitie’s (famous for its digestive biscuits) was involved in a court case over the right classification of ‘Jaffa Cake’ (many Brits refer to it as the Britain’s greatest invention after the steam engine). Jaffa Cake has cake-like and biscuit-like qualities. The company claimed it’s a cake and hence tax zero-rated. The Customs and Excise Department agreed, then disagreed and sought to tax it as biscuit. The tribunal finally held it to be a cake. It lives on to be VAT-free to this day.
Also in the U.K., Pringles first won and then lost the battle not to be potato crisps. Because crisps are taxed, and so in 2008 Procter & Gamble argued Pringles contained less than 50% potato and hence are general foodstuff not crisps - which would attract VAT. The High Court agreed but the ruling was overturned by the Court of Appeal a year later.
For those of us who grew up in the 1990s, the mention of ‘Vicco Turmeric’ brings back memories of its catchy jingle. In multiple languages the jingle drove home the point that Vicco Turmeric was “not a cosmetic” but “an ayurvedic cream”. Tax was probably the inspiration there too.
Vicco Laboratories spent decades losing and winning the battle to classify the product as ayurvedic not cosmetic, and hence eligible for tax benefits.
Finally, in 2007, the Supreme Court awarded this case in favour of Vicco.
How do these stories, some fascinating and some absurd, come about? Why is a parotta not a roti? How can a Jeep become a car? How can a chocolate be anything else?
The answers lie in how tax laws are framed and why they are framed that way. Taxation is linked to commercial activities – sale, production, income, profit, etc. Laws can seek to cover goods, services or businesses that exist or can be anticipated to exist. But entrepreneurs are creators, businesses are ever-changing and new products and services are created and brought to the market every single day. Tax laws cannot think ahead of them or cover every variation in advance.
Indirect taxes (VAT/GST/Excise Duty) are transactional taxes, that group goods, services and businesses and tax them at varying rates.
Which is why a single rate or even fewer rates, while ideal for ease of administration, is not always practical. A globalised, digitalised world has only added to the complexities of tax categorisation.
But, tax departments catch up quickly. When the excise law was framed it probably didn’t envisage that a chocolate would be sold as a wafer. After losing the case to Nestle it learned quickly and notified a new rate for “chocolate-coated wafers ”. Till the taxman catches up, businesses are well within their right to use classifications to their advantage. That is, if the law is unclear and two views are possible, the taxpayer is entitled to follow the view beneficial to the taxpayer. And then it falls to tribunals and courts to make sense of it all.
Remember the Mcvitie’s Jaffa Cake case. In that the court went into not only the ingredients, but also size, packaging, marketing, the supermarket aisle they were were stocked in, manner of consumption and how they tasted when stale – ‘a Jaffa cake goes hard like a cake rather than soft like a biscuit’.
In the latest case, the Karnataka AAR interpreted the product category 1905—“Khakhara, plain chapati or roti”—as one that covered ready-to-eat food items while the ID Fresh Food parottas required heating before eating and hence were determined as falling in a different category.
India’s GST has seven rates that cover over 1,350 tariff items – and that’s just goods. Yet, almost-ready-to-eat parotta didn’t make it to the list. That’s why the identity crisis.
Ajay Rotti is Partner at Dhruva Advisors LLP.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.