GST’s cat-and-mouse game that drives innovation

Jokingly, this would have been incomprehensible to non-Indians, but it immediately affected millions of Indians who had to wrestle with the absurdities of India’s notoriously complex tax laws for decades.

So much so that Finance Minister Nirmala Sitharaman had to take to Twitter to defend the GST on food products, saying the decision was made by a committee of state ministers made up largely of state-led representatives. by the opposition. The decision was actually a collective decision of the GST Board with center and state members.

The GST has had many twists and turns. Including in case of GST on popular staples like rice, dals and atta.

Originally, the GST was only collected on these basic products sold in branded packaged form. Items sold in bulk were exempt, but there was a catch – if they were put in a package by the store and the package had the store’s name on it, it technically became “wrapped and marked”.

Small traders and traders protested vehemently, saying that simply providing a package to the consumer should not constitute packaging.

So the mandarins clarified that only brands that had trademark protection or some other such legal cover would be taxed and others would not. Unfortunately, this meant that a large portion of grocery sales fell outside the GST bracket again, pinching states’ pockets.

Another round of clarifications followed. This time, any package that complies with certain provisions of the law on legal metrology falls under the law. It was therefore taxable if the package contained statements such as weight, price and expiry date. But the fine print indicated that it didn’t matter whether the actual package actually contained these statements. He also said the rule applied to the package “sealed or unsealed”, so the concept of “pre-packaged” has effectively gone out of the window.

What were traders doing now? They discovered another loophole: packages over 25 kg sold at retail were exempt. So now stores offer customers packages over 25 kg. For those who want less, the same pack can be opened and smaller quantities sold in bulk, without being taxed (provided the store has not provided the packaging).

The game of cat and mouse between the taxman and the tax evaders is not only played on the segment of small traders. India Inc has been equally adept at innovating to evade taxes. At the start of the car manufacturing revolution in India, and when the government was still invested in a small car manufacturing business, the tax authorities decreed that cars under four meters in length would be taxed at 8% duty. excise. One more millimeter and the rate jumped to 20%.

The result was an explosion of small cars in India. With Maruti and Hyundai dominating the market with their sub-4 meter sedans, every other automaker that followed was bound to have an offering in this segment. Ditto for differential taxes on cars depending on the number of seats. Cars that exceeded the four-meter length limit fell into the upper bracket, but reverted to the lower category if they were carrying seven or more people. Thus, all large vehicles squeezed into a third row that could only accommodate young children or exceptionally vertically. challenged adults, but nevertheless placed them in the category of “movers” and in a lower tax bracket.

One would have thought that after the introduction of the GST, which taxes all forms of motorized vehicles at a flat rate of 28% (except vehicles for the disabled), all these jugaad innovations to somehow not pay taxes, or pay as little tax as possible, would be gone. But no, the tax authorities have introduced a so-called special compensation, which – you guessed it – varies depending on length, engine size, etc.

Thus, a petrol/CNG/LPG car less than four meters long and with a cylinder capacity of less than 1,200 cm³ benefits from a 1% compensation. If the length increases beyond four meters, the tax increases to 15%. And if the engine exceeds 1200cc (regardless of length), it goes to 22%. And so on – different rates for every possible engine length/displacement/fuel combination you can think of. This is why more than 75% of all vehicles sold in India are still in the sub-four meter class (India is the sub-subcompact SUV capital of the world), and even a premium SUV occupies a third row. of seats.

Fanciful tax rules have arguably been one of India Inc’s most powerful incentives to innovate. . .

Such cases are so ubiquitous that most Indians do not even notice them. The reason your neighborhood hotel in Udipi has an “air-conditioned room” is that food sold in an air-conditioned establishment attracted a higher tax than food sold in a non-air-conditioned establishment. The reason bars, even in high-end hotels, have a little sign somewhere saying “permit room” indicates that under prohibition rules (applicable in Mumbai, for example), only licensed drinkers a government-issued license can legally drink. The government’s attempt to promote Ayurveda by reducing taxes on Ayurveda products led to Vicks VapoRub suddenly becoming an Ayurveda product in India. This also explains why Ayurvedic beauty products from Shahnaz Husain can surpass Western rivals in price.

It’s the kind of maze of rules and tax implications that the GST was supposed to simplify, but which has fallen victim to the old ways of tax collectors and tax evaders.

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