This note is only intended as a general overview and is not to be viewed as a substitute for legal advice. Brands & Bonds shall not be liable for any actions taken or not taken on the basis of this note.

The Finance Minister in his budgetary speech has introduced the fat tax with the objective to fight obesity. Understandably, the state of Kerala accords the highest literacy rate and is also celebrated for its high obesity rate.

According to a recent study, the country itself ranks third in obesity chasing US and China. Few countries have successfully introduced similar “fat” taxes on high-calorie foods. Hungary for example taxes foods with high fat, sugar and salt and Mexico followed with sugar tax. UK however burnt itself while introducing sugar tax and in US the dilemma continues.

It is in this scenario, Kerala being the first state in the country to introduce a “fat” tax on junk food gears attention. Much attention and appreciation is poured in on Kerala’s ‘fat tax’ on pizzas, burgers, sandwiches and tacos being introduced as an important public health measure. From the economic perspective, it acts as the incentive to the treasury in fetching much needed revenue to the state.

However, ironically the business community along with the legal and economic fraternity were taken aback and went for a twirl when the Finance Bill 2016 -17 was placed before the state legislature. Obviously everyone expected tax incidence on fatty food items like pizzas, burgers, sandwiches and tacos, but what lay in the camouflaged kitty was a blatant blow on brands and trademarks.

The finance minister is reported to have said that branded restaurants would be targeted and that the tax was aimed at the richer, urbanized section of society, whose new, westernized eating habits are causing serious health issues in the state. However, corollary to the above view, the recent Finance Bill have introduced item 30 A to the Third Schedule of Kerala Value Added Tax Act, 2003. The Third Schedule prescribes 5% of tax (lower rate) on various items.

The wordings of the Finance Bill are as follows.

“Cooked Food, other than,-

  • those served to any airline service company or institution or shipping company for serving in air craft, ship or steamer or served in air craft, ship, steamer and five star hotels, and
  • burgers, pizza, tacos' doughnuts, sandwiches, burger-pattys, pasta, bread-filling and other cooked food items sold by restaurants having a brand name or trade mark registered under the 'Trade Marks Act, 1999”.

The above clauses 1 and 2 are exception and thus would attract higher rate of tax. It is justified and acceptable that being a fat tax, higher rate of tax (14.5%) is levied on burgers, pizza, tacos' doughnuts, sandwiches, burger-pattys, pasta, bread-filling however, the last part of the provision opens up the pandora box when the higher rate of tax is levied on even other cooked items if the same is sold by restaurants having a brand name or registered trade mark. Hence, triggering incident and tax incidence is whether the restaurant’s brand is registered or not. To fuel it up further one is left bewildered as what amounts to ‘other cooked items’. In other words, on literal interpretation, if the restaurant’s brand is registered, even non fatty food like idili, dosa, chapathy or even tea, coffee and maybe even a bottle of water might attract FAT tax.

The pertinent danger of shifting of tax incidence from Fat to Brand is that all the above stated fatty foods shall not be subject to the higher rate of tax if the same is sold from a restaurant which has not registered its trademark. Is it then defeating the real intent? Ironically, if a person happens to have his food from a small trademark registered restaurant serving only vegetarian foods with low calories at moderate rate, the pathetic consumer is left with deeper hole on his pocket and left at the predicament of such restaurant owner. The same applies to any branded “health food” restaurants and “low calorie foods” offered by branded restaurants. The common ground that leaves both the consumer and the owner of the restaurant is a sole prayer – Un-brand it!

The crucial objective of the trademark or brand is creation of identity and result of identity is accountability and the result of accountability is credibility. The new tax reforms draw sword on – credibility!!.

Undisputedly it is not ‘Fat’ tax but ‘Brand’ tax.

Desirably tax authorities may bring in clarity before burning calories.

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