Why carbonated drinks makers want layered sugar tax?
There are growing calls to revisit India’s tax policy on carbonated soft drinks. Many argue that the current 40% tax, including GST and cess, is excessive for beverages with little or no sugar. Advocates propose a tiered tax system, with lower rates for zero and low-sugar drinks, encouraging healthier options and industry innovation, aligning with global practices.
There are renewed calls for revisiting India’s taxation policy for carbonated soft drinks, which some say is misconceived as it imposes excessively high taxes on beverages that have little or no added sugar.
Carbonated soft drinks, including those constituted with fruit juices, currently attract goods and services tax (GST) of 28%, which is the highest slab, and compensation cess of 12%, translating into a tax incidence of 40%. Many are advocating a layered “sugar tax” on non-alcoholic beverages, where drinks that have no added sugar are taxed at a lower rate and those with high sugar content at a higher rate.
India is an outlier on taxing carbonated beverages at excessively high rates while the global practice involves imposing a sugar tax on beverages with high sugar content rather than the carbonated drinks. The UK’s Soft Drink Industry Levy of 2018, for instance, taxes sugar sweetened beverages based on sugar content. To avoid or reduce the tax, the UK beverage industry began lowering sugar content.
Significantly, the pleas for changes in taxation for carbonated beverages have come at a time when a GST committee is deliberating on rationalisation of the rates of the consumption tax. The current end date of the compensation cess is March 31, 2026, while indications are that it might continue to exist with a redefined end use even after that.
A recent policy brief of the Indian Council for Research on International Economic Relations (ICRIER), a public policy organisation, titled Carbonated Beverages Industry in India: Tax Policy to Promote Growth, Innovation and Investment advocates 12% GST on carbonated soft drinks with zero sugar and 18% GST on those with low-to-moderate sugar level while retaining the 28% tax on those with high sugar content.
“The high taxes on low and zero-sugar carbonated soft drink (CSDs) products are not aligned with the recommendations of the World Health Organisation (WHO) or health experts/nutritionists in the country, who support the concept of taxing CSDs in different layers proportionate to their sugar content. Globally, over 120 countries have come up with such layered tax policies for CSDs to encourage product reformulation and support the production of healthier CSDs,” ICRIER’s policy brief stated.
It added that the compensation cess of 12% should be removed from CSDs to facilitate more investment, job creation and innovation. “This will also help startups to enter and invest in this sector. Overall, tax rates in India need to be compared with those in ASEAN and other countries to give Indian manufacturers a level playing field with their global competitors,” the authors led by Arpita Mukherjee have suggested in the policy brief.
Presenting the paper at a conference in Delhi recently, Mukherjee noted that there was no scientific evidence that carbonated drinks are not healthy. For that matter, doctors advise consumption of carbonated drinks in certain medical conditions. India’s food safety regulator, Food Safety and Standards Authority of India, does not classify carbonated beverages as unsafe.
She added that the GST rate structure on beverages was very confusing. Soft drinks such as Coca-Cola and Pepsi, sports drinks with added sugar such as Gatorade and carbonated beverages with fruit juice are taxed at 28% together with 12% compensation cess, sodas and packaged drinking water are taxed at 18% while fruit-based drinks which have high sugar content such as Maaza, Frooti and Slice are taxed at 12%.
Mukherjee added that the tax system can be used to encourage industry players to reformulate beverages, introduce more low-sugar and healthier products, and also influence consumer choices. Following the Covid pandemic, the richer sections of society have become more conscious of consuming healthier food and lowering sugar intake. However, the consumption of sugary food has increased among the poor who have become susceptible to lifestyle diseases such as diabetes. Products with added sugar can be cheaper than the healthier options due to the subsidy given to sugar mills.
Indian Beverage Association’s secretary general Jagdish Prasad Meena said that rationalisation of the taxes on non-alcoholic beverages will benefit not just the industry and consumers but also retailers, supply chains and farmers. “The tax structure was proving to be an impediment to India becoming a beverage processing hub,” he said, observing that India was a major producer of fruits. “Farmers’ income will rise if more horticulture produce is procured by the beverage companies.” At present, the industry does not find it viable to introduce more fruit-based beverages
He added that major players had already invested Rs 50,000 crore in the sector in the last few years and that investments could rise to Rs 80,000 crore in the next five year with the right tax environment.
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