New Delhi: The beverage industry on Monday called for a "layered" tax on sugary carbonated soft drinks linked to the sugar content in them.

Currently, carbonated or aerated beverages, ranging from low-sugar, fruit-based and flavoured drinks to zero-sugar aerated water, are placed in the highest slab of 28% goods and services tax (GST) in India, along with a compensation cess of 12%, taking the total levy to 40% tax. This is irrespective of their sugar or fruit content.

"Sugar-layered tax approach has been adopted by many of the countries including the UK, France, Thailand, and the results are good because the companies have different layers of sugar--i.e. higher-sugar high-tax; low-sugar low-tax," JP Meena, secretary general of industry body Indian Beverage Association (IBA), on the sidelines of an industry event. "Obviously, the companies would like to come in a bracket where they pay less."

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On Monday, the think tank Indian Council for Research on International Economic Relations (ICRIER), in a report, recommended a tiered tax structure on carbonated soft drinks, with a lower levy on drinks with less sugar. An increasing number of countries have implemented a layered-sugar tax on such beverages, creating a market for reformulated low-sugar beverages.

"Indian consumers are becoming more health conscious and are ready to explore new products like low or no sugar carbonated beverages and fruit-based carbonated beverages," ICRIER report said. "Hence, there are opportunities for the country to increase the manufacture of different varieties of carbonated soft drinks (CSD), including low-sugar varieties, which can increase the revenue of the sector, investment in manufacturing and create jobs. Thus, a layered tax model based on added sugar content in CSDs can promote growth."

Such a layered tax structure will encourage consumers to opt for low and no-sugar beverages, it added.

India's top beverage makers include Coca-Cola, PepsiCo, Reliance Consumer Products, Dabur India, Tata Consumer Products.

Beverage industry investments

India's beverage industry has attracted over ₹50,000 crores of investment in recent years, ICRIER said in its report. The market size of the non-alcoholic, ready-to-drink segment is set to touch ₹1.5 lakh crore by 2030, up from the current ₹60,000 crore.

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IBA's Meena said revised tax rates depend on what the government wishes to implement.

"Once the government accepts the principle of taxing on the basis of sugar content, obviously, any product which has less sugar should logically have less rate," he said. "It can be anything which the government thinks of but there should be differentiated rates based on sugar content."

According to Arpita Mukherjee, professor at ICRIER, even though the Indian consumer wants to experiment with different products, companies face the tax hurdle. "This, therefore, does not incentivize existing producers and start-ups to invest in healthier options, limiting investment and job creation in the sector."

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Reformulated low-sugar and zero-sugar CSD and fruit-based fizzy drinks are costly to produce compared to traditional products which have relatively high sugar content. That's because sugar is highly subsidized in India, while its alternatives are expensive, making it cheaper to produce CSDs with high sugar content compared to reformulated products, according to ICRIER.

High taxes on all carbonated drinks irrespective of their sugar content makes it difficult and unattractive to innovate, as it increases the price of low-sugar products, ICRIER said.