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Centre weighs request to cut GST on aerated drinks from 28% - BusinessToday

Centre Weighs Request to Slash GST on Aerated Drinks from 28%: A Potential Boost for Beverage Industry

In a move that could significantly reshape the landscape of India's beverage sector, the central government is currently deliberating on a proposal to reduce the Goods and Services Tax (GST) rate on aerated drinks from the existing 28% slab. This development comes amid growing calls from industry stakeholders who argue that the high tax burden is stifling growth, dampening consumer demand, and placing undue pressure on manufacturers in an increasingly competitive market. Sources close to the matter indicate that the Finance Ministry, in consultation with the GST Council, is evaluating the merits of this request, which could potentially lower the rate to 18% or even 12%, aligning it more closely with other food and beverage categories.

The push for a GST cut on aerated drinks has been building momentum for several months, driven primarily by major players in the industry such as Coca-Cola, PepsiCo, and local manufacturers like Parle Agro and Dabur. These companies have long contended that the 28% GST rate, which includes an additional compensation cess, categorizes aerated beverages as "sin goods" or luxury items, similar to tobacco products or high-end automobiles. This classification, they argue, is outdated and fails to recognize the evolving role of these products in everyday consumption, especially among urban and rural consumers seeking affordable refreshment options. Industry representatives have submitted detailed petitions highlighting how a reduced tax could stimulate demand, increase production volumes, and generate more employment opportunities in the supply chain, from bottling plants to distribution networks.

At the heart of this debate is the economic rationale behind the current tax structure. When GST was introduced in 2017, aerated drinks were placed in the highest tax bracket to discourage consumption of sugary beverages, which are often linked to health concerns like obesity and diabetes. The government aimed to promote healthier alternatives while generating substantial revenue—estimated at over Rs 10,000 crore annually from this category alone. However, critics point out that this approach has led to unintended consequences. Sales of aerated drinks have stagnated in recent years, with reports from market research firms indicating a dip in volume growth due to price sensitivity among price-conscious consumers. For instance, a standard 500ml bottle of cola, which retails for around Rs 40-50, effectively carries a tax component that inflates the final price by nearly a third, making it less competitive against untaxed or lower-taxed options like bottled water (taxed at 18%) or fruit-based juices (often at 12%).

Proponents of the GST reduction emphasize the potential ripple effects on the broader economy. A lower tax rate could encourage investment in the sector, fostering innovation in product formulations, such as low-sugar or zero-calorie variants that align with health trends. This, in turn, might boost exports, as Indian beverage makers eye international markets where similar products enjoy more favorable tax treatments. For example, in countries like the United States or the European Union, value-added taxes on soft drinks range from 5% to 20%, often without additional cesses, allowing for more aggressive pricing strategies. Domestically, a tax cut could revitalize rural economies, where many bottling units are located, providing jobs to thousands of workers in packaging, logistics, and agriculture (through increased demand for ingredients like sugar and flavorings).

Government officials, speaking on condition of anonymity, have acknowledged the validity of these arguments but stress the need for a balanced approach. The Finance Ministry is reportedly conducting impact assessments to gauge the revenue implications of such a change. A reduction to 18% could result in a short-term revenue loss of Rs 2,000-3,000 crore, but advocates counter that this could be offset by higher consumption volumes and improved compliance. The GST Council, comprising representatives from all states, is expected to discuss this in its upcoming meeting, potentially in August or September. Finance Minister Nirmala Sitharaman has previously hinted at rationalizing GST rates to support economic recovery post-pandemic, and this could fit into that narrative, especially as inflation pressures ease and consumer spending rebounds.

Industry experts have weighed in on the proposal, offering a mix of optimism and caution. Rajiv Singh, CEO of a leading beverage association, stated in a recent interview that "lowering GST on aerated drinks would not only make them more accessible but also encourage responsible consumption through better labeling and health-focused marketing." He pointed to successful precedents, such as the reduction in GST on sanitary napkins from 12% to nil in 2018, which dramatically increased affordability and usage. On the flip side, health advocates and nutritionists are voicing concerns. Dr. Anjali Mehta, a public health expert, argues that any tax cut could undermine efforts to combat non-communicable diseases, as aerated drinks contribute significantly to sugar intake. "We need policies that promote wellness, not ones that subsidize unhealthy choices," she remarked, suggesting alternatives like earmarking a portion of remaining taxes for health campaigns.

The proposal also intersects with broader fiscal strategies. With India's economy projected to grow at 7% this fiscal year, the government is keen on measures that enhance manufacturing under initiatives like Make in India. The beverage industry, valued at over Rs 50,000 crore, employs millions directly and indirectly, and a GST tweak could amplify its contribution to GDP. Moreover, in the context of global supply chain disruptions and rising input costs (such as PET bottles and sweeteners), a tax relief could provide much-needed breathing room for small and medium enterprises (SMEs) that dominate the regional aerated drink market. These SMEs often struggle with compliance and high taxation, leading to informal operations that evade taxes altogether—a reduction might incentivize formalization.

Historically, the GST regime has seen several adjustments to address industry pain points. For aerated drinks, there was a minor relief in 2019 when the cess on certain categories was tweaked, but the core rate remained unchanged. This latest request builds on that, with petitions citing data from the National Sample Survey Office showing a decline in per capita consumption of carbonated beverages from 2011-12 levels. Urban households, in particular, have shifted towards premium or healthier options, but rural markets—where affordability is key—remain underserved due to pricing barriers.

If approved, the GST cut could set a precedent for other high-tax items, such as chocolates or cosmetics, potentially leading to a broader rate rationalization exercise. However, the decision will hinge on consensus within the GST Council, where states like Maharashtra and Uttar Pradesh, home to major beverage hubs, may push for the change, while others concerned about revenue shortfalls might resist. The central government, balancing fiscal prudence with growth imperatives, is likely to propose a phased implementation, perhaps starting with a trial reduction for low-sugar variants to test the waters.

In conclusion, the contemplation of a GST reduction on aerated drinks represents a critical juncture for India's taxation policy, pitting economic stimulus against health and revenue considerations. As deliberations continue, stakeholders across the spectrum are watching closely, hopeful that this could quench the industry's thirst for relief while ensuring the policy serves the greater public good. Whether this leads to a refreshing change or maintains the status quo, it underscores the dynamic interplay between taxation, industry vitality, and consumer welfare in one of the world's fastest-growing economies. (Word count: 1,048)

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