Why GST reform must recognise the pivotal role of beverages in retail outlets

PM Modi made a clarion call for a massive GST reform, promising what he described as a 'Diwali gift' to consumers and businesses alike.

By Arpita Mukherjee 

Festivals in India are as much about consumption as they are about celebration. From Onam and Ganesh Chaturthi to Diwali and Christmas, the last quarter of the year drives a surge in spending on food, clothing, gifts and entertainment. For millions of small shopkeepers, these months are more than just busy - they often determine whether their businesses close the year in profit.

This festive season coincides with a vital policy moment. In his Independence Day address, Prime Minister Narendra Modi made a clarion call for a massive GST reform, promising what he described as a “Diwali gift” to consumers and businesses alike.

Pivot to a two-slab architecture

The Group of Ministers has reportedly endorsed the government’s proposal for a simplified two-slab GST structure, which would scrap the 12 and 28 per cent brackets, retain 5 and 18 per cent, and introduce a 40 per cent category exclusively for sin goods. Industry experts widely agree that rationalising tax rates would boost manufacturing, reduce compliance burdens and, most crucially, spur consumption at a time when demand is seasonally high.

Retail as a backbone of consumption

India’s retail market has expanded rapidly, from ₹35 lakh crore in 2014 to over ₹82 lakh crore in 2024. Alongside shopping malls and online platforms, it is the corner shop — the Kirana store — that remains the most resilient node in the chain.

With nearly 15 million Kirana outlets spread across the country, these shops are not just transactional spaces but embedded institutions that provide credit to households, absorb underemployment into self-run enterprises, and maintain accessibility in semi-urban and rural markets.

Despite the growing popularity of quick commerce in metros, its reach remains narrow, concentrated in the top ten cities. For the majority of India, the festival purchase still happens at the neighbourhood store. In Tier 2 and Tier 3 cities, especially, Kiranas remain the primary access point for daily consumption, even as modern formats slowly expand. For policy, this means that protecting their viability is directly linked to ensuring inclusive growth.

Beverages as a driver of retail sales

Within the wide range of products sold in Kiranas, beverages hold a distinctive place because of how often and at what price points they are purchased. Unlike bulk goods that move monthly, aerated drinks and packaged beverages are bought frequently, often on impulse, and mostly in small, affordable packs. More than 70 per cent of sales come from bottles priced between ₹10 and ₹20, a range that keeps them within reach of lower- and middle-income households and ensures a steady flow of customers to local shops.

This regular demand matters all the more as Kiranas face growing competition from quick-commerce platforms, which attract urban consumers with convenience and aggressive discounting. For small shopkeepers, the ability to retain footfall depends on products that move quickly and still leave a margin worth sustaining. Beverages perform this role better than most other FMCG categories.

While many staples leave retailers with slim returns, aerated drinks offer margins in the 19–24 per cent range, giving Kiranas the cushion they need to cover costs. The industry, in turn, supports this model through branded coolers, predictable delivery schedules and supply chain assistance, which allow Kiranas to keep stocks fresh and even branch into other perishable goods such as dairy.

The relationship is thus symbiotic: beverages rely on the reach of Kiranas, and Kiranas rely on the steady income stream that beverages generate.

The GST paradox

Despite this embedded role, beverages face one of the steepest indirect tax burdens. Classified under the 28 per cent GST slab with an additional 12 per cent compensation cess, aerated drinks, irrespective of their sugar content, are treated as demerit or sin goods alongside tobacco. Water has 12% and 18% GST, depending on bottle size. This classification fails to account for their actual consumption profile as mass, low-priced products central to small retail. The current GST 2.0 proposal still considers keeping them in the demerit category, even as other packaged goods are likely to move to lower slabs.

Inverse relationship between taxes and demand

In smaller towns and rural areas, high taxes suppress demand, narrowing the income base of Kiranas and reducing incentives for companies to expand distribution. Moreover, punitive taxation has fueled the rise of an informal sector, where counterfeit beverages thrive. Estimates suggest that unregulated products already account for close to 80 per cent of sales, highlighting the scale of the distortion. Far from serving public interest, the current structure fragments markets, reduces tax collection and weakens legitimate retail.

Towards smarter taxation

Beverages are often described as “non-essential,” yet in practice, they are essential to the viability of Kiranas and the resilience of India’s retail backbone. A 2022 ICRIER study found that the sector contributed ₹7.91 lakh crore in value to the economy in 2018–19 and supported nearly 6.9 lakh jobs directly and indirectly. Continuing to treat such a sector as a sin industry risks undermining one of India’s most employment-intensive segments.

GST 2.0 offers an opportunity not just to simplify slabs but also to revisit outdated classifications, which ignores variety of beverages classified by sugar levels. Correctly rationalising tax on beverages keeping low sugar and zero sugar drinks in the lowest tax category, water at 5 %, would expand legitimate consumption, shrink counterfeit markets and strengthen Kirana incomes in an era where competition from digital formats is intensifying.

As the GST Council meets next week, it will deliberate on a reform that coincides with the peak of the festival season. A rational tax system that recognises the role of mass-consumed goods like beverages can ensure that festivals remain not only occasions of cultural significance but also moments of inclusive prosperity across India’s diverse retail landscape.

(Arpita Mukherjee is Professor, ICRIER (arpita@icrier.res.in.)

Views are personal and do not represent the stand of this publication.