Does “Fat Tax” Promote Healthy Consumption Among Public?

I. Introduction

Though The COVID pandemic has been threatening the world for the past two years, there has been another epidemic called “Obesity”, which has continued to rise in the dark shadows possessing grave perils to public health. Overweight and obesity are defined as abnormal or excessive fat accumulation that may impair health.² The sedentary lifestyle of unhealthy food choices increased consumption of alcohol or beverages, and physical inactivity has resulted in a tremendous increase in overweight and obesity among the global population. The World Health Organization (WHO) has reported that over 1.9 billion adults worldwide were overweight in 2016, of which 650 million had obesity.³ Thus, there has been a subsequent rise in non-communicable diseases in connection with obesity, such as diabetes, cancer, cardio disease. The study titled Global Burden of Disease reveals that obesity is the major cause of 4.7 million premature deaths every year⁴

Obesity and overweight were once problems in high-income countries, but now are common problems in middle and low-income countries. They also have financial implications for the economy of the country. The obesity-induced health complications demand increased social security payments and health care benefits. A study conducted in countries around the world revealed that during 2019, per capita costs of obesity ranged from US$17 in India to US$940 in Australia. Countries on average spend 1.8% of gross domestic product (GDP) towards the economic costs of obesity.⁵

Over the past few decades, overweight and obesity have been a growing concern among the Indian population too. It was found in the survey by National Nutritional Monitoring Bureau that more than half of the adults among the urban population were overweight and obese.⁶ In order to counteract the skyrocketing obese population, WHO suggested the development and implementation of fiscal policy measures to reduce the consumption of products causing obesity by making them less affordable.

One such policy measure that has been tried and tested in many countries was the introduction of a fat tax. This is imposed with the idea that increasing the price of an unhealthy commodity by imposing additional tax can lead to a fall in demand for such foods. This has been practised by several countries around the world, and even in India, the state of Kerala levied a fat tax on junk foods sold at multinational food chains. These are progressive measures that benefit low-income populations relatively more once health care costs and health burden are considered.

II. Meaning of fat tax

A fat tax is a tax imposed on products not suitable for high consumption like junk foods or Street foods that leads to obesity and causes other health issues. It is levied as a surcharge on selected foods that are responsible for increasing the body weight of an individual. The imposition of the fat tax is aimed at curbing the consumption of such unhealthy foods and thus reducing the economic costs of obesity. It is revealed through studies that one 1% of a levy per ounce of beverage reduces its consumption by 25% ⁷.

It is considered an example of Pigouvian taxation. A Pigouvian tax, after British economist Arthur C. Pigou, is a tax levied on any market activity that generates negative externalities. It is a tax that is intended to correct an inefficient market outcome by setting it equal to the social cost of negative externalities. Applying this principle to fat tax, obesity is assumed to have negative externalities. Obesity affects public health, forcing the Government to increase its spending on health care. But these costs are not all borne by the obese. This way, obesity in some people becomes a burden for everyone and hence creates negative externalities.⁸

One of the major challenges for introducing Fat Tax is the rate at which the tax should be levied. It is usually determined by the evaluation of information about the current level of per capita fat consumption and the daily recommended level of fat consumption of the state/country in question, as it can vary across different countries. Effects of input supplies, demand elasticity and substitution effects among different fat items should also be taken into consideration before setting the tax limit.⁹ But the fat tax introduced in Kerala did not have sufficient work, as mentioned above, to justify the 14.5% taxation.

The next issue arises as to the definition of the term unhealthy foods or fat-rich foods. Not all foods that are high in fat content can be deemed to be unhealthy. (e.g., Nuts, Salmon, Avocado). So, it is difficult to impose a blanket tax on all fat-rich foods.

III. Advantages of fat tax

• Curbs obesity- Evidence suggests that a 20% tax placed on sugar-sweetened drinks could lower obesity rates by as much as 3.5%.¹⁰ Jensen and Smed¹¹ found that the fat consumption in Denmark dropped by about 10% following the taxation in 2011. This also encourages the public to prefer healthier foods.
• Healthy nutritious foods can be subsidized - revenues collected through fat tax can help in providing healthier foods to the public at a subsidized rate. This provides access to nutritious food for every section of the public, opening up an option of a healthier lifestyle as proved by the report of Lancet Task Force study, official partner of WHO Independent High-level Commission on Non-communicable Diseases.¹²
• Increase revenue to the state - On average, the state governments in India have just allocated 5.4% of their total budget towards the public health care system.¹³ The additional tax collected would increase the revenue of the state, enabling the state to increase the public spending on the health sector.
• Improve personal productivity- being overweight can affect the productivity as well as the health of an individual. Curbing the unhealthy appetite of a person by imposing additional tax can help in improving his health and immunity. This might provide them with the required energy to be productive.
• Cheap and effective- Taxes on junk appear to be one of the cost-effective methods to discourage the consumption of such food. The higher the tax, the lesser people's intent to buy such foods. This, combined with healthy alternatives provided at a subsidized rate, would pave the way for a wholesome life of the public.

IV. Tax on junk food: experiences around the world

The fat tax has been imposed in various countries, but the structure of the tax is not the same across these countries.

• Denmark - The concept of fat tax was pioneered and introduced by Denmark in October 2011 with the aim of reducing the risk of cardiovascular disease among the citizens. As per the regulation, any food item which contains over 2.3% of saturated fat will cost an extra 16 krone (US$3) per kilogram.¹⁴ So Consumers paid a tax of $1.26 per pound of saturated fat on domestic and imported food. It equated up to 30 per cent more for butter, 8 per cent more for potato chips and 7 per cent more for olive oil. Saturated fat consumption was expected to decrease by 4 per cent.¹⁵ But Denmark was not able to achieve the objectives as the taxpayers were able to bypass their liability by purchasing the taxed items across the border in Sweden or Germany. Thus, the Danish Government repealed the taxation within a year in November 2012.
• US and Canada - Instead of imposing a separate tax, Canada, through the implementation of Value Added Tax (VAT) and the United States through Sales Tax, are able to curb consumption of junk food to a certain extent. This also helps to generate higher revenue for the country. Researchers have estimated that the national excise tax of 1 cent per 12 ounces for soft drinks could amount to the revenue generation of 1.5 billion US dollars per year.¹⁶ Within three years after the imposition of SSB tax in Berkeley (A city in California, USA), SSB consumption decreased by 52%, and water consumption increased by 29%¹⁷
• United Kingdom - In April 2018, A soft drinks levy finally came into force in an effort to reduce the consumption of sugar. Drinks with 8g or more of sugar per 100ml now face charges of 24p per litre of drink, and for those between 5g-8g per 100ml, 18p. The measure was expected to bring in £240m in its first year – significantly down from the original forecast of £520m after a reported 50% of manufacturers proactively reformulated. Public Health England’s first-year progress report revealed that for own-brand and manufacturer-branded products, there was an 11% reduction in sugar levels per 100ml for the drinks included in the soft drinks levy. In addition, there was a shift in volume sales towards products with levels of sugar below 5g per 100g, i.e., those not subject to the levy.
• Mexico - Sugar Tax- In September 2013, The Mexican Government also imposed taxes on sugar-containing sweetened beverages in the form of a “Sugar Tax”. It also levied a sales tax on various energy-dense food items to reduce the burden of obesity and other nutrition-related morbidities.¹⁸ The tax did result in a 5.8% decline in the purchase of taxed foods among middle-class households and a 10.2% decline among households within a poorer socioeconomic bracket. But producers changed the production recipe for soft drinks. They substituted cane sugar with high fructose corn syrup, which was relatively cheaper and unhealthy
• Hungary- Hungary imposed a 10% tax on packed food products such as snacks and sugary drinks with health risks. But no tax was levied on fast-food. It was revealed that four years after its introduction, the tax was able to reduce the consumption of junk foods among 73% of consumers. Over two-thirds of such consumers chose a healthier alternative, of which the most frequent were mineral water, fresh fruit & vegetables, homemade sweets and green herbs and spices.
• Chile - In Chile, a newly introduced SSB tax was able to reduce the monthly purchase of a volume of the higher taxed sugary soft drinks by 21.6%.¹⁹
• France - In France, Sugar-Sweetened Beverages were subjected to tax. But a study showed that tax was fully passed on to the consumers for sodas, which had no untaxed substitutes. However, in the case of flavoured water and food drinks, the tax was not fully passed on to consumers and for which substitutes were more widely available.²⁰
• India - Kerala was the first state to impose a fat tax at the rate of 14.5% on foods such as burgers Pizza which are sold in shopping complexes, indoor stadiums etc. The Fat Tax was introduced by Kerala Finance Act,2016. The Act added a new entry number 30A to the third schedule of Kerala Value Added Tax Act, 2003, which came into effect in August 2016.²¹ The fat tax also applied to fast food sold at multinational restaurant chains like McDonald's, Pizza Hut, KFC.

According to a National Family Health Survey, Kerala has the greatest number of people suffering from obesity after the northern state of Punjab in India.²² This was done with a vision that introducing such Mandatory taxes would not only improve the financial condition in the state but also protect public health. Revenue generated from such fat tax imposition is directed towards improving the health sector of the state. The state considers this might also increase the consumption of indigenous food.

However, in 2017 the Central Government passed the Good and Services Tax, which subsumed several taxes, including VAT. This Fat tax ceased to have an effect within one year of its introduction as no provision for such tax exists under the current GST regime.

• Other countries- Ireland has imposed a tax on Sugar-Sweetened Beverages. (SSBs).²³ In 2011, Finland imposed a tax upon sweets (including soft drinks and ice cream) and nonalcoholic beverages. Philadelphia became the first major city in the US to introduce a soda tax. In all these countries, the impact of tax to persuade the consumers towards a healthy lifestyle was short-lived. The demand for Junk foods came back to normal over time.

V. The efficiency of fat tax to curb junk food consumption

It is evident from the above discussion that consumption of junk food causes a lot of health issues among the public. The implementation of a fat tax prevents such harmful consumption. People, especially younger adults, would be encouraged by Increasing the taxes for unhealthy junk foods should encourage the people to make healthier food options like fruits and vegetables, especially among younger adults. This has been proved by a systematic review conducted in 2013 where it was reported that the 20% taxation on sugar-sweetened drinks might reduce its consumption among younger adults by about 24%.²⁴It makes consumers aware of their food preferences and prevents obesity.

But the positive impact of Fat Tax is very much limited, fictitious and not successful in the longer run.

Unhealthy foods and drinks are only a small contributor to many factors that lead to obesity. Taxation may shift food choices away from junk foods but doesn't seem to induce the public to eat healthy foods. It just adds to the plethora of taxes already in existence as consumers keep switching to other untaxed unhealthy foods. They also consume unhealthy quantities of all foods, which, coupled with lack of physical activity, still would make them obese.

Moreover, with regard to the supply side, some manufacturers started reformulating the production recipe by using cheaper inputs that are of lower quality and might lead to even worse health outcomes.

Levying a tax onset of food in such an overly simplistic manner only undermines efforts to combat the complex issues of obesity. Food is not the only culprit for obesity. Instead, the focus should lie on restoring physical activity programs and offering incentives and tax breaks for those who implement healthy behaviours. To win the war against obesity, People are in need of motivation, not further legislation.

VI. Conclusion

The Government considers Fat Tax to be a preventive measure to check the increasing affluence of Non-communicable diseases. Fat taxation has the capacity to influence the consumption habits of the general public. It also helps in generating additional revenue, which can be redirected towards health care initiatives.

But the Government can't simply tax ‘empty calories’ and expect a miracle in public health. There needs to be a parallel effort to promote the consumption and access to nutritious food and exercise, particularly among the young. As part of this effort, subsidies for fruits, vegetables and organic food and a reduction in the price of healthy foods must be provided. Effective public health awareness activities promoting sports and athletics must be carried out. It is also necessary to build the necessary infrastructure which would complement the above efforts.

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