Sukumar Mukhopadhyay: The fight over VAT on diapers

Should diapers be exempted from VAT? Do they fall under "medical products"? European countries are divided over the issue. But it's just one of the innumerable issues relating to interpretation of items under VAT.

The great nappy tax debate in the European Union (EU) has all the elements of a battle royal. Some of the finest legal brains of the European Commission, the executive body of the EU, have already spent hours debating one of the most petty but absorbing subjects of negotiating on a bizarre issue, whether to exempt diapers "" babies' nappies "" from value-added tax (VAT). Countries like the Czech Republic, Portugal, Poland, Hungary and Malta have exempted nappies from the EU's minimum rate of duty, which is currently 15 per cent. Their interpretation is that nappies fall under "medical products" "" an interpretation which needs one to stretch his imagination a bit too much. The UK does not tax nappies at all because of grandfathering rights negotiated during their entry into the EU. This interpretation has not been accepted by most other countries. In fact, the EU's tax commissioner has been preparing his case with the support of other dissenting countries to launch a legal challenge against these five European countries, which, according to them, are applying wrong rate of VAT on diapers. It is interesting to note that while there happen to be been thousands of cases in a year against infringement of the rate by EU countries, this one in particular has got the countries divided into two opposite camps.

These five pro-exemption countries, however, are being supported by a powerful alliance of other countries such as Germany and France and some of the powerful vice presidents of the Commission. So the anti-exemption group is finding the business of launching prosecution against the five countries tough going. The argument of the countries that have exempted the tax is that the full rate of 15 per cent VAT would send wrong signals to young Europeans who are otherwise reluctant to have babies. In some cases, even old people also use diapers. The issue is one of definition of "medical products". Nappies are usually available in medical shops and, therefore, the pro-exemptionists contend that such goods are known in the market, as medical products, and should be taxed on the basis of that definition. On the other hand, the opponents claim that the interpretation is wrong since many non-medical products are also available in medical shops.

There is also an ongoing controversy on the exemption on lower rate to restaurant bills, France being in favour of it.

In India, we have not lagged far behind in this respect. In fact, we have done one better. And we may draw some consolation from the fact that even the EU, the home of VAT, is having the same type of controversy, which does not relate at all to any grand economic policy but to ordinary consumer items of daily use. Classification of commodities on the basis of their scientific definition as against their definition in common parlance, has been a matter of intense controversy in high courts and the Supreme Court. There have been interesting cases in the Supreme Court relating to vegetables such as chilly, coconut, ginger and lemon. In a case of sales tax on betel leaf, the Supreme Court's decision was that betel leaf is not a scientific word but a word of common parlance. The market understands betel leaf not as a vegetable (which may be its scientific classification) but as a condiment for chewing. In that view, it would have to pay sales tax, decided the Supreme Court in Ramavatar Budhiprasad vs Asstt. Sales

Tax Officer. However, if there is a definition of a product in the statute, then that will prevail over market parlance or scientific definition, ruled the Supreme Court in Dunlop India Ltd vs U.O.I. We had also a raging controversy in India on defining "vanity bag", when it was exempted. There was no statutory definition and the understanding in market parlance was not very definite. So the tribunal relied upon several dictionaries to come to the commonly acceptable meaning that "vanity bag" is one which is so specifically designed as to accommodate cosmetics that a woman would ordinarily use and to facilitate carrying of these articles. One common thing about all the dictionaries is that they make it necessary that a vanity bag is fitted with a mirror. An ordinary handbag is not fitted with a mirror, which disqualifies it from getting the exemption for vanity bag. The tribunal decided in the case of Teja Industries vs CCE Mumbai accordingly. The Supreme Court also agreed to the analysis of the tribunal when it dismissed the appeal. There are many such judicial pronouncements by high courts and the Supreme Court on common items such as biscuits, condensed milk and ice cream.

The conclusion is that just having VAT does not end the controversy on exemptions. There are innumerable issues of interpretation regarding defining items under the VAT regime even in the EU. Such non-issues will continue to be debated in a grand fashion so long as the authorities continue to be populist irrespective of whether it is VAT, sales tax, customs or excise.

The writer is former member, Central Board of Excise and Customs