The popcorn story is so ludicrous that it’s become the go-to example to prove what a loser India’s Goods & Services Tax (GST) had become. It’s been repeated ad nauseam, and yet it shocks every time it’s trotted out. India taxes popcorn at three rates – five percent when served loose, presumably because poor people buy it that way; 12 percent when it’s packaged for hygienic middle classes; and at 18 percent for the chic set who like it caramelised!
So, here’s a trick question for the “poor” GST inspector who must enforce the levy at the point-of-sale. What if the smart kid at the counter scoops it up loose, puts the dainty white bulbs in a zip lock bag, sprinkles caramel from the top, gives it a good shake, and seals the plastic. Which GST rate should be applied?
The kid at the counter will insist it’s five percent. The belligerent inspector will threaten to slap 18 percent. After some haggling, the kid and the inspector will smoke a “peace” pipe, a wad of notes here, a 12 percent rate there!!
An Innocent CEO is Arrested!
Stay with me as I expand my story onto terrain it’s hitherto not trodden.
Imagine a multiplex chain which has 20 high-class theatres across three contiguous Indian cities in North India. But it’s a franchise set-up, with each of the 20 properties owned by different landlords in 20 different special purpose vehicles (SPVs), that is, each property is a separate legal entity with its own, unique GST number (please remember the facts in italics, because this emphasis is critical).
Being a storied multiplex brand, the footfall is high, resulting in loose popcorn sales of Rs 50 lakh every year at each theatre, equal to gross sales of Rs 10 crore across the chain. Each property studiously deposits Rs 2.50 lakh as GST every year, at the stipulated rate of five percent for loose popcorn sales.
It’s all fine and dandy, until a GST team comes with a warrant for the CEO of the fancy multiplexes for popcorn sales recorded five years earlier.
“Mr CEO, you are under arrest. Your company sold caramelised popcorn worth Rs 10 cr to high-end customers. You should have deposited Rs 1.80 crore as GST, but you fraudulently used the lower rate of five percent to pay only Rs 50 lakh. We are charging you with evasion of Rs 1.30 crore of GST.
With interest and penalties, the amount is over Rs 5.50 crore, much above the threshold of Rs 5 crore, so you have committed a cognisable, non-bailable offence. Welcome to Tihar!”
The CEO is handcuffed and shoved, even as he’s screaming: “But it’s all wrong. We are not one company, but 20 legal entities. How can you aggregate like this? Also, the alleged amount evaded is only Rs 1.3 crore, much below the Rs 5 crore threshold. So, even if I have committed an offence, it’s non-cognisable and bailable. You can’t add interest and penalty to do “threshold inflation”. You cannot arrest me like this ….”. His screams peter out as the police jeep drives away.
My popcorn-in-a-multiplex case study is dramatic and hypothetical, but alas, it’s also entirely plausible.
Similar excesses and abuse of the GST law have happened. So, when Prime Minister Modi announced a radical restructuring of GST, from a 4-slab to a 2-slab structure of five percent and 18 percent, abolishing the 12 percent and 28 percent rates while introducing a “sin rate” of 40 percent, people leapt in joy. Despite the apprehension of a drop in sales in the 2-month interregnum – i.e., why would anybody buy a car worth Rs 10 lakh if its price is set to fall by close to a lakh in a few weeks – the business community is happy to suffer this sharp short-term pain, hoping for a fundamental reform of a draconian tax.
Now here’s the Rs 20 lakh crore, or 250-billion-dollar question – will India’s hidebound bureaucracy permit a full-scale reform, or stymie the process by inserting caveats and complexities?
A 5-Point Plan to 'Radically' Reform GST 2.0
Frankly, the PM’s “radical” reform will dissipate unless a clear, unambiguous 5-point restructuring is done:
There should be no over-lapping classifications of the same item or commodity.
The lawmakers must avoid the temptation of creating three different types of popcorn, or two different types of biscuits, or taxing cream-on-toasted-bun at 18 percent while cream and bun are taxed at five percent. The bulk of the disputes and bribes, are triggered by such artificial distinctions which are prone to mischievous interpretation, and consequently to corruption and extortion.
Arrests and police action should be permitted only in cases of forgery (of invoices) and fraud, but not in interpretational or classification disputes.
For example, in our hypothetical case, the law should not have permitted the CEO’s arrest, since the dispute was entirely over the classification of the types of popcorn, not over any fraudulent activity.
There should be clear rules on aggregation.
The tax authority should not be allowed to lump together distinct legal entities with different GST filings into a single number just to “inflate” the evaded amount above Rs 5 cr, which then enables them to “create” a cognisable, non-bailable offence where none existed.
The “sin category” should not be expanded to include “luxury” goods.
These are legitimately aspirational and desirable for a middle class with rapidly increasing incomes. While a million-dollar Maybach may be a “sin” in India, a Rs 70-lakh SUV is a symbol of middle-class ambition that should not be snuffed by onerous taxes.
Finally, for heaven’s sake, do not resurrect the “non-profiteering authority”.
That was a failed symbol of a nanny state which is deeply suspicious of market forces, which believes in price controls and gun-slinging prosecution of genuine businesses. The PM’s “radical” reform will degenerate into exploitation if the non-profiteering rules are re-invoked.
It’s time to reimagine GST 2.0 from scratch. Beware of earlier infirmities creeping in via the back door!