Thursday, June 4, 2009


Taxation is a powerful tool in the hands of governments vested with the responsibility of managing the affairs of the country. In India as per the constitution both the state as well as the central governments are empowered to impose taxes and financial levies. Currently excise duty, import duty, service tax, income tax and vat provide major resources for meeting the expenditure to run the governments and take up development projects. Taxation policies can play a vital role in encouraging or discouraging consumption of any materials by the population besides protecting domestic manufacturing sector from unfair imports. Of course under the WTO regime it is becoming increasingly difficult to put in place any protectionist policy that will affect the exports of other member countries with a redressal mechanism available to the members for addressing such incidences.

One of the most successful efforts in using taxation as a tool to discourage consumption is in the tobacco field and if current smoking trend is any indication, imposition of high taxes on cigarettes and other tobacco products is certainly a major disincentive against tobacco consumption including smoking. Same approach to alcohol consumption could not be as effective though the growth of the liquor industry did slow down on account of high prices caused by punitive rate of taxation. The politics associated with alcohol production and consumption can be held responsible for the survival of liquor industry because in states like Kerala the local government itself took up manufacture and marketing of low cost liquors for the benefit of "poorer" segments of society leaving high end products to the private sector! It is difficult to understand the logic of such an approach though the argument supporting low cost alcohol products points out to further "economic bleeding" of poor families if they are to depend on costly varieties offered by the private sector.

For a number of years GOI focused its attention on food products that are considered luxury oriented and in absence of a clear demarcation between luxury foods and common man's foods, most of the processed foods came under the first category attracting heavy taxation. Naturally such a policy made such foods unaffordable to a large segment of the population thereby stunting the growth of food processing industry during seventies, eighties and nineties of the last millennium. Introduction of VAT addressed this issue to a limited extent but leaving the states to decide on the items to be included under various VAT rates has created wide disparities in prices of same products in different states. Unless GOI takes a pro-active policy to bring all foods under a uniform tax regime this situation is likely to continue.

If we have to live with a situation where processed foods are taxed, why not make use of the policy to favor healthy foods? If we are convinced that high levels of consumption of sugar, salt and fat through processed foods needs to be discouraged and curbed, can we think of a taxation structure that will reduce their consumption through price differential brought about by higher taxation on such products? Is it conceivable that one pays more for a sugar based drink than that paid for a natural juice? Or high fat products are made costlier through appropriate taxation while low fat ones are made available at a lesser cost? Or low salt food products are exempted from taxes to attract more consumers? Or can the food products be classified based on nutrient density with those with empty calories being taxed heavily? What about corporate taxation incentives to encourage the industry to expand their product portfolio containing certain category of healthy foods? All these initiatives require massive technical inputs to GOI for arriving at a rational tax regime vis-a-vis processed foods. If there is a will and determination this is not beyond our reach.

The recent proposal by New York state in the US to impose a 18% tax on soft drinks, considered to be one of the culprits for American obesity was shot down because of strong lobbying by the industry. How far the new proposal being taken up by the US government to introduce punitive taxes nation wide on sugar products will succeed remains to be seen. Experts believe that every penny increase in the price of a 12 oz can of soft drink can reduce the consumption by 1% because of its high price sensitivity. Such taxation can contribute to foot the bill that country has to bear for programs aimed at fighting obesity and other health care projects. Same holds true for India also and it is time GOI considers seriously the health related problems waiting to become epidemic in the coming years due to increasing imbalances in food consumption.


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