The carbonated soft drinks (CSD) sector in India is grappling with significant challenges as it struggles to expand under the country’s tax regime, according to a recent report by the Indian Council for Research on International Economic Relations (ICRIER). The report highlights that despite government initiatives like ‘Make in India’ and ‘Aatmanirbhar Bharat,’ the industry is facing a slowdown due to high taxation under the Goods and Services Tax (GST) framework.
High GST Rates Stifling Growth
One of the key findings of the ICRIER study is that India’s tax rate on carbonated soft drinks is among the highest in the world, posing a significant hurdle to the growth of the sector. At a staggering 40%, the tax rate on sugar-sweetened beverages (SSBs) in India surpasses those in more than 90% of the countries that impose taxes on similar products. The GST structure imposes a 28% tax on CSDs, coupled with a 12% compensation cess, making the total effective tax rate 40%. This steep taxation has stunted the sector’s growth potential, limiting innovation and expansion.
According to the ICRIER report, “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.” This highlights the significant role tax policies play in hindering the development of the CSD market in India.
Global Shift in Consumer Preferences
Adding to the industry’s struggles, consumer preferences are evolving globally, with a growing trend towards healthier, low-sugar, and no-added-sugar beverages. This shift is being observed in India as well, where health-conscious buyers are beginning to move away from traditional sugary soft drinks and are instead opting for beverages with less sugar or natural fruit-based options. As a result, both global and domestic producers are reformulating their products to cater to this changing demand.
While the CSD industry in other countries is witnessing a wave of innovation supported by fiscal and non-fiscal incentives from their respective governments, Indian companies are finding it hard to keep up due to the tax burden. The report mentions that although some Indian companies have begun revamping their product portfolios to include healthier options, the high tax rates continue to be a roadblock to innovation and diversification.
CSD Market’s Untapped Potential in India
Despite the challenges, India’s carbonated soft drinks market still holds substantial potential. In 2022, the sector generated $18.25 billion in revenue, marking a 19.8% compound annual growth rate (CAGR) between 2017 and 2022. However, considering the size of India’s population and its position as one of the world’s largest fruit producers, the market remains relatively small compared to other developing nations like Thailand and the Philippines.
The ICRIER report underscores this gap, stating, “India’s position as a major fruit producer contrasts with its lagging CSD manufacturing sector. The country offers fewer CSD varieties compared to other developing nations, representing untapped potential for the industry.” This untapped potential suggests that the Indian CSD market could expand significantly if tax policies were made more favorable, encouraging innovation and investment in the sector.
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Lack of Product Variety and Innovation
One of the key criticisms in the ICRIER report is the lack of product variety and innovation in the Indian CSD sector. Although there is a growing demand for low-sugar and fruit-based carbonated beverages, the industry’s response has been limited. While startups and established companies are trying to introduce new products that cater to evolving consumer tastes, the high tax burden discourages substantial investment in research and development.
“The Indian consumer wants to experiment with different products such as low-sugar CSDs or fruit-based CSDs, and startups are trying to come up with new products. However, investment, product varieties, and innovation in CSDs in India are much lower compared to global standards,” the report points out.
Government Initiatives vs. Industry Challenges
Despite government-led initiatives such as ‘Make in India’ and ‘Aatmanirbhar Bharat,’ which aim to boost domestic manufacturing and innovation, the carbonated soft drinks sector has not been able to fully capitalize on these opportunities. The high GST rates on sugary beverages not only hinder the growth of traditional soft drinks but also affect the development of healthier alternatives that align with global consumer trends.
The ICRIER report suggests that the government needs to reconsider the tax structure for the CSD industry to enable its growth. “Revisiting the GST rates for carbonated beverages, especially for those with lower sugar content, could encourage more companies to invest in the production of healthier alternatives, thus benefiting both the industry and consumers,” the report recommends.
Future Outlook for India’s CSD Market
The future of India’s carbonated soft drinks sector depends largely on how the government responds to these challenges. Revisiting the tax structure and offering incentives for innovation could unlock the market’s growth potential, helping India become more competitive on the global stage.
With health-conscious consumers demanding more low-sugar and fruit-based beverages, and with startups eager to innovate, the CSD market in India is ripe for expansion. However, unless the tax regime is made more conducive to growth, the sector will continue to struggle to reach its full potential.
Conclusion
India’s carbonated soft drinks sector is at a crossroads. The industry shows significant potential for growth, but high taxation under the GST regime is hampering its expansion. While global consumer preferences are shifting towards healthier alternatives, and Indian companies are keen to innovate, the current tax structure remains a major barrier to progress.
For the CSD market to thrive in India, the government may need to rethink its approach to taxing sugar-sweetened beverages. Lowering taxes or providing incentives for healthier alternatives could boost investment, increase product variety, and ultimately help the sector grow, benefiting both businesses and consumers alike. Until these changes are made, however, India’s carbonated soft drinks industry will continue to struggle under the weight of high taxes.
