Pizza toppings and momos have exposed GST’s flawed design. Time for an overhaul and make it good and simple

In less than a hundred days from now, a significant milestone in India’s taxation history is quietly, but surely, going to take place. The Goods and Service Tax (GST), which was billed as independent India’s biggest reform initiative, will complete five years of rollout on July 1, 2022.

After nearly a decade of confabulations, GST kicked in at a grand midnight event in Parliament. The new indirect tax system held out the promise of dismantling fiscal barriers among states and turning India into a common national market for goods and services by consolidating a welter of local and central levies into a single tax.

Five years later, GST continues to remain a work in progress. A few pain points have been ironed out along the way, but many still remain. The primary among the remaining issues is, of course, the multiple slabs. Multiple slabs go against the conceptual construct of a uniform, unified, nation-wide tax system.

While multiple tax slabs continue to run against the GST’s definitional idea, it is the interpretation of rules by taxmen that have not only flummoxed many, but also raised major questions whether too much has been left open for unpredictability and inconsistencies to emerge as major irritants to small and medium businesses.

There are two recent examples that standout for seeming arbitrariness.

On March 10, the Haryana Appellate Authority for Advanced Ruling (AAAR), ruled in favour of levying a higher GST on pizza toppings, stating that a pizza topping isn’t pizza, its preparation method is different, and should therefore be categorised differently.

The AAAR said that pizza toppings will now attract an 18 percent goods and services (GST) tax.

The ruling, besides triggering a flood of funny memes on social media, has raised flagged serious design flaws in the system that leaves too much of discretionary power in the hands of taxmen and bureaucrats.

This can be both dangerous, and worrisome. The pizza topping instance is a classic example that, effectively, shows that there are three different tax slabs not only for various parts of the pizza, but where it is made, bought or eaten. A pizza made, bought and eaten in a restaurant attracts 5 per cent GST. However, if the pizza is delivered at home, it is considered a service and attracts 18 per cent GST. It gets even more complicated when the pizza is made at home. A pizza base will attract a 12 per cent GST, 18 per cent GST on the topping and 12 per cent on the rest of the ingredients such as sausages etc.

The pizza topping example, it appears, is not an isolated case. There are now reports that bakeries and other outlets that serve food such as momos have come under the taxman's lens for availing lower goods and services tax (GST) rates applicable to a restaurant. The tax department has demanded 18 per cent GST, instead of 5 per cent, from several bakeries and outlets. The interpretation is that these are not “restaurants” as food is prepared somewhere else and only heated up at these places before they are served to customers.

This is reminiscent of the immortal lines from the Beatles’s 1966 number Taxman:  If you drive a car, I'll tax the street; If you try to sit, I'll tax your seat; If you get too cold I'll tax the heat; If you take a walk, I'll tax your feet; Taxman ! Cos I'm the taxman, yeah I'm the taxman.

Before GST, India’s indirect tax structure was a mixture of something like this: central excise duty, additional excise duty, duty levied under the Medicinal and Toiletries Preparation Act, service tax, countervailing duty, special additional duty of Customs, VAT, CST, entertainment tax, octroi, purchase tax, luxury tax, taxes on lottery, betting, gambling and cesses and surcharges.

GST was intended to offer a single shot solution by cleaning up this untidy patchwork of central and provincial levies that cause red-tape, confusion and corruption. The promise was that once adopted, it will dramatically alter tax administration by consolidating this web of levies into a single tax.

GST is risking itself to turn into a distorted caricature of the earlier gobbledygook that it replaced, with multiple slabs, erratic interpretations, and arbitrary taxmen’s interference. Five years since it was born, it may be just the right time to move GST into a simpler and easy-to-administer two slab system.