An idea whose time has gone

| Updated on March 12, 2018

The economic logic behind a tax on branded clothes is at best antediluvian and at worst counter-productive.

It is not clear why the Finance Minister has decided to impose an excise duty of 10 per cent on branded garments that thus far faced zero duty. It is also unclear what economic purpose can be achieved by making a distinction between branded and unbranded clothes. Obviously, the intent is to tax the luxury segment that branded garments represent, but it has in fact brought into the net a wide swathe of producers and consumers. The trouble is that while about 60 per cent of garments sold in the country has a label stitched on, not all of them are necessarily pieces of luxury. If the purpose is to tax the big producer and help the smaller one, excise protection below a threshold level is already available to the latter. Thus the economic logic behind the tax is at best antediluvian and at worst counter-productive. It is antediluvian because the luxury element of a luxury good is already captured by its higher price, and the ad-valorem nature of the tax will ensure higher yields. The political need is different and results in the worse consequence: revenues actually decline because the tax is passed on to the consumer, who buys less of the product. In any case, it is not very clear, even politically, who is pleased by the tax. The fact that branded clothes will be taxed is hardly likely to result in a flood — let alone a tsunami — of votes for the ruling party.

It may be recalled that a couple of years ago a tax of over 18 per cent was imposed on branded processed agricultural products, even though such products were subject to Central sales tax, value-added tax and local levies. The consequence was stagnation in the industry. No one gained, everyone lost. A similar tax on branded jewellery exists but doesn't seem to have had any deleterious consequences. The reason is simple: clothes and food are not jewellery, which is a genuine luxury. And then there is khadi. Khadi clothes are sold under the brand name of Khadi Gramodyog. Does the Finance Minister propose to tax khadi also? If not why not, considering 80 per cent of what is sold as khadi now is actually a blend of handloom and polyester?

The real problem is political parties do not understand that luxury must also be linked to goods produced with inputs that are scarce. For example, capital is scarce in India compared to labour, so electricity should be classified as a luxury, to prevent its excessive consumption. Likewise for diesel, kerosene and LPG. But all these are subsidised! Were they not, their prices would capture their scarcity or luxury element. Instead, in India we tax refrigerators even though, by preserving food over a longer period, they serve a vital national need.

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Published on March 09, 2011
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