Why India’s Carbonated Soft Drink Sector is Struggling Under GST?

India’s carbonated soft drinks (CSD) sector is facing a significant roadblock in its quest for expansion, primarily due to high taxation under the Goods and Services Tax (GST) regime, according to a recent report by the Indian Council for Research on International Economic Relations (ICRIER). Despite the Indian government’s efforts to promote domestic industries through initiatives like ‘Make in India’ and ‘Aatmanirbhar Bharat,’ the carbonated soft drink industry continues to struggle under the burden of excessive taxes.

A Snapshot of the Sector’s Growth Potential

The CSD sector in India, though showing some promise, is not expanding at the rate anticipated. In 2022, the industry generated revenue of $18.25 billion, achieving a compound annual growth rate (CAGR) of 19.8% between 2017 and 2022. While this growth is notable, especially in comparison to other sectors, the market still remains relatively underdeveloped given India’s massive population.

India, being one of the world’s largest producers of fruits, has significant potential to lead in the production of fruit-based carbonated beverages. However, when compared to other developing countries like Thailand and the Philippines, India still lags in terms of product variety and innovation in the CSD space.

The GST Structure: A Heavy Burden on CSDs

At the core of the issue lies the current GST structure, which places an overwhelming burden on the CSD sector. Under the GST regime, carbonated drinks fall under the highest tax slab—28%, which is further compounded by an additional 12% compensation cess. This effectively results in a staggering 40% tax on these products, irrespective of their sugar content or any health-related reformulations.

The compensation cess, introduced to offset potential revenue losses faced by states post-GST implementation, has become a major impediment to the growth of several industries, including carbonated beverages. The high GST rate, combined with the cess, makes it increasingly difficult for companies to invest in innovation or expand their product portfolios.

This contrasts sharply with global practices, where many countries offer fiscal incentives to encourage the production of healthier beverages, such as low-sugar or sugar-free alternatives. These incentives are lacking in India, where all carbonated drinks, regardless of their composition, are taxed at the same rate. As a result, even companies that are trying to innovate and adapt to the global shift toward healthier alternatives are being stifled by the current tax regime.

Global Shift Towards Healthier Alternatives

Worldwide, consumer preferences are shifting towards healthier, low-sugar, or no-sugar-added beverages, driven by increasing awareness of the health risks associated with high sugar consumption. Many governments have responded to these changes by implementing lower tax rates for sugar-free or reduced-sugar beverages. This has provided a stimulus for manufacturers to invest in reformulating their products to cater to health-conscious consumers.

Indian consumers are also following this global trend, with a rising demand for fruit-based or low-sugar carbonated beverages. However, the heavy taxation on all carbonated drinks in India—regardless of sugar content—acts as a deterrent to investment in these healthier alternatives.

According to the ICRIER report, the industry faces a dual challenge: on one hand, there is increasing demand from consumers for healthier, innovative products; on the other hand, the high GST and cess rates prevent companies from making the necessary investments to meet these demands. “The CSD segment is unable to reach its potential in terms of scale expansion due to barriers such as the high tax brackets and compensation cess under the GST regime, implemented since 2017,” the report notes.

The Impact of GST on Innovation and Market Expansion

The uniform tax treatment of all carbonated beverages, regardless of their sugar content, discourages manufacturers from investing in product innovation. As companies are subject to the same 40% tax rate for low-sugar beverages as for regular soft drinks, there is little incentive to develop healthier alternatives. This lack of innovation is particularly problematic in a market like India, where consumers are showing a growing preference for new, healthier options but the industry is unable to keep up with this demand.

Countries like Thailand and the Philippines, which offer a wider variety of CSD products at more competitive prices, have created a more conducive environment for industry growth by implementing more nuanced tax policies. India, by contrast, has maintained a one-size-fits-all approach under the GST regime, which has stifled the sector’s ability to innovate and scale.

The ICRIER report points out that startups in India are making attempts to launch new products in the carbonated soft drinks category, particularly healthier options. However, the heavy tax burden makes it difficult for these new entrants to thrive. As a result, India’s CSD market remains smaller and less dynamic compared to other developing economies.

Calls for Reform: Lessons from Global Practices

One of the key takeaways from the ICRIER report is the need for a more balanced and reformative GST structure, particularly one that encourages innovation in healthier beverage options. Globally, many countries have adopted progressive tax structures where beverages with lower sugar content are taxed at a reduced rate. For example, in several European countries, beverages containing less than a certain threshold of sugar are subject to lower tax rates, providing an incentive for companies to reformulate their products.

By adopting a similar approach, India could encourage the production of healthier beverages, benefiting both the industry and consumers. Lowering the GST rate on low-sugar or sugar-free carbonated drinks would not only promote healthier choices but also create an environment that fosters innovation and investment in the CSD sector.

Additionally, there have been suggestions for revisiting the compensation cess, which was originally intended as a temporary measure. As the GST regime matures, there is a growing argument that the cess should be phased out, or at the very least, not applied uniformly across all categories of goods and services.

Conclusion: The Path Forward for India’s CSD Sector

India’s carbonated soft drinks sector has significant untapped potential, but the current GST structure, particularly the high tax rate and compensation cess, is stifling its growth. As consumer preferences shift toward healthier alternatives, the industry faces the dual challenge of meeting this new demand while grappling with the financial burden imposed by the GST regime.

For the sector to thrive, the industry players feel that there is an urgent need for reform. A more nuanced tax policy, one that differentiates between high-sugar and low-sugar beverages, could spur innovation and help the industry grow. Phasing out or reducing the compensation cess would also ease the financial strain on companies and encourage investment.

Ultimately, addressing these challenges will not only benefit the CSD sector but also support broader government initiatives aimed at promoting domestic industries and fostering a healthier consumer market.