Yet, when it comes to beverages—particularly carbonated drinks—the policy has resulted in a tax burden that not only diverges significantly from international norms, but also hampers the ease of doing business.

Also Read: Simplify India's GST regime: The case for it is clear and it's time to act

Under the GST regime, beverages like aerated drinks (taxed at a rate as high as 40% before GST) were assigned a standard rate of 28%. To address potential revenue losses for states, the Subramanian Committee recommended an additional 12% compensation cess, pushing the effective tax rate on these products to 40%. 

Recently, to harmonize the tax treatment of similar products, the GST Council decided to raise the rate on caffeinated beverages from 18% to 28%—again, with an additional compensation cess of 12%. These decisions have cemented India's position as one of the highest-taxing nations for sugar-sweetened beverages.

Internationally, the contrast is stark. The World Bank has noted that among 115 countries with GST or value added tax (VAT) systems, India's tax rates are among the highest. The median global tax rate for carbonated beverages hovers around 18.4%. 

In comparison, India's total tax rate for carbonated beverages of 40% is not only significantly higher, but also places the country in a minority group, with only a few West Asian nations such as the UAE, Saudi Arabia and Oman surpassing it.

The impact of such high taxation has not always yielded the intended outcomes in other countries. In Denmark, for example, the introduction of a 'fat tax' led to unintended consequences, including a surge in cross-border shopping and a rise in informal markets, ultimately forcing the government to withdraw that tax. 

Also Read: Campa, Smoodh and now, Amul Tru: India's ₹10 beverage market is starting to get crowded

In West Asia too, where some of the highest beverage taxes exist, consumption patterns have not shifted significantly, but illicit trade has grown. These experiences suggest that excessive taxation does not always result in healthier consumer choices but instead distorts markets and cramps space for legitimate economic activity.

Impact on business growth and investment: On the other hand, India's beverage industry—valued at about ₹1 trillion—has significant untapped potential. With projected investments of ₹85,000 crore planned by 2030, the sector could create substantial employment, stimulate economic activity and drive rural development. The industry already supports over 700,000 jobs, particularly in small towns and villages. But the current tax regime has stifled its growth prospects.

Between 2018-19 and 2019-20, many companies operating in the carbonated soft drink (CSD) segment reported revenue losses and declines in their GST contributions.

Meanwhile, unregulated products have flooded the market as consumers looking for more affordable options have turned to informal sellers. 

In effect, high CSD taxation has given rise to an informal sector, with its products accounting for around 80% of India's CSD market, as estimated. Counterfeit beverages abound. This has created gaps in monitoring food safety and quality standards and weakened trademark enforcement, even as efforts to bring the informal sector under a formal tax regime have faltered.

Moreover, India's vast horticulture sector has not lived up to its potential. With horticultural production estimated at 351.9 million tonnes for 2022-23, making India the world's second-largest grower of fruits and vegetables, the country possesses the raw material needed to excel in fruit-based and functional beverages. High taxes, however, have prevented India from leveraging this advantage to capture a share of the growing global demand.

The case for rate rationalization: Sin taxes are common around the world, aimed at mitigating the negative externalities associated with harmful products. But India's beverage tax remains one of the highest globally, imposing a blanket levy across a broad category of beverages, effectively placing them on par with tobacco products.

This approach needs a rethink. Globally, countries like the UK and Thailand have adopted differentiated tax frameworks, with key factors such as sugar content, product type and portion size taken into consideration. This allows for a better targeted strategy that addresses variations in the harm potential and economic contribution of various beverages. India's current system overlooks all this.

Also Read: Charanjit Singh: Campa Cola's forgotten founder who battled Coca-Cola, Pepsi, and India Today

Rationalization of beverage taxation could unlock substantial economic value for the country. It could foster increased investment, spark entrepreneurial activity and open new avenues for value addition. Such a reform would lead to an expansion in production capacity, enhance export competitiveness and lend vibrancy to the startup ecosystem. 

In turn, this would contribute to regional economic development, job creation and a more dynamic market. As India tries to enhance the ease of doing business and drive sustainable growth, a relook at its beverage tax would be rewarding.

The author is a development economist and a former secretary to the Government of India.