NEW DELHI: It’s a tax on multinationals, and not one that is genuinely aimed at curtailing the intake of fat. This is how chains selling burgers and pizzas see the new fat tax imposed by Kerala’s Communist government.
Their contention: mithais, pooris, butter dosas and other traditional savouries that are fattier than their products are let off by Kerala FM Thomas Isaac. The state Budget on Friday proposed a 14.5% tax on “junk food such as pizzas, burgers and doughnuts sold in upscale restaurants”. Kerala is the first state to bring in such a tax that some European countries like Hungary and Denmark already levy.
Though Kerala isn’t currently a big market for these products, and so the impact on the financials will be limited for the chains, there is a fear among them that this may set a precedent for other states to follow. And, they are up in arms against the move.
“Anything in excess is unhealthy, which includes most traditional Indian savouries and sweets,” said National Restaurant Association of India (NRAI) Secretary Rahul Singh. “Targetting a cuisine segment which is not more than 10% of Indian food consumption and taxing the organised sector is an easy scapegoat.”
NRAI represents thousands of restaurants, including established names such as Pizza Hut, McDonald’s and Domino’s.
“The tax clearly singles out multinational brands. What about local Indian brands — some of their products are that much more unhealthy and many do not follow basic hygiene standards,” said the managing director of a leading American fast food brand in India.
He requested not to be named. Edelweiss research analyst Abneesh Roy said the tax is sentimentally negative for the quick service restaurant sector as it may lead to copycat actions from other states. “This (such actions) will have a potentially big impact on volumes as taxes become almost double versus the existing 15% service tax,” Roy wrote in a report to clients.
Friday’s announcement saw shares of Westlife Development, which runs McDonald’s in South and West, and Domino’s franchisee partner Jubilant FoodWorks fall more than 2% each on the Bombay Stock Exchange, underperforming the benchmark Sensex that closed 0.3% lower.
Executives at Yum Restaurants, which has franchise rights for Pizza Hut and KFC, said the tax burden would be passed on to consumers selectively though the firm would try to mitigate the impact. Unnat Varma, managing director at Pizza Hut, told ET on Friday that the move is “business-unfriendly”.
The development is happening at a time the segment isn’t doing that well. Almost all players in the western style foods segment have been posting single-digit same-store sales growth over the past six quarters, as consumers scale back on discretionary spends.
Same-store sales compare sales at stores open for at least a year and are a key retail performance indicator. A Goldman Sachs report last month attributed the sectoral slowdown to persistent store expansion which led to supply outstripping demand growth. Also, “affordability continues to be a challenge”, the report, titled India Consumer Close-up, said.
However, it projected that the sector would grow 20% annually over the next few years, up from a compound growth rate of 16% in the past decade. NRAI’s Singh said the government should target the unorganised sector if it really wants to address the problem of increasing consumption of unhealthy food.
“Close to three-fourths of the food service business in India constitutes the unorganised sector, which doesn’t contribute to any taxes or have any compliance of food safety and standards,” he said. “Policies of the state should focus towards spreading awareness which result in moderation, and not deprivation.”
The CPI(M)-led government’s Budget for 2016-17 also proposed a 5% tax on certain packed foods such as maida and rava. Another state, Bihar, had earlier this year imposed a 13.5% tax on local snacks, including samosas and kachoris.
