A recent judgment by a Bench of the Haryana Appellate Authority for Advanced Ruling (AAAR) has provoked much hilarity while giving indigestion to the Khera Trading Company based in Panipat. The ruling involved the distinction between a pizza base, cheese and pizza toppings made with cheese. Pizza base and mozzarella cheese both attract 12% GST. Pizza sold in a restaurant attracts 5% GST without input credit while pizza delivered to your home has a GST of 18% but with input credit. So what GST should be levied on a pizza topping made with mozzarella cheese?

Khera Trading, among other things, makes and sells pizza toppings with mozzarella cheese, milk solids and vegetable oils as the main ingredients. The company’s argument was that its pizza toppings contained 14.5% mozzarella cheese and 15% of other milk products. Hence, it said this should be taxed at the same rate as processed cheese.

The Bench of Amit Kumar Agrawal and Anil Kumar Jain were distinctly unimpressed by the company’s line of thinking. They upheld the judgment of the Authority for Advanced Ruling (AAR) pointing out that not only did the Khera Trading pizza topping contain plenty of vegetable fat, the process of blending and heating of the mozzarella cheese resulted in an end product that could not be classified as processed cheese. It should instead be classified as “food preparation otherwise not specified or included” and taxed at 18%, it said.

While the ruling caused much mirth on social media, it was not unexpected. A similar dispute had cropped up earlier in the case of breaded cheese sold by a company in Uttar Pradesh.

Neither is cheese—or for that matter pizza—the only products that have caused tax tribunals to spend quality time interpreting how a product should be classified—and hence taxed. A few years ago, a Karnataka Bench of AAR had decided that the Malabar parotta could by no means be compared with the humble readymade roti. Its view was that while the GST rate for readymade rotis was 5%, the Malabar parotta should come under the category of miscellaneous edible preparations and hence be taxed at 18%.

Classification disputes over taxes are more common than the layperson realises. Nor are they confined to food stuff and GST either. In the past, disputes have cropped up over the definition of coconut oil vs hair oil (if coconut oil is sold as an edible oil, it attracted one duty, while hair oils made with coconut oil attracted another duty), chappals vs sandals and cycle locks vs normal locks (should a cycle lock be treated as a cycle accessory or as a lock?). There have also been multiple classification disputes over customs duties on imports.

Where there are different rates of taxes on different goods, classification disputes will always arise as will people looking for loopholes and broad definitions to pay lower taxes. This is why bureaucrats spend months writing down detailed descriptions of products and services and the taxes they will attract and also in defining what does not fall under a particular classification. In any modern economy, the sheer number of goods and services and variations of even simple products make this a nightmare for those drafting the rules.

Can tax slabs be done away with altogether? Not really because a uniform rate is iniquitous when there is huge income inequality. But tax slabs certainly can be reduced.

The number of slabs in GST are not merely because detailed calculations were made for revenue neutral rates that would ensure that tax amounts did not fall sharply because of a uniform, lower rate. Indian taxpayers also need to deal with what policymakers think of as “undesirable” or “luxuries” for the common populace. This is a mindset issue that has plagued India since Independence when the government had consciously chosen a socialist path. But long after the economic reforms that were initiated in 1991, the mindset continues—which is why a number of goods and services that are no longer in short supply or could be considered as luxury consumption items in a modern economy attract usurious rates of taxation. It has also led to lobbying for lower tax rates on specific classifications though similar goods might attract higher tax rates. Cars of different lengths being taxed differently is an example.

Lawmakers, while working out GST rates, have often argued that certain goods and services need to be taxed more because they are “luxuries” as they are only consumed by well-off people. The counter argument that is overlooked is that if these goods and services were taxed at a lower rate, would they become affordable to even the not-so-well off and hence actually fetch the government better tax revenues than higher taxes that crimp their volumes? Equally, the government needs to realise that classification disputes clogging up courts lead to enormous productivity loss that hurts the country’s growth.

When it comes to the multiple customs duty rates, one can still argue that there is a certain clearly discernible economic philosophy. If you want to discourage imports of specific goods and encourage their domestic production, tax rates can be a valid tool for policymakers. But that does not apply to GST rates in general. And that is why reducing the number of tax slabs and cesses and simplifying the GST structure would benefit everyone.