Time for sin tax on sugary foods, beverages to curb consumption?

Higher taxes have been implemented by several countries in the past on ultra-processed foods like sugar-sweetened beverages (SSBs), to reduce the consumption of such food items. This is based on the assumption that taxes will increase the price of the products, which will discourage consumers to purchase them.

Similarly, a lower tax on healthier products like plain water, fruit/vegetable-based drinks and fruit or vegetable juices, can increase their sales and incentivise manufacturers to reformulate their products (for example, zero sugar carbonated drinks) to reduce the sugar content.

Given some of the adverse health implications of high consumption of SSBs, like diabetics and obesity, high taxes can raise substantial revenue, which can be deployed towards public welfare and other health programmes.

While these arguments look perfectly logical, consumer purchase data across different countries show that taxes have not always been successful in guiding consumers towards healthier consumption, especially if consumer demand is price inelastic or if they find innovative ways to shop.

For example, until 2013, Danish people were taxed EUR0.22 per litre of SSBs, but in 2014, Denmark eliminated the sugar tax because Danish residents travelled to neighbouring countries and border shops to purchase untaxed sugary foods and beverages. This adversely impacted the country’s manufacturing sector leading to job losses. From a tax collection perspective, while the scrapping of the sugar tax led to a loss of about EUR60.35 million per year in revenue, this money was not only recovered, but the government earned more as it reduced the sale of illegal soft drinks, increased investment in manufacturing and people stopped crossing the border to buy cheaper soda. Thus, there is a need to study the consumption pattern of the country and consumers’ shopping behaviour before implementing taxes. Unless this is done, high taxes can have other adverse impacts, including slowing down manufacturing and job losses.

In India, the lowest socioeconomic group bears the burden of high taxes on carbonated beverages

In fast-growing developing countries like India, where per capita income is rising and consumers are becoming more health-conscious, data shows higher taxes on SSB can be regressive. This is because lower-income groups are increasing their consumption of carbonated soft drinks (CSDs), while higher income groups are shifting toward healthier products.

Let us compare the Indian market today with that in the 1980s. In the 1980s, there were few carbonated soft drinks brands in the market, consumers had limited choices and such products were hardly consumed by the low-income groups. However, today low-income groups are the main consumers of such products. A recent study by the authors found that while the highest income group (SEC A) has reduced the purchase of CSDs and has shifted to healthier options like juices, lower socio-economic classes have increased the purchase (see Table 1), thus shifting the burden of taxation to the lower socio-economic groups.

India, today, has one of the highest tax rates of 40% (28% GST plus 12% compensation cess) on CSDs, much of which is borne by the lower socio-economic groups.

Higher taxes can also give rise to counterfeit products and illicit markets. One example of it is the high taxes on mineral water in India and the large unbranded product market. In India, where 80% market is in the informal sector; higher taxes may slow down the process of corporatisation in this sector, and thereby, lower tax revenue earnings.

Further, taxing essentials like clean and safe drinking water is not aligned with other goals of the government like achieving the Sustainable Development Goals (SDG - 6). In the case of India, not only the taxes are high for mineral water, but they also vary by package size. Natural/mineral water and aerated water are taxed at 18% but water packed in a 20-litre bottle is taxed at 12%, discouraging smaller purchases.

In most countries globally, mineral water is taxed at an average of 5%, irrespective of the size, as it is part of the Sustainable Development Goals (SDG - 6). Similarly, juices are taxed at 12% in India, whereas in many ASEAN countries it is at 5%. With one of the highest taxes in the beverages sector, the study found that despite being one of the largest producers of fruits, sugar and other ingredients, the beverages processing is low and high taxes in India, as has been in case of Denmark, is deterring “Make in India”.

How should taxes be designed?

If taxes are designed to guide consumption, the lowest taxes should be on mineral water and low-sugar content beverages and nutritious drinks. In countries like France and the United Kingdom (UK), tax is based on the level of sugar content in the drink. For example, in April 2018, the UK government introduced the Soft Drinks Industry Levy (SDIL), a two-tiered excise tax applicable on drinks with high sugar concentrations. For SSBs, with a sugar content of more than 8g/100 ml, the tax rate is applicable at GBP0.24 per litre, and for drinks with sugar content between 5g and 8g/100ml, the tax rate is GBP0.18 per litre. Drinks having a sugar content of less than 5g are not taxed and pure fruit and vegetable juices and milk drinks are exempted from taxes. Such tax structures encourage consumers to shift to healthier products and producers to innovate new products. India can learn from these global best practices.

While data shows that tax may not guide consumers towards healthier consumption, consumers may be guided towards nutritious beverages through awareness building campaigns and proper labelling. The role of designing taxes like GST (Goods and Services Tax) is to maximise revenue earnings. The Denmark example shows that revenue can increase through various routes, including addressing the issue of counterfeit products and supporting the growth of manufacturing.

Analysing sales and purchase data in India, the study by the authors titled “Contribution of Non-alcoholic Beverage Sector to Indian Economic Growth & Atmanirbhar Bharat”, concluded that a moderately high GST on SSBs of 28%, along with the lowest taxes on nutritious drinks like fruit juices or essentials like water, will guide consumers towards healthier consumption of non-alcoholic beverages.

A moderate tax, along with incentives for nutritious products, will encourage the Indian non-alcoholic beverages industry to innovate and develop healthier products and will help corporatise the informal sector, which will, in turn, increase the tax revenue.

(Dr Arpita Mukherjee is a professor at the Indian Council for Research on International Economic Relations (ICRIER). Eshana Mukherjee is a research assistant, ICRIER. The authors can be reached at arpita@icrier.res.in and emukherjee@icrier.res.in, respectively. Views expressed are personal.)