High GST is preventing innovation in the carbonated beverages industry in India

Financial ExpressNovember 17, 2024

In the consumer market today, have we noticed that there are only a few low-sugar and zero-sugar varieties of carbonated beverages in India, as compared to countries such as Thailand, Philippines, UK. We hardly have any fruit-based carbonated beverages, despite India being one of the largest global producers of fruits such as mango, banana, guava, papaya and lime. This is because carbonated soft drinks (CSDs) irrespective of whether they are fruits-based or have low or zero sugar are taxed at 40% under the Goods and Services Tax (GST), which also includes the highest rate of 28% GST rate and an additional 12% compensation cess. The Honourable. The Prime Minister had called on the industry to add fruit juice in carbonated beverages to enhance the sustainability of Indian agriculture produce and help improve the economical sustainability of Indian farmers.

The 40% tax has led to four key issues. First, there is no incentive to invest in innovative, low-sugar and healthier options in the CSD category. Globally, over 44% of the revenue of beverages is generated by this category. With an estimated revenue of USD 226 billion in 2024, the global market for CSDs has seen a proliferation of different product varieties with different sugar content ranging from cola beverages, carbonated fruit beverages, to carbonated lemonades and tonic water. The Indian CSD market is relatively small; it generated revenue worth USD 18.25 billion in 2022, and lags much behind other developing countries such as Thailand or the Philippines. Thus, the potential for the CSDs sector to contribute to employment and investment in India remains largely unexplored, despite being a major contributor to the food processing industry. At the same time, Indian consumers want to experiment with new products and this brings us to the second issue. Tariffs are reducing under the trade agreements and domestic producers are facing unfair competition from imports as consumers want to try different products. Third, start-ups are not able to scale-up in innovative products as they are expensive and only high-income consumers are able to afford the low-and zero sugar healthier beverages. The current taxation is repressive on low-income groups. The fourth and the most important issue is that high tax has led to the growth of the informal sector which accounts for around 80%, while the GST revenue contribution from CSDs has not seen an increase

While GST has been a path breaking reform, there is no denial that it needs to be streamlined for certain products, which have evolved in the last ten years, and CSDs are one of them. When the GST discussion began there were only a few varieties of CSDs in the market. The high excise duties on CSDs in the state excise was reflected in the high GST rate of 28%. Further, as suggested by the Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax (GST) from 2015, a ‘sin tax’’ of 12% was imposed, without considering that if an edible product is approved by the Food Safety and Standards Authority of India (FSSAI) how can it be classified as a ’sin good’? And, if having a high sugar drink is a ‘sin’ why is sugar subsidised?

With the growing incidence of non-communicable diseases, WHO and health experts around the world have been proposing a layered-sugar tax (with high-tax for high-sugar products and low-tax for low and zero-sugar products) for more than a decade. More than 122 countries have imposed some form of layered tax on beverages, however, the layering is based on the sugar content and not whether the beverages are carbonated or not.

As per World Bank database on SSB taxation globally, India has one of the highest tax rates for CSDs, the only markets that have a higher tax than India are Middle-East, countries like Bahrain, Oman and the United Arab Emirates (UAE), which had a tax rate of 50% on CSDs. Seeing a drop in tax revenue, these countries are in the process of revising their tax model to move towards a sugar-based layered tax.

A survey conducted by the authors revealed the GST contribution of several beverage companies in the CSD category declined from 2019 to 2020 and some have also reported revenue losses between FY 2018-19 and FY 2019-20. The survey also revealed that there is a huge tax revenue leakage in the Indian CSD market, owing to 80% of the market being informal and not paying tax. Given the high tax of 40%, some start-ups mentioned that they are advised by their tax consultants to invest in non-carbonated beverages. Further, the GST rates are not aligned with the sugar content in the CSDs, nor are they aligned with the product classification given by the FSSAI, that companies have to mandatorily follow.

Comparing India with other countries, it is clear that the GST rates are not aligned with the broader objectives of improving public health and/or expanding tax revenue base. The core objective of a tax department in any country is to increase revenue collection with broader economic goals of generating investment in manufacturing, creating employment, etc. If sales grow, tax collection is expected to grow. Given this, there is an urgent need to visit the GST slabs for CSDs.