A fat tax that shouldn't go up in smoke

When governments enact laws which appear discriminatory, they face scrutiny for over-reach

Updated - August 25, 2016 01:11 am IST

Published - August 25, 2016 01:10 am IST

When Kerala recently imposed a “fat” tax of 14.5 per cent on burgers, pizzas, tacos, doughnuts and pasta sold by “branded restaurants” such as McDonald’s and KFC, many applauded the tax. It was seen as a responsible move by a government keen to curb rising rates of obesity and related ailments such as type II diabetes in the State, and in the hope that taxing processed foods would prompt people to move away from calorie-laden, unhealthy food choices. On the other hand, others criticised the tax for its emphasis on particular foods sold by “branded restaurants” while ignoring the variety of processed Indian foods sold at a plethora of food outlets, whether branded or otherwise. If the idea of the tax is to address the health risks of processed food, its focus on “fat western foods” to the exclusion of equally unhealthy “fat Indian foods”, appears incomprehensible. Moreover, the emphasis on food sold by branded restaurants, mainly local franchises of western food brands, again defies legitimate explanation.

Moushami Joshi

Can well-meaning public health measures like the Kerala fat tax have unintended discriminatory effects which undermine the legitimacy of government action? Quite possibly. To understand why, one needs to look at international arbitrations and World Trade Organisation (WTO) cases involving tobacco control laws.

Discriminatory effects: the cigarette case No one disagrees that tobacco is harmful to health. And government laws curbing tobacco use are viewed as a legitimate exercise of its sovereign duty to protect public health. Yet, government actions controlling tobacco use have not always gone in favour of governments implementing them. A case in point is the WTO challenge to a U.S. law seeking to curb smoking among young people.

The United States implemented a law to reduce smoking among its youth by prohibiting the imports of clove cigarettes because there was evidence that young people were drawn to smoking by using cigarettes which had flavours such as clove. Indonesia, which exported clove cigarettes to the U.S. challenged the law at the WTO.

Indonesia argued that U.S. law banned the imports of clove cigarettes, but it did not similarly ban locally produced menthol cigarettes. Indonesia claimed both clove- and menthol-flavoured cigarettes had the same effect, of drawing young consumers to smoke, and hence a law banning only clove cigarettes was not justified. The WTO agreed. It faulted the law for being discriminatory and struck it down. Though the U.S. objective was laudable and the law well-meaning, it nevertheless discriminated against Indonesian clove cigarettes and such discrimination could not be adequately justified.

Laws based on scientific guidelines On the other hand, an international investor-state arbitration brought by the tobacco giant, Philip Morris, against Uruguay failed.

Uruguay had implemented a law which placed major restrictions on how tobacco companies could use their trademarks on cigarette packs. Philip Morris found that it could no longer use its snazzy trademark, Marlboro, to market variations like ‘Marlboro Red’, ‘Marlboro Light’ and ‘Marlboro Fresh Mint’. It had to stick to one trademark. Further, health warnings needed to become bigger and more graphic covering 80 per cent of the cigarette pack.

Other countries such as Australia and United Kingdom have also implemented similar laws. Countries claim they are justified in imposing these far-reaching measures and point to WHO’s Framework Convention on Tobacco Control (FCTC) as providing the international framework for tobacco control policies like Uruguay’s or Australia’s.

Tobacco companies are not happy. They view packing restrictions as a major violation of their trademark rights and are fiercely battling governments in international courts. WTO cases against Australia have been filed by Ukraine, Cuba, Honduras, the Dominican Republic and Indonesia, allegedly with the backing of tobacco companies.

The arbitration case where Philip Morris faced a stinging loss against Uruguay holds some important lessons for when international tribunals are likely to defer to government action and uphold laws that are enacted to serve a public health purpose.

In the Philip Morris arbitration, judges deferred to Uruguay’s decision to take measures in response to an acknowledged public health risk. That the law was based on the WHO’s science-backed guidelines was important. The law was adopted in good faith and was reasonable because it was tailored to combating the risk of smoking. It was not arbitrary or discriminatory. All of these elements provided the law with the necessary mantel of legitimacy.

Unlike Uruguay’s law, the Kerala fat tax could be called out for being discriminatory. The tax applies to western fat food but does nothing about processed Indian food. It is doubtful whether scientific literature would support the proposition that western processed food poses a health risk while processed Indian food does not. And then there is the restriction on branded restaurants. Again, singling out a particular type of food outlet by burdening it with the tax goes against the well-intentioned objective of the tax, which is to generally encourage healthy eating and reduce obesity.

International tribunals are inclined to defer to a government’s sovereign right to regulate, particularly in matters of public health. But when governments enact laws which appear discriminatory, it is difficult to justify such laws as being tailored to address a legitimate health risk. In such cases, the law faces the prospect of being scrutinised for its over-reach. The tobacco cases provide guidance of where the balance can be struck.

Moushami Joshi practises international trade law at Pillsbury Winthrop Shaw Pittman LLP.

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