The cat-and-mouse game of GST that fuels innovation

As a joke, this would have been incomprehensible to non-Indians, but it immediately rang a bell for millions of Indians who have had to deal with the absurdity of India’s notoriously complex tax laws for decades.

So much so, Finance Minister Nirmala Sitharaman took to Twitter to defend the GST on food items, saying the decision was taken by a committee of state ministers that largely included representatives from opposition-ruled states . In fact the decision was a collective decision of the GST Council along with the members of the Center and the states.

GST has gone through many twists and turns. Also included in the case of GST on popular staples like rice, pulses and flour.

Originally, GST was levied only on such staples sold in branded, packaged form. Loosely sold items were exempt, but there was a catch – if put into a packet by the store, and the store name is on the packet, it technically became “packaged and branded.”

Small traders and shopkeepers strongly protested, claiming that just providing a packet to the consumer should not be in the form of packaging.

Mandarin then clarified that only brands enjoying trademark protection or other such legal cover would be taxed and not others. Unfortunately, this meant that a major part of grocery sales again went out of the purview of GST, which blew the pockets of the states.

Another round of clarification ensued. This time any package meeting certain provisions of the Legal Metrology Act came under the Act. Therefore it was taxable if the package contained declarations such as weight, price and expiration. But the fine print said whether the actual pack actually contained these announcements didn’t matter. It also said that the rule applies to “sealed or not” packages, so the concept of ‘pre-packaged’ effectively went out the window.

What did the merchants do now? They discovered another drawback – packages over 25 kg that were sold at retail were exempted. So now the shops are giving packages weighing more than 25 kg to the customers. For those who want less, a single pack can be opened and sold loose in smaller quantities without tax (provided the store does not offer packaging).

The cat and mouse game between the taxman and the tax dozers is not alone in the small business segment. India Inc. has been equally adept at innovating around taxes. In the early days of the automobile manufacturing revolution in India, and when the government was still investing in a small car manufacturing venture, Taxmann decided that an eight percent excise duty would be levied on cars less than four meters in length. One millimeter more and the rate increased to 20 percent.

The result was an explosion of small cars in India. With Maruti and Hyundai dominating the market with their sub-4-metre hatchbacks, every other carmaker had an offering in that segment. Exactly the same for different taxes on cars based on seating capacity. Cars that passed the four-metre length cut-off fell into the higher bracket, but moved back to the lower category when carrying seven or more people – so all the larger vehicles were squeezed into the third row that only allowed small children or exceptional people. Challenged adults who could have fit vertically, but still moved them into the “people mover” category and lower tax bracket.

One would have thought that after the introduction of GST, which levies a uniform rate of 28 per cent on all types of motorized vehicles (with the exception of vehicles specially designed for the disabled), all these jugaad innovations somehow Not paying taxes, or paying as little tax as possible, would have gone. But no, the taxpayer introduced something called a special compensation cess, which – you guessed it – varies based on length, engine size, etc.

Therefore, one percent compensation is given on petrol/CNG/LPG cars with a length of less than four meters and engine capacity less than 1200 cc. If the length is increased by more than four metres, the cess increases to 15 per cent. And if the engine crosses 1,200 cc (regardless of length) it jumps up to 22 percent. And so on – different rates for every possible length / engine cubic capacity / fuel combination you can think of. This is why more than 75 percent of all vehicles sold in India are still in the sub-four-meter category (India is the world’s sub-compact SUV capital), and even a high- End SUVs also have a third row. of seats.

The quixotic taxation rule has arguably been one of the more powerful incentives for India Inc. to innovate. Behind every Indian innovation—from a small, single-use sachet of detergent to a mini pack of glucose biscuits—there’s a tax law behind it. ,

Such examples are so ubiquitous that most Indians do not even notice them. The reason you have an “AC room” at your neighborhood Udipi hotel is because food sold in an air-conditioned establishment is taxed more than non-air-conditioned food. That’s why even high-end hotels have bars. A little sign saying “permit room” means that under prohibition rules (for example, enforced in Mumbai), only drinkers with a government-issued permit can legally drink. Vicks VapoRub suddenly became an Ayurvedic product in India due to the government’s attempt to promote Ayurveda by cutting taxes on Ayurvedic products. This also explains why Shahnaz Husain’s Ayurvedic beauty products can outperform western rivals in terms of price.

It is like a maze of tax rules and events that GST was supposed to simplify, but has fallen prey to the age-old habits of tax collectors and tax evaders.

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