Government Considers Higher Tax, Cess On Caffeinated Energy Drinks

The government is considering imposing a higher tax and a cess on energy drinks that contain caffeine, according to two officials aware of the development, to bring brands like Red Bull and Monster Energy on a par with sugary sodas.

The plan is to impose a compensation cess of 12-15 percent on caffeinated drinks classified as other non-alcoholic beverages, the officials said on the condition of anonymity as they are not authorised to talk to the media. The Finance Ministry is also considering increasing the goods and services tax rate to 28 percent from 18 percent on such drinks, the first of the two officials said.

The proposals, if accepted, will remove the anomaly of caffeinated beverages being taxed less than carbonated drinks like Coca-Cola and Pepsi that invite a total levy of 40 percent (28 percent GST plus 12 percent compensation cess), the official said. They will also bring energy drinks under the ambit of Goods and Service Tax (Compensation to States) Act, 2017. The law allows for a cess on luxury items like cars and sin goods like cigarettes to compensate states for loss of revenue in the first five years of the GST rollout.

A higher tax rate is also warranted as energy drinks pose a health risk to children and the young, the first official said, adding that the World Health Organization has issued several warnings.

The move to increase GST rate and impose a compensation cess on energy drinks may fetch the government an additional Rs 150 crore, the second official quoted above. The changes are likely to be considered in the next meeting of GST Council, and the amendments will be made along with other budget proposals, the official said.

Sumit Lunker, an indirect tax partner at PwC India, said the government is looking at bringing the emerging category of non-alcoholic drinks on a par with carbonated beverages in the market. “This will make energy drinks expensive for consumers and is not a positive for companies in the space.”

The combined market for sports and energy drinks was worth Rs 1,207 crore in 2017, according to market researcher Euromonitor International. Sports drinks, like PepsiCo's Gatorade, do not contain caffeine.

Energy drinks account for 60-65 percent of the market and are growing at 22 percent every year, according to the second official quoted above. Red Bull has around 85 percent share in the energy drinks segment, the official said. BloombergQuint couldn't independently verify the numbers.

Other energy drinks available in India include Monster Energy, owned by Monster Beverage Corporation and partly by Coca-Cola Company, and Hector Beverages Pvt. Ltd.'s Tzinga.

Red Bull India Pvt. Ltd. has yet to respond to BloombergQuint's emailed queries. Monster Beverage Corporation and Hector Beverages could not be reached for a comment.

(With inputs from Sharleen D'Souza)