This latest controversy was ignited when food manufacturer iD Fresh Foods questioned the Karnataka Authority for Advance Ruling (AAR) – the local judicial body deciding on items’ Goods and Services Tax (GST) classifications and issues – about differentiating levels of GST being applied to flatbread products.
Specifically, this year an 18% GST was levied on frozen parotta (a layered flatbread made with finely milled wheat flour common to Southern India) as opposed to 5% GST levied on roti (usually a single-layer flatbread usually made from whole-grain wheat flour and more common in the North)
At the heart of the issue was the fact that ‘roti’ is also traditionally used as a general term for all flatbreads – and the same has been done by iD Fresh Foods and many other flatbread manufacturers in previous years - but this was not accepted by the AAR.
“The [Karnataka AAR] has decided that [parotta] is not plain roti but is a distinct product [as it still needs processing before consumption],” said the Ministry of Finance’s tax administration arm Central Board of Indirect Taxes & Customs (CBIC) in a formal statement.
“Hence, [the] AAR held that such frozen and preserved parotta [will] not be entitled to concessional GST rate as available to roti (5% GST), which is [ready-to-eat]. Frozen and preserved parotta [will be subject to] GST at the rate of 18%.”
The AAR’s decision ignited a flurry of heated debate on social media with many calling out the country’s tax laws and multi-level GST system, and various tax experts have also called for the system to be simplified.
At present, there are four levels of taxation which apply to food items: For example, heavily processed foods are taxed 18%, preserved fruits are taxed 12%, sugar and coffee are taxed 5%, whereas basic fresh foods like dairy and meat are not taxed at all.
“The wide range of tax slabs [in India’s GST system] and lack of ambiguity in the law leaves scope for many such classification disputes,” said Ernst and Young Tax Partner Abhishek Jain in a statement.
“Such disputes had also existed in pre-GST excise duty regime, but with time, the rates were broadly aligned and led to lower number of disputes. So, similarly in GST, reduction of rate slabs might help in lowering such cases.”
Accounting firm AMRG & Associates Senior Partner Rajat Mohan also warned that this decision places many food businesses in a risky tax position.
“This classification dispute would give shockwaves to the entire supply chain engaged in 'ready to eat foods', and such businesses are looking at high tax risk in relation to the tax positions taken since 2017 [when the GST system was implemented,” he said.
Comments on social media were harsher, with ‘We need fewer rates, fewer sub-categories, fewer compliance requirements and an overhaul of the law’ and ‘How true to the Indian taxation system to make simple law complex’ being some of the most common sentiments.
In addition, a social media campaign under the hashtag #handsoffporotta emerged as a top Twitter trend after the CBIC’s announcement, with many people calling out the decision as ‘fascist’ and ‘culturally racist’, referring to the supposed differential treatment between porotta common to South India and roti (by its whole-grain ingredient definition) which is more in the North.
“The government gave a very lame explanation that Porotta is taxed simply because it's not Roti. The flawed logic shows the north south divide in their politics,” said one netizen, whereas another called out the government for being ‘bigots’ and asked why ‘the Northie food is taxed less and the Southern hefty’.
Not the first time
That said, this is not the first time India’s complicated tax system has caused confusion for the food industry – with the affected food manufacturers often on the losing end.
One of the more well-known recent cases took place last November when the Madhya Pradesh AAR ruled to classify Indian snack Fryums as a ‘residual entry for food items not specified elsewhere’ (18% GST) as opposed to a flat snack known as papad (5% GST) after this was raised by local manufacturer Alisha Foods.
But examples of success do exist, especially with enough clout: Back in 1999, Nestle India battled and won against the Excise Department to classify Kit Kat as a ‘wafer with a chocolate coating’ (10% taxation) instead of a ‘chocolate with a wafer inside’ (20% taxation).
In a 22-point statement, the Mumbai Customs, Excise and Gold Tribunal (now the Customs, Excise and Service Tax Appellate Tribunal) found that ‘while all chocolate must necessarily contain cocoa, it is not every cocoa product or preparation that is chocolate’.
“There is nothing to show that [it] was the presence of the chocolate alone as distinct from the chocolate and biscuits which [gave] the product its appeal to customers,” said Justices S.T. Gowri and G. Srinivasan who were on the bench.
“On the other hand, the market advertising brief [refers] to the presence of the biscuit market as well as the chocolate market and it talks of the products as wafer covered with crisp chocolate, drawing from both the biscuit market as well as the chocolate market.
“Even on the assumption that the product is sold and known as chocolate, the classification confirmed [as chocolate] cannot be justified.”