By Karam Grover
India’s carbonated beverages sector, a crucial component of the non-alcoholic ready–to–drink (NARTD) market, faces significant challenges under the current tax regime. Despite its economic potential, the industry is constrained by a tax structure that hinders growth and innovation. Revisiting and restructuring this tax framework can unlock new opportunities, fostering a more conducive business environment while addressing public health considerations.
From fuelling body to fuelling economy
India’s carbonated drinks industry is a hidden giant, generating over $18 billion in revenue in 2022. Yet, this figure barely scratches the surface of what’s possible. The carbonated beverages sector is deeply woven into the fabric of the food processing industry and has the potential to create employment opportunities for thousands, especially in Tier 2 and 3 cities. From local Kirana stores to sprawling distribution networks, the ripple effect touches countless livelihoods.
The non-alcoholic ready-to-drink (NARTD) segment, which includes bottled water, stills (like fruit juices), and sparkling beverages, was valued at approximately INR 58 thousand crores in 2022, experiencing growth of roughly 30% over 2021. Despite this growth, the reach of any segment within the beverages category remains limited—bottled water is available at 40% of grocery stores, sparkling beverages at 39%, and still beverages at just 32% of outlets in India. This highlights significant room for expansion, especially compared to other FMCG products.
The Indian Beverages Association plans to invest approximately $10 billion in the sector in the next 5 years, demonstrating the industry’s immense potential. This investment could spark a wave of innovation, job creation, and economic growth across the country. The industry currently employs over 7 lakh people directly and a factor of 9x indirectly, including transporters, retailers, and other blue-collar workers, especially in Tier 2 and Tier 3 towns and villages.
The Soda Squeeze: Taxing the Fizz
Currently, India imposes a whopping 40% tax on CSDs—one of the highest rates in the world. This includes a 28% GST and a 12% compensation cess. This tax is sugar content-agnostic, meaning both high-sugar and low-sugar options bear the same burden. This approach doesn’t make sense. If meant to curb sugar consumption, it’s inconsistent: other food items with higher sugar content are taxed less. There’s also no differential treatment for zero-sugar or diet beverages, despite their lower health risks.
If the tax is based on carbonation, another issue arises: soda water is taxed at 18%, and if caffeine is the concern, tea and coffee are only taxed at 5%. This one-size-fits-all approach stifles industry growth and innovation.
The Globe vs. India
Globally, there’s a growing trend towards smarter taxation of sugar-sweetened beverages (SSBs). As of 2023, 105 out of 108 countries monitoring SSB consumption have implemented some form of tax on CSDs, though strategies vary widely.
The World Health Organisation and the World Bank advocate for fiscal measures to incentivise healthier product formulations, including layered taxation in proportion to the sugar content—a recommendation India has notably deviated from in its policies.
A case of this is the UK. The UK’s Soft Drinks Industry Levy (commonly known as the “Sugar Tax”) introduced in 2018, imposes a tiered tax based on sugar content: 18p per litre for drinks with 5-8 grams of sugar per 100ml, and 24p per litre for drinks with more than 8 grams of sugar per 100ml. Similarly, Thailand has implemented a sugar-based excise tax since 2017, with rates increasing progressively based on sugar content.
On the other hand, Denmark’s sugar tax of EUR 0.22 per litre on sugary drinks faced criticism for not accounting for consumer behaviour, leading to increased purchases of untaxed products in neighbouring countries. This oversight undermined the tax’s effectiveness, hurt the domestic manufacturing sector, and resulted in job losses.
The Solution: A Smart, Tiered Tax System
To address these challenges and unlock the industry’s potential, India needs a smart tax system. High-sugar drinks keep the current tax rate, medium-sugar drinks get a slightly lower rate, and low-sugar or sugar-free options benefit from a significantly reduced rate. This approach could work well to revolutionise this fledgling industry to the benefit of all stakeholders. Consumers would have access to a wider range of affordable, healthier beverage options. Companies would be incentivised to innovate and create lower-sugar products, potentially leading to increased sales and market growth. The government could see increased tax revenue from a growing, more diverse beverage market. Public health would benefit from reduced sugar consumption, aligning with national health goals. Local economies, especially in Tier 2 and 3 cities, could flourish with new job opportunities in production, distribution, and retail.
Path ahead
It’s time to pop the cap on innovation and let the fizz of progress flow. With a smarter tax approach, India’s beverage industry can truly sparkle—refreshing not just our taste buds, but our economy too. By providing fiscal incentives for healthier reformulations while appropriately taxing high-sugar products, India can create a win-win scenario: a thriving beverage industry that supports economic growth while promoting public health.
Furthermore, it’s crucial not to couple carbonated beverages with sin goods like tobacco and alcohol, which are subject to heavy compensation cess. Instead, the focus should be on developing a tax structure that recognises the unique position of the beverage industry. Removing the compensation cess from carbonated beverages can alleviate undue financial burdens and foster growth and innovation.
This transformation requires the Food Safety and Standards Authority of India (FSSAI) and health organisations to work closely with the GST Council. Specifically, the Rate Rationalisation Committee of the GST Council should aim to create a tax framework that aligns with both health outcomes and economic growth, ensuring a balanced and equitable approach to taxation in the beverage sector.
The author is the director of Bharat Gain. (Views expressed are the author’s own and not necessarily those of financialexpress.com)