Denmark’s unsavoury experiment shows us why Kerala’s fat tax may be a healthy idea only in theory

Will you choose a salad if your favourite burger becomes more expensive?

Kerala’s policymakers seem to be hoping you will. In a first, the state has proposed a 14.5% "fat tax" on junk food like burgers and pizzas sold at fast-food restaurants in the state. While the state hopes to ramp up Rs 10 crore a year from the tax, there’s no evidence to suggest it will actually end up making anyone healthier.

Fat chance of success?

Just take a look at Denmark.

This was first country in the world to levy a tax on food items containing saturated fats above a threshold. However, the country’s attempt to fill its coffers while making people leaner fell flat on its face. The fat tax was rolled back in January 2013, within 15 months of its implementation, and has now become a case study of what not to do when trying to make people eat healthy.

In Kerala, the Communist Party of India (Marxist)-led Left Democratic Front government, which came into power in May, proposed the tax in its first state budget announced last week. However, there is no clarity yet on what the government wants to achieve with the tax, prompting speculation that this is just another move to earn the debt-laden state some revenue.

The theory gains credence when one looks at other budgetary announcements, such as the decision to impose a 5% tax on packaged basmati rice, coconut oil and products made of wheat. Disposable plastic glasses are going to be taxed at a steep 20%.

This is not to say that the state doesn’t have an obesity problem. Kerala has the second-highest rate of childhood obesity in the country, according to data from the National Family Health Survey. The obesity rate among adults, too, is much above acceptable levels, according to previous surveys.

Gulping the tax

But a blanket tax on junk food may not be a solution.

In Denmark, for instance, where the government taxed all food items with more than 2.3% fat (including cheese, butter, oil and milk and meat), this failed to solve the problem of obesity. Reports said that people started buying cheaper variants or getting food from across the border and the poor were heavily burdened.

This happened for many reasons. While the government set up a committee to look at the impact of the tax on revenues, it failed to monitor its health impact, leaving the assessment to independent researchers and organisations.

The government carried out consultations with 39 organisations, including the banking sector and municipalities, but only four of these bodies were in the domain of health, according to researchers from the University of Copenhagen.

In their study, they highlighted that the price of 250 grams of butter increased by about 20% after the introduction of tax but researchers from the university claimed the science behind fat taxes had long become “obsolete” – as the fat in dairy products was not considered bad for health and the harmful effects of saturated fat itself were debatable.

Moreover, they argued that saturated fats were also likely to be substituted by carbohydrates, which can also be harmful. The move, they said, could potentially increase “type-2 diabetes and heart disease” in the country.

A survey carried about the Danish Grocers’ Association in March 2012, said that the move was highly unpopular among the country’s citizens. More than 45% of the respondents said that they disagreed with taxing dairy even though almost half of all respondents said they won’t mind higher taxation on products like ice-cream, candy and soft-drinks.

Kerala seems to be going down a similar path. The government is yet to speak about the health objectives, if any, of the tax.

“By imposing a tax, you are making it a little more non-affordable and more costly for the customer," Shibu Phillips, business head at Lulu Shopping Mall in Kochi told the Economic Times. "Imposing (the tax) is not going to change consumption patterns."

The tax comes at a time when the restaurant businesses in Kerala are just coming out of a slump.

The tax could also further hurt the state’s finances, which are already ailing, according to the white paper released by the government recently. A tax like this could make the dining industry unviable for some players, while others – as was seen in Denmark – could shift to neighbouring states.

“The focus in Kerala has been on only a few calorie-rich, non-essential food items for additional taxation and is not based on any cut-off energy density or fat content,” R Prasad argued in The Hindu. “As a result, numerous energy-dense, fat-rich food products have been left out.” Prasad pointed out that beverages laden with sugar are exempt from the tax.

Prasad, however, said there is a strong possibility that consumption patterns will change due to the high rate of taxation. Kerala has a chance to battle obesity rates if it makes “mid-course corrections” rather than “go the Denmark way”, he wrote.

How to make consumers switch

Denmark’s not-so-savoury experience with fat tax has prompted countries trying to battle obesity with policy measures such as taxation to think hard about the impact of imposing levies on essential goods.

Countries like Mexico and France have implemented a “sin” tax on carbonated drinks such as colas and sodas which have high-sugar content, while Hungary has a fat tax on soft drinks, chocolate bars, chips and other food high on salt, sugar or fat. Some reports have suggested that these taxes have worked.

If Kerala has to be successful in bringing about a difference in eating habits through such a tax, it needs to analyse the socio-economic concerns specific to the state and come up with a clear roadmap for implementation.

A paper published by three marketing professors in 2014 titled “Will a fat tax work?” could give the Southern state some clues on how to make it work. Carried out in the US, the study revealed that consumer behaviour changes when the prices of products are declared on the shelves rather than at the end of the buying process on the checkout counter.

For instance, the researchers hypothesised that if a consumer is able to see upfront that a brand of fat-free milk is even a few cents cheaper than the milk carton with a higher fat content then he could end up choosing the former to save money.

“A selective taxation mechanism that lowers the relative prices of healthier options, and is reflected on the shelf, can serve as an effective health policy tool in the efforts to control obesity,” the authors wrote.

Kerala’s decision to tax burgers, pizzas and doughnuts is not misguided, but the state will need to ensure that people don’t simply switch to cheaper but equally unhealthy alternatives. Nutella sandwich, anyone?