India’s Curry Tax Exclusion Goes Awry

April 1, 2016

India has experienced some problems with their curry tax deduction over the past months. As part of the Make in India Great campaign, the Indian government has passed tax reform to attract manufacturers. These reforms included a special lower corporate income rate for income derived from the processing of curry powders or preparing and packaging curry products. Although the reforms specify that organic matter classified as a spice must be an input to the process, the final use of the product was not defined in the law. The ambiguity has led many manufacturers to apply for the curry tax deduction, even though the end use of the product is not for human consumption. With a back log in the court to hear cases, many of these manufacturers have been granted the curry deduction, drastically reducing the countries tax revenues.

The Make in India Great campaign was designed to stimulate the slowing Indian economy, which is suffering from the global downturn. Along with streamlining the tax code, the tax reforms connected to this campaign reduced taxes on the processing of curry products. Law makers in India hoped that food companies, which use foreign facilities to process spices grown in India, would relocate operation to India to take advantage of the tax break and consolidate their supply lines within India.

After enacting the reforms, many food processors received the curry carve out, but when pet food and pepper spray manufacturers were awarded the deduction, pharmaceutical and chemical companies began applying. Initially, these manufactures were denied the deduction, but upon discovering that these manufactures were adding spices to pills, creams, cosmetics, oils, and other chemicals; during an inspection of their facilities, courts ordered the government to extent the deduction.

According to an interview with a pet food manufacture, surplus spice purchased on consignment have been added to the process. Given a bumper crop of hot peppers, dogs around the world should expect an extra surprise in their food. When asked about losing customers, the manufacture said, “Let the consumer decide if the spicier mixture is better or worse for their dogs. My tax burden is so low now that I can afford to lower my prices to compete with less spicier brands.”

The World Health Organization published a report warning that pills and creams made with spices may cause problem. The report mentions the loss of smell and taste to many senior citizens in India. According to the authors, “Spices added to pharmaceuticals for tax breaks is likely to reduce the efficacy of the active component and create other unintended consequence. Thus far, loss of olfactory senses and irritation of the bowels has been the predominant side effects of this alarming trend.”

Seemingly unrelated industries are also attempting to designate their products a curry. Steel producers have been adding peppercorn shells into the forging process in attempts at obtaining a lower rate on their products. Leather tanning has returned to an old process using spent tea leaves. Refineries are adding cardamom extract to petrol under the guise of improving the environmental. If all of these industries receive the curry deduction, revenues from corporate taxes are estimated to plunge over the next ten years.

In an interview with Mr. Najib Shah at the Indian Revenue Service (IRS), he shared the silver lining of the curry tax deduction.

Not everything from the [curry deduction] is bad. Sure we are losing revenue, but industries with the deduction are growing at a faster pace than industries without the deduction. Prices on goods sold are falling and consumption is picking up; well, except for curry. Growth in the manufacturing sector was the purpose of the tax reforms and the Make in India Great campaign. It seems that we should have just reduced the tax rate for all businesses in retrospect. We could have avoided that bad taste left in our mouths.

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