Parota-vs-roti tax fight will exist until Indian policymakers let go of Socialist mindset

The roti-vs-parota battle is hardly India’s first tax classification problem. Remember chappal vs sandal? It’s a problem with how Indian officials function.

Parotta | Wikimedia Commons

Classification disputes crop up because India’s lawmakers still have not got out of their Socialist mindset – and because they like the discretionary power it gives them.

Tax judgements, in general, cause more heartburn than mirth. But the opinion of the Authority for Advance Rulings (AAR), Karnataka Bench, that a Malabar parota would attract 18 per cent GST compared to the 5 per cent for readymade rotis has caused much hilarity as well as debate in India. The AAR Karnataka ruled that frozen Malabar parotas would be classified as miscellaneous edible preparations instead and should, therefore, be taxed at 18 per cent. Was the parota just a roti fried with ghee or was it an altogether different beast?

The question cropped up because the GST list does not explicitly mention parotas (or the north Indian paratha for that matter) under any specific heading. The roti is taxed at 5 per cent while bread attracts zero taxation. Pizza bread again attracts 5 per cent GST.

While the fine difference between the roti and the parota has given rise to multiple hashtags and memes on social media, the debate actually puts the spotlight on the ability of Indian policymakers (and by policymakers, I mean both the ministers as well as bureaucrats who work out the fine print) to complicate simple issues. This leads to plenty of business for accountants, tax consultants and tax lawyers, while often tying up precious time of courts. (I have no doubt that the AAR Karnataka ruling will now be appealed and the case will go on for several more years).

Not the first fight

The roti-vs-parota battle was hardly the first classification dispute that hit the courts. There was the famous case of what constituted a sandal and what constituted a chappal that went on for many years, winding its way up the justice system until a Delhi High Court bench finally pronounced its verdict. And there have been other cases, both in consumer as well as industrial goods that are still being fought in different parts of the country. Because of the details put into (and also left out) in different Harmonised System of Nomenclature (HSN) codes of the GST, there have been disputes over woven and non-woven bags made with mixed fibres (the Kerala AAR had taken one view and the West Bengal another), and multiple other things.

The basic problem that causes classification disputes is the multiplicity of rates, which then requires a largish army of bureaucrats to nail down each separate product under a specific rate. As there are infinite possibilities for any product (a bag can be made of leather, rexine, cotton, jute, polyester, or different permutations or combinations of all these), one or the other is always missed. This leads to different interpretations, appeals, tax demands and litigation. This also leads to notifications and clarifications from tax officials from time to time – which in turn lead to more litigation and lobbying.

This sort of classification problems exist in other countries as well, but not quite in the volumes we face. In India, they have existed since the first set of customs and excise duty structures were notified, and have continued despite sincere efforts to sort them out. For a very long time, companies spent hefty sums of money lobbying to get their specific products in better excise or customs duties or, in old days, preferential treatment in terms of import quantities. The epic PTA vs DMT battle between the late Dhirubhai Ambani’s Reliance Industries and Nusli Wadia’s Bombay Dyeing was the most famous, but hardly the only one in the pre-liberalisation era.

A mindset problem

So, why do lawmakers always choose the complicated path over the more simple one? There are primarily two reasons for this. The first one is, of course, the ability to bestow favours, which requires laws that leave a certain amount of ambiguity as well as discretion in the hands of both ministers and bureaucrats. Industry associations and individual companies spend enormous sums lobbying to get favourable tax and other classifications, which would give them a big competitive advantage. For politicians and officials, the classifications and regulatory discretion provide the opportunity to make money. A recent book, Getting Competitive: A Practitioner’s Guide for India, by Maruti India chairman R.C. Bhargava has pointed out how the licence raj in the pre-economic reform era allowed corruption to flourish at every level. Two of the big five tax consultants told me separately that while corruption and discretionary power of tax authorities in different states were supposed to go down after GST, they have actually burgeoned. The same, to a large extent, applies to import duty changes and export incentives.

But an equally big reason that is not often talked about is the Socialist mindset of the bulk of our lawmakers. As several people privy to the GST discussions told me, the reason behind the multiple rates was the view of what was essential for the poor, what the middle class consumed, and what were actually things that only the rich could afford. Former finance minister Arun Jaitley had articulated it in a Parliament debate by saying that a BMW could not be taxed at the same rate as a hawai chappal. Who uses them matters. (It did not seem to matter to him that a 10 per cent tax on a Rs 150 hawai chappal is very different from 10 per cent of a Rs 1-crore car). It was hardly surprising that many lawmakers of different political parties endorsed his view. (Unconfirmed reports say higher taxes for luxury goods got the biggest support from the Communist lawmakers).

This was however exactly the kind of thinking that has plagued Indian industry over the years. It led to a lack of competition and shortage in the pre-reform years and currently leads to tax disputes and endless difficulties in doing business for the corporate sector. Until this mindset is addressed, the disputes will continue, no matter how ridiculous they seem.

The author is the former editor of Business Today and Businessworld magazines and a veteran business journalist. Views are personal.