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What is luxury tax?

Introduction
What is luxury tax?
  • Luxury tax is a tax imposed by state governments on luxury goods which are not considered essential and mostly consumed by the wealthy class.
  • Luxury items in normal parlance include air conditioners, services offered by five star hotels, expensive cars, etc.
  • The average luxury tax that can be levied on an individual in India ranges from 5.5% to 14.5%.

Bihar cabinet gives green signal to luxury tax

12 Jan 2016
Bihar cabinet gives green signal to luxury tax
  • The Bihar cabinet has agreed to levy 13.5% tax on auto parts, dry fruits, electrical goods, sweets, saris, sand and cosmetics, which are primarily used by the privileged classes.
  • Other taxable goods include food items, mosquito repellents and foam, used by lower middle-class.
  • The tax accumulated will be used as funds for colleges and increased wages for jail inmates, semi-skilled and non-skilled workers.

Bihar taxes samosas and kachoris

14 Jan 2016
Bihar taxes samosas and kachoris
  • The Nitish Kumar government announced the imposition of 13.5% tax on luxury items to boost Bihar's revenues.
  • The tax will be levied on samosa, kachori and namkeen costing upward of ₹600/kg, sweets priced over ₹500/kg, and cosmetics, packaged foods, deodorants, hair oils costing minimum ₹2000.
  • Transformers, industrial cables and inverters along with sand and auto parts will also be taxed at 13.5%.

The ruling party justification

Fact
Quote

"Only Bihar sold items like samosas, kachoris and packaged food without any tax. But we have now decided to impose a tax of 13.5% on these items. We’ve taken this step to increase revenue”- Neeraj Kumar, JD(U) (ruling party).

What was the thought-process behind this move?

Rationale
What was the thought-process behind this move?
  • Bihar had earlier decided to ban country made liquor, exempting foreign liquor from 1 Apr'16.
  • This is expected to cause ₹4000cr in losses to the Bihar government.
  • To cover up the revenue loss, the state government had introduced new types of liquor such as Bacardi Beer and Bacardi Cola.
  • The newly increased tax on luxury goods will also help cover up the revenue loss.

Criticism all around

14 Jan 2016
Criticism all around
  • The opposition parties have criticized the move as anti-poor.
  • Shahnawaz Hussain, the Bihar BJP spokesperson stated that "Imposing tax on items like samosas and kachoris is insane."
  • Experts assess that the move may invite political backlash against the Nitish Kumar government.
  • However, the JD(U) has stated that the move will not affect the poor, and only affect those who can afford such items.

Daily snacks - no luxury

Fact
Quote

"Imposing a tax on kaju ki barfi is something I understand but tax on samosas and kachoris sounds ridiculous to me,” - Shiv Vishwanathan, a New Delhi-based sociologist.

Only 'packaged' snacks under luxury tax purview

16 Jan 2016
Only 'packaged' snacks under luxury tax purview
  • The Bihar government explained that the 13.5% VAT which would be levied on "packaged dry samosas and kachoris" that are being sold over ₹600 per kg and not the ones sold at roadside eateries.
  • The clarification came after the move was largely criticised as a poor measure to compensate for the losses that would be incurred from the alcohol ban in Bihar.