Popcorn Tax and Complicated Rules in India
Analysing the complexity of rules in India, how they are made, the problems they pose and some solutions
A recent decision by the GST Council to charge different types of popcorn with different tax rates has received widespread criticism, outrage, and mockery. While increasing tax burdens on people is indeed a problem, we will skip the issue for now. In this article, we will look at the popcorn tax as a reflection of a different public policy problem that India faces - the problem of complicated rules. Complicated rules, which are often very difficult to enforce, create issues of rent-seeking behaviour, increased costs for Governments, inefficiency, and ultimately impact economic growth.
In this article, we try to identify why such complicated rules are drafted in the first place, the problems that arise out of these rules, and possible solutions to address the situation.
Complicated Rules and How They Are Made
In 2017, compulsory and paid maternity leave for employees in India was increased from 12 weeks to 36 weeks. When we compare the law with other maternal policies elsewhere in the world (see figure below), we find that India’s policy is comparable to developed and advanced countries of the world.
Maternity Leaves Around the World as per 2022 (source - World Policy Center)
While the intention of the policy was great, it had a serious unintended consequence. The policy, which asked employers to pay the entire salary during the maternity period, led to a decline in female employment and incomes.
In this case, we tried to copy a law that works well in an advanced country to our system. While the law might have worked well in a developed country with large and profitable enterprises, there were hurdles in India where most of the industries were micro, medium, or small enterprises. This phenomenon, called isomorphic mimicry, is brought about by multiple factors. In the book "Building State Capability", economists Matt Andrews, Lant Pritchett, and Michael Woolcock discuss some of the reasons why countries do the mimicry and adopt complicated rules:
Focus on Form Over Function: Countries sometimes replicate the visible structure or design of successful policies without replicating the underlying processes and state capability that made them effective. For example, adopting complicated anti-corruption measures without addressing the deep-rooted political or bureaucratic problems that enable corruption.
Pressure to Conform: International organizations such as the International Labour Organization, donors, or global norms create pressure to adopt policies similar to those in developed countries.
Copy-Pasting Solutions: Without thinking about local or cultural factors, policies are copy-pasted directly from developed countries. Without a proper understanding of the context, these policies may face problems as seen in the maternity leave example.
Incentives: Politicians or bureaucrats may implement policies based on their own personal incentives. This may be either to get votes, funds, promotions, or public approval.
Our adoption of stringent labour laws, Bus Rapid Transit Systems in cities like Pune, and other complicated rules we find around us can be attributed to such isomorphic mimicries which did not work well.
Problems of Complicated Rules
Economists Shruti Rajagopalan and Alex Tabarrok in their essay “Simple Rules for the Developing World”, present some critical problems arising out of the complicated rules countries like India have adopted.
The first problem is the creation of rent-seeking behaviour and corruption. With complicated rules, the costs required to conform to the rules will also be high. For example, the stringent and complex labour laws in India will make it difficult for employers to adhere to all its nuances. In such a scenario, there is an incentive to bribe the enforcing officer as the cost of bribes will be far lesser than the cost of adhering to the labour laws.
The second problem is the large costs that Governments need to bear for enforcing these complicated laws. When the Bus Rapid Transit System in Pune was implemented, there was a large upfront cost for infrastructure as exclusive roads had to be developed for buses. Additionally, barriers and human resources (traffic policemen/women) had to be kept to ensure that other vehicles did not enter bus lanes which created large costs just for the rule to be enforced.
The third problem arises due to the stress and inefficiencies that arise in the system. As rules become more and more complicated, it creates stress on the capability of the Government to enforce the rules. This results in inefficiencies. With popcorn being taxed at different slabs, the GST inspector may become overburdened, thereby impacting his work and messing up the entire GST system she is in charge of.
Perhaps the most significant problem arising out of the complexity is a lack of economic growth. With complicated labour laws and other compliances, a person who wishes to start their enterprise may think twice. This prevents our country from reaching its true potential.
Two Solutions
There are two possible solutions that can be pursued by the Government in the existing scenario:
Build State Capability - The book “Accelerating India’s Development” by Karthik Muralidharan explores the idea of building state capability and governance systems. As the rules we have are complicated, the state capability needs to be improved drastically to address gaps in enforcement and implementation.
Simplify Rules - As Shruti Rajagopalan and Alex Tabarrok argue in “Simple Rules for the Developing World”, we should simplify rules for now. With growth and economic development, complicated rules can come naturally at a later point in time.
While we do not prefer one solution over the other, a combination of simplifying rules wherever possible while developing state capability gradually may be the way to go for India in its pursuit of development.
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