In today’s Finshots, we see what's all the fuss about GST and pizza toppings.

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Alright, on with the story now.

The Story

Nearly 1725 days ago, at the stroke of midnight, India launched its most ambitious tax reform — the goods and services tax (GST). It was supposed to be a magic pill — a silver bullet for all those pesky tax complications. The Prime Minister even called it the “Good and Simple Tax.”

But last week, we had a stark reminder that even the most well-intentioned schemes can spawn confusion.

So here’s what happened.

Haryana-based Khera Trading Company sells a cheesy pizza topping under the brand name Goodrich. You know what a pizza topping is, right? You take some of this stuff, splash it over your pizza and you’ll have a nice stringy cheesy meal once it's out of the oven.

Now the Khera Trading Company argues that their preparation ought to be classified as processed cheese. After all, it’s a cheese topping, that looks like cheese, tastes like cheese and even smells like it — for the most part. And if you were to classify it as such, then the product is taxed at 12%.

But a court in Haryana didn’t quite agree with this assessment. Their argument was simple — “ The processed cheese, in this case, isn’t processed cheese at all, for processed cheese must be manufactured by combining, mixing, melting and emulsifying, with the aid of heat… one or more varieties of cheese, and one or more of the following: cream or other dairy products, salt, spices, flavouring and water.”

The Goodrich pizza topping however included Water, Mozzarella Cheese, Milk solids, Skimmed milk powder, and… this is the most important bit… Vegetable oil. In fact, here are the proportions — 14.5% Mozarella cheese and 22% Vegetable oil.

Now, you might look at this and go — Why is the company using vegetable oil in what is cheese topping? Well, we can’t say for sure, but there could be multiple reasons. Vegetable oil helps with texture. It helps with consistency and is inexpensive. But as we noted earlier, the definition of processed cheese precludes Vegetable oil altogether. So the court believed that the Goodrich preparation fails the key ingredient test. A test that is used to determine what a product truly is.

So if it’s not processed cheese? What is it?

The court believes that Goodrich pizza topping is what you would call an edible preparation taxed at 18%.

However, the lawyers for Khera Trading company argued otherwise. Their contention was this — “The Milk solids and the Mozarella cheese combined account for nearly 30% of the product. Besides, it doesn’t matter what the key ingredient is, so long as it passes the common parlance test i.e. how do regular consumers see this product?”

Do they see it as processed cheese? Or do they see it as something else?

In fact, they even quoted a ruling from the US Customs department — a matter related to the classification of Mozzarella Cheese sticks. For the uninitiated, the cheese sticks contain more bread than cheese. In fact, almost twice the amount. However, the product was classified under the header “Cheese and Curd” since the essential character of the product (cheese) was retained even after the addition of bread.

The court didn’t buy this argument. They ruled  that any product with such high contents of vegetable oil couldn’t possibly be treated as processed cheese and as such classified it under the header “Miscellaneous edible preparation” taxing it at 18%. Now, this ruling immediately created a lot of confusion since people automatically believed that all pizza toppings would now court a tax rate of 18%.

However, after reading this story, you probably understand the precarious nature of this ruling. This ruling was limited to Goodrich Pizza Toppings — a product containing high amounts of vegetable oil. If it only contained Mozzarella Cheese, then the court wouldn’t have ruled this way.

But that being said, there is a problem here.

Oftentimes, tax rulings such as these can be extremely confusing for industry incumbents. Take for instance court rulings on classifying flavoured lassi and flavoured milk. It seems flavoured lassi continues to be treated just like Lassi (courting no tax at all), but flavoured milk carries a tax rate of 12% unlike regular milk (with no tax).

In other cases,  tax authorities extend contradictory rulings in different states. Take the case of auto manufacturers. In one case, the AAR (tax court) in Madhya Pradesh ruled car manufacturers wouldn’t be able to claim any tax credit on demo vehicles. However, the AARs in Maharashtra and Kerala didn’t agree with this assessment. They argued that companies could claim tax credit on demo cars.

So you see, GST isn’t just about setting a tax structure. But it’s also about classifying different items. And if there isn’t a way to consistently deliver unambiguous rulings, then you’ll have entrepreneurs scratching their heads more often than not.

Until then…

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