Everything is Fair in Love and Taxes
Dr. Seuss says “It's not about what it is, it's about what it can become.” Some companies took it way too seriously!
What if we told you that your favourite KitKat chocolate is not a chocolate at all? What if Pringles were cakes, not chips. What if Sachin was not a cricketer? What if the Earth was actually flat? What if... What if... What if!
Crazy just to think of it, right?
Well, all of this is actually true! Except for the part about the Earth being flat though. Sorry Flat-Earthers!
Do you think this picture is that of a cake or a biscuit? We’ll give you a hint, it breaks in half, has a crunch and is placed on the biscuit aisle of supermarkets.
Must be a biscuit then, right?
Not for tax purposes.
In a very creative fashion, Jaffa Cakes were allowed to be categorized as a cake instead of a biscuit. After all, cakes had 0 tax, but chocolate-covered biscuits were charged 20% Tax!
But how?!
After a long drawn out case to figure out its true nature, the authorities in the UK noticed that Jaffa cakes, owned by McVitie’s, went hard when they were stale. Biscuits go soft when they become stale whereas cakes become hard. This was the Eureka moment that saved McVitie’s, even though Jaffa Cakes continued to be racked in the biscuit aisles.
In the same way, one of the most popular chocolates, KitKat, is not categorised as a “chocolate.”
Wait, so KitKat is not a chocolate?
Not according to tax laws.
A chocolate with a wafer inside attracts 20% tax. But, this is exactly what KitKat is, isn't it?
Wait for it…
A wafer with a chocolate coating attracts a 10% tax.
Confused? So was Nestle, back in the 90s.
They continued to pay 10% tax. Who wouldn’t want to pay lesser tax, right?
But the Central Excise Department didn’t agree with this classification and Nestle was forced to pay a whopping Rs.24 crores as tax!
This, however, was short-lived as the tribunal ruling went on to favour Nestle. Their justification was quite creative indeed. It was underlined that while all chocolate products contain cocoa powder, every product containing cocoa powder cannot be classified as chocolate. Nestle also argued that when a customer picks up a KitKat, they know that they are going to bite into the wafer, unlike a Cadbury chocolate.
Time for a KitKat break? Not for the tax authorities!
But can anyone and everyone get away with such creative classifications?
Not quite.
Importers have tried to classify oats as fodder for animals which is tax free. At that time, oats were not a popular food choice in India. However, since people eat oats as well, it was recategorised as a breakfast cereal and taxed accordingly.
Even P&G tried to get away with categorising Pringles as cakes instead of chips, claiming that potatoes had to be mixed with flour to make the iconic Pringles shape. However, a UK High Court ruling that allowed Pringles to be categorised as cakes or bread was overturned and P&G was liable to pay £100 million!
So, food is the danger zone?
Here’s where Sachin makes his entry like the hero he is!
But, Sachin is a cricketer!
Is he, though? He sure is a cricketer when he’s playing on the ground. But when he is shooting ads for Pepsi or Visa, he is essentially acting.
But, he got the advertisements only because he is a famous cricketer, right?
Why would Sachin care, though?
Authors, musicians, actors, sportsmen and individuals with other vocational skills are given a special leeway in tax under Section 80RR. If they earn foreign income while practicing their profession, they only need to pay tax on 50% of their income (25% in some cases).
This meant that Sachin, who was a cricketer, could not claim this benefit for his income through ads because he was not practising his profession - playing cricket - while earning this income.
Shooting for advertisements involves standing in front of the lights and camera and appealing to the imagination of viewers. He isn’t playing cricket while shooting the ads.
Therefore, it was ruled that while Sachin was not playing cricket, he was acting and therefore, as an actor, he could enjoy the benefits of Section 80RR of the Income Tax Act, 1995.
Using such “hacks” to reduce taxes isn’t new. Companies try to find unique ways to advocate their products just so that they have to pay less tax.
Does this point to tax evasion techniques or simply exploiting loopholes while staying within the legal limits?
Edible oil attracts less tax than cosmetic hair oil. This was enough reason for Parachute to be categorised as edible oil when almost all of us have only used it as hair oil.
But, how companies perceive their product isn’t reason enough for the tax authorities. Convincing them is the real game-changer.
But Parachute advertises the product as a hair oil!
Here’s where you grab a bottle of Parachute coconut oil and look for any indication of using it as hair oil. Its packaging and its true chemical composition indicate that it is indeed edible coconut oil.
So tell us, will you be using Parachute oil for cooking purposes?
A user’s perception isn’t enough to drive categorisation for tax.
There are plenty of other cases that shock users about the true nature of the product, at least as per taxation rules.
Converse shoes, for example, have fuzzy soles to bring their tax rate from 37.5% (tax rate of shoes with rubber soles) to 3% (tax rates of slippers)! Yes, Converse shoes are taxed as slippers!
Law was meant to be the great unifier: something that let mass common sense prevail. Maybe we’ve come too far from that, maybe we need to get back to the drawing board.
Should the law be abided by only in letter, and never in spirit? You decide.
In the meantime, do you know of any other companies that tried categorising their products differently to evade taxes? We would love to get more examples!
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