Pasty Tax: The Great VAT Dilemma

British government decided to levi 20 percent VAT on cornish 'pasty' - the popular british oven baked snack. The pasty tax, as it was popularly called invited sharp criticism. The Sun newspaper ran a campaign against the government "Who VAT all the pies?". 

source: The Sun

UK entered into recession in second quater of 2012. To increase the tax inputs, UK Lord chancellor George Obsborne suggest mechanisms to bring various products and services under VAT regime in budget proposed in March. The campaigners against the change claimed the VAT system is completely in mess and shadow minister Chris Leslie said, "What a chaotic way to run a country. How on earth can you have a budget process that unravels in a day when you've got this kind of shambolic business?"

Picture Source: USA today

Out of all the taxes, the pasty tax was probably most interesting from policy perspective. The tax was scrapped for hot pasties fresh from the oven. The new tax plan will only tax those pasties which were required to be reheated during the day. Let me explain the tax through a case study:

- Roger buys a pasty from 'Greggs - a high street baker' in the morning when the pasty  is fresh out of oven - No Tax (GBP 2.50)

- Katrina buys a pasty from Greggs after some time when it comes out of oven and now it is in the process of natural cooling down or lukewarm - No Tax (GBP 2.50)

- I was not in such a hurry to eat the pasty. I buy a pasty from Greggs during the day when pasty is sitting on a hot plate or it required to be re-heated in the microwave - TAX TAX TAX (GBP 3.0)

According to the new law, the pasty which require additional effort of reheating or microwave will attract 20% VAT. The food stall owners and bakeries have welcomed the move. On the other hand, food stall which sells fried fish (they were levied VAT long time back), said system is not fair.

With the policy reversal, Gregg share rose by 9% on May 29th, 2012 (Their share took GBP 30 million beating on March 21st, 2012 when pasty tax was announced). 

Nikhil Agarwal