India’s carbonated beverages market lags far behind its global counterparts in innovation and growth. Unlike countries like Thailand and the Philippines, which boast diverse low- and zero-sugar beverage options, India struggles to bring such products to the market. The reason? A staggering 40% GST rate, including the 28% GST and an additional 12% compensation cess, applies uniformly to all carbonated beverages, irrespective of sugar content or fruit-based components.
While GST has been transformative for India, its current structure for carbonated soft drinks (CSDs) prevents innovation and investment in healthier options.
Key Challenges Created by High GST on CSDs
| Challenge | Impact on the Industry |
|---|---|
| Lack of Innovation | High taxes disincentivize investment in low-sugar and zero-sugar beverages, stalling innovation. |
| Unfair Competition | Imported products benefit from lower tariffs, making it harder for domestic producers to compete. |
| High Consumer Costs | Start-ups struggle to scale production, leading to premium pricing that excludes low-income consumers. |
| Informal Market Growth | An estimated 80% of the market is informal, causing significant GST revenue leakage. |
How High GST Impacts Growth and Innovation
1. Missed Revenue Opportunities
Globally, the carbonated beverage market is projected to generate $226 billion in 2024, with low-sugar and zero-sugar products contributing 44% of the revenue. In contrast, India’s CSD market generated only $18.25 billion in 2022, significantly lagging behind other developing nations like Thailand and the Philippines.
2. Repression of Healthier Options
While the global market offers a wide range of fruit-based and sugar-free beverages, India’s high GST discourages manufacturers from exploring these options. The Prime Minister’s call for integrating fruit juices into carbonated beverages to support agriculture remains largely unheeded due to the high tax burden.
3. Unbalanced Taxation
- The 40% GST on CSDs applies uniformly, regardless of sugar content.
- Comparatively, countries like UAE, Oman, and Bahrain, which initially imposed high taxes on CSDs, are transitioning to a layered sugar-based tax model to reduce revenue losses.
Global Trends: A Layered Sugar Tax Model
Over 122 countries now adopt a layered sugar tax based on sugar content rather than carbonation. Key global examples:
- United Kingdom: Tax rates increase progressively with sugar levels in beverages.
- UAE and Bahrain: After observing revenue declines, these countries are shifting towards sugar-based taxation.
Why India Needs Layered Taxation:
- Aligns GST rates with public health goals, encouraging healthier product options.
- Promotes innovation by reducing the burden on low- and zero-sugar beverages.
Global Trends: A Layered Sugar Tax Model
Over 122 countries now adopt a layered sugar tax based on sugar content rather than carbonation. Key global examples:
- United Kingdom: Tax rates increase progressively with sugar levels in beverages.
- UAE and Bahrain: After observing revenue declines, these countries are shifting towards sugar-based taxation.
Why India Needs Layered Taxation:
- Aligns GST rates with public health goals, encouraging healthier product options.
- Promotes innovation by reducing the burden on low- and zero-sugar beverages.
Policy Recommendations
- Adopt Layered Taxation:
Introduce a sugar-based tax model with lower rates for low- and zero-sugar beverages. - Reclassify CSDs:
Align GST rates with FSSAI classifications, ensuring consistency with public health standards. - Encourage Formalization:
Reduce GST rates to incentivize compliance, reducing revenue leakages from the informal market. - Support Start-Ups:
Provide tax benefits for start-ups focusing on innovative and healthier beverage options.
Conclusion:
The current GST structure for carbonated beverages is a missed opportunity to drive innovation, investment, and public health improvements. By transitioning to a layered sugar-tax model, India can encourage healthier products, boost domestic production, and expand its GST revenue base.
“A balanced tax policy fuels innovation, investment, and inclusive growth.”