In a three-part blog posting, reprinted here with express permission, Mountain Bee Kombucha founder, Bangalore-based Honey Islam, argues that proposed Indian Government taxation changes, scheduled to take effect on September 22, 2025, will punish the kombucha industry. The first part gives background, the second part examines the impact. The third part makes policy recommendations and advises Indian brands how to prepare for and respond to the planned changes.

Part One: Background

In India’s latest GST reform, designed to streamline the tax system and boost consumption, a concerning development has surfaced that could derail an entire category of health-focused beverages before it even finds its footing. The government’s decision to introduce a new 40% tax slab, labelled as a “demerit” category, has extended far beyond its intended target of sugar-loaded fizzy drinks and synthetic stimulants. It now encompasses a broad range of non-alcoholic beverages, including kombucha, cold-brew teas, infused waters, and many others developed with wellness in mind. The consequences of this sweeping categorization may be far more damaging than anticipated.

Penalty on innovation

For emerging brands and startups working tirelessly to create “better-for-you” alternatives to traditional beverages, this move feels like a heavy-handed penalty on innovation. Kombucha, for instance, is a fermented tea often consumed for its probiotic and gut-health benefits. It is not an indulgence nor a vice, it is consumed for its functionality, often with minimal or no added sugars, and serves as a daily wellness drink for a growing segment of mindful consumers. But by placing it in the same tax bracket as colas and high-caffeine energy drinks, the government has effectively signalled that kombucha is no different from the very drinks it was meant to replace.

Misclassification

This is not just a misclassification but a dangerous precedent. By branding such beverages as “demerit goods,” the policy paints the entire category with a broad, negative brushstroke. It doesn’t matter how clean the label is, how natural the ingredients are, or how little sugar the product contains. If it is sweetened, flavoured, or carbonated even mildly now falls under the punitive 40% GST regime. The message is clear: all non-alcoholic, processed beverages are guilty until proven otherwise, even if they are developed to support health and wellbeing.

Such a regime disproportionately hurts small and mid-sized players. Functional beverage startups, many of which are still in the early stages of consumer adoption and scale, will find it nearly impossible to survive with their products priced out of reach due to excessive taxation. Margins will evaporate, price competitiveness will disappear, and the very promise of a health-forward beverage economy will crumble under the weight of regulatory pressure. It is not an exaggeration to say that the kombucha industry in India may be killed before it even properly emerges.

Long-term effects

The consequences go beyond the immediate players. This tax structure discourages investment in low-sugar, functional or fortified beverages. It disincentivizes research and product development in clean-label drinks. And it sends a confused message to consumers who are trying to make better choices for themselves and their families. Instead of encouraging a transition away from sugar-heavy mass-market options, it effectively penalizes the alternatives with the same brush by removing any financial or psychological incentive to choose healthier options.

At a broader level, this policy risks throttling India’s burgeoning non-alcoholic beverage segment just as it was beginning to diversify. The sector had only recently started to see traction in formats like kombucha, aloe vera juices, hibiscus waters, turmeric tonics, and adaptogenic teas. These are products that tap into a global movement toward preventive health, conscious hydration, and functional nutrition. But instead of nurturing this shift, the tax policy crushes it under a system that fails to acknowledge nuance.

Outdated assumptions

This is where the real concern lies. By simplifying the tax code without recognising the diversity of the category, the GST Council has missed an opportunity to use taxation as a tool to guide consumer behaviour toward better health. A more progressive approach would have created distinctions based on sugar content, ingredient quality, or functional value, rewarding brands that are truly innovating for public good. Instead, the new regime treats every beverage not derived from a milk/mylk or fruit as a potential threat.

In essence, we have entered an era where a probiotic tea is treated no better than a bottle of cola. Where innovation is punished not because it fails the market, but because it fails the system’s ability to understand it. And where wellness products are taxed not based on their value, but on the outdated assumptions of what a beverage should be.

Pricing

If left unchanged, this policy will not only stunt the evolution of health-focused beverages in India, it will also ensure that the next generation of good-for-you hydration startups are stillborn. They won’t just be paying higher taxes. They’ll be fighting the stigma of being labelled a “demerit good” every time they try to explain to consumers why their drink is actually good for them.

And perhaps most devastatingly, this decision risks derailing the larger non-alcoholic beverage movement in India, a movement that was finally beginning to gain cultural ground. Over the past decade, young consumers across urban and semi-urban India have embraced conscious choices over cocktails, fermented teas over fizzy drinks, and mood-enhancing, health-boosting beverages as a new social ritual. Bars began stocking adaptogen blends. Cafés evolved to offer sparkling herbal tonics. Kombucha on tap wasn’t just a trend; it was a reflection of a changing India, one that wants to drink better, not just different. By making these alternatives financially unviable, the government risks slowing a public health shift that was organic, inclusive, and aligned with global wellness currents. If the non-alcoholic revolution gets priced out before it reaches scale, India will have lost not just a market opportunity but a cultural one.

Part Two: Impact

Context: From 22 Sept 2025, most non‑alcoholic beverages—including “other non‑alcoholic beverages” (HS 2202 91/99), caffeinated drinks, and carbonated drinks (incl. fruit‑based)—move to 40% GST. 

This article explains why that form-based approach rather than nutrition based thresholds penalises genuinely “better-for-you” innovations like zero-sugar seltzers, kombuchas, prebiotic sodas, and non-alcoholic spirits. We unpack how the shift strengthens big cola and energy-drink incumbents (via broader ITC and simpler compliance), raises costs and stigma for homegrown brands, and tilts shelf competition toward the categories the policy favours.

What moved where (with why it matters)

1) Water‑based drinks

• Who’s in the firing line:
  • Flavoured/functional still waters, flavoured seltzers/sparkling waters (even with zero sugar) typically sit in HS 2202 as “other non‑alcoholic beverages” or “goods … flavoured”, so they are now 40%
• Why they lose: They compete head‑to‑head with milk/mylk and fruit‑based drinks that just got pushed to 5%, widening the shelf‑price gap overnight

2) Tea‑based ready‑to‑drink (RTD) beverages

• Likely treatment: Most RTD iced teas / tea tonics are non‑alcoholic, flavoured beverages under 2202 → now 40%. The Council’s rationale explicitly sweeps flavoured non‑alcoholic beverages and caffeinated beverages into 40%.
• Why they lose: They’re branded as “light and healthy,” but price jumps and stigma from the “sin/luxury” slab undercut that positioning

3) Coffee‑based ready‑to‑drink beverages

• Important nuance: Bulk coffee got a rate cut to ~5% (core commodity), but caffeinated drinks (energy/RTD coffee formats marketed as beverages) are explicitly at 40%. So latte‑style RTDs, coffee tonics, “cold brew in a can” can get pulled into 40% if classified as caffeinated/non‑alcoholic beverages. 
• Why they lose: Brand confusion (coffee cheaper, but coffee drink costlier), plus direct competition with 5% milk‑based beverages that can mimic similar taste/energy cues at lower tax.

4) “Healthy” no‑sugar sodas / seltzers (zero‑cal, stevia, etc.)

• Where they land: If they’re flavoured (most are), they fall under “goods … flavoured” in HS 2202 → 40%—even without sugar. Several lists call out “all goods … containing added sugar or … flavoured” and “other non‑alcoholic beverages” at 40%
• Why they lose: The policy doesn’t distinguish sugar‑free; the flavouring hook is enough to push them into 40%, blunting the “better‑for‑you” proposition at the cash register

5) Kombucha & fermented tea

• Classification minefield: Since Kombucha does not fall under a defined category it is clubbed under ‘other non-alcoholic beverages’ moving to 40% slab from earlier 18%. Inspite of its positioning as a gut-friendly, healthy beverage. 
• Why they still lose (practically): Retailers/distributors may apply a cautious interpretation or push price parity across the “fizzy” shelf. Uncertainty alone raises working‑capital and compliance costs and deters new‑brand launches.

6) Non‑alcoholic “spirits” & alt‑cocktails

• Where they land: Non‑alcoholic distilled/compounded N/A “spirits” typically map to HS 2202 (“other non‑alcoholic beverages”) → 40% under the new regime. They’re flavoured, non‑alcoholic, often caffeinated/functional — all roads lead to 40%.
• Why they lose: These brands already carry premium COGS (botanicals, micro‑scale manufacturing). A 40% slab kills NA movement

7) Prebiotic/probiotic sodas, functional tonics

• Where they land: Nearly all are flavoured non‑alcoholic beverages (HS 2202) → 40% irrespective of the health angle.
• Why they lose: They carry ingredient premiums (fibres, cultures, adaptogens), now stacked with top‑slab GST, yet they don’t qualify for the “healthier” 5% buckets reserved for milk/mylk & fruit‑pulp/juice drinks (non‑carbonated). 

Why the regime “failed to separate good from evil”

1. Policy draws lines by form (HS codes), not nutrition
   The 40% slab keys off “flavoured / caffeinated / carbonated / other non‑alcoholic beverages” rather than sugar thresholds or nutrient profiles. Hence zero‑sugar, low‑cal, prebiotic drinks are treated the same as colas if they’re flavoured
2. A structural price handicap vs. “encouraged” categories
   Milk/mylk beverages, plant‑based milks, and non‑carbonated fruit‑pulp/juice drinks were cut to 5%, creating a 30–35‑point tax spread versus 40% drinks—an enormous retail price headwind for water/tea/coffee‑based “health” SKUs
3. Stigma & shelf dynamics
   Being in the “sin/luxury” bucket muddies brand perception. Retailers may cluster them with colas/energy drinks; consumers will trade down to cheaper 5% categories positioned as “healthy” (yogurt drinks, mylk shakes, juices)
4. Big cola/energy’s relative advantage
   • The rate is the same as before in incidence terms (~40%), but it’s now a single GST instead of GST+cess, which simplifies compliance and—critically—broadens input tax credit (ITC) set‑offs for large players (an inference consistent with the Council’s shift from multi‑levy to a single levy and press coverage on simplification). That favors scale players with deep taxable supply chains. (Inference based on official shift from 28%+cess to 40% GST; precise ITC mechanics await detailed notifications.)

What home‑grown “good‑for‑you” brands are up against

• Higher tax liability at launch and scale: 40% GST on most water/tea/coffee‑based “functional” SKUs vs 5% on milk/mylk/fruit‑pulp beverages.
• Stigmatization by category nameplates: Grouped with “sin/luxury goods” in media/retail narratives, undermining health positioning
• Shelf competition: A cheaper 5% cohort (milk/mylk/juice drinks) wins price wars and promos; carbonated fruit drinks also sit at 40%, but legacy colas can better absorb costs and optimize credits

The move leaves big colas largely unscathed on incidence but strengthens them via broader ITC and simpler compliance, while homegrown better-for-you brands face higher prices, stigma, and tougher shelf competition. Without nutrition-based thresholds or clear carve-outs (e.g., sugar-free, probiotic), the policy risks penalising innovation and nudging consumers away from genuinely healthier choices.

Part Three: Recommendations

A Policy Blueprint for Kombucha in India: Reclassification, Reform, and Survival

The recent GST overhaul in India has placed all beverages (except for fruit juice/pulp-based, milk/mylk-based) with added sugar, flavourings or sweeteners including aerated, flavoured, or caffeinated non‑alcoholic drinks into a 40% “demerit slab”. While this is aimed at curbing unhealthy consumption, the policy broadly sweeps in functional, probiotic, or otherwise health‑oriented fermented beverages like kombucha in the same category, confusing consumers of its positioning and claimed health benefits.

Here are the key recommendations to protect both the industry and consumers, and to ensure kombucha remains a viable, safe, trusted category.

1. Re-classification of kombucha under a separate HSN (Harmonized System Nomenclature) reflecting a lower GST % which takes into consideration its health benefits (gut health, probiotics, fermentation) and distinguishes it from sodas or energy drinks
2. Adopting a sugar‑based taxation model – Push for a slab structure where the tax rate depends on the amount of added sugar per 100 ml. The Indian Beverage Association already advocated for a sugar‑based levy approach, pointing out that low/no sugar variants are being unfairly taxed under the existing/new slab
3. Formal recognition of kombucha as a functional/health beverage – Request that kombucha be formally classified under FSSAI not as “flavoured / sweetened non‑alcoholic beverage,” but under a Functional Beverage / Probiotic Health Drink category.
4. Establish standardisation of kombucha and its variations – pasteurised, unpasteurised, from concentrate, traditionally fermented, mandatory ingredients, level of post-manufacturing processing, preservatives, additives, starter culture definition, carbonation, alcohol compliance, pH, labelling requirement, probiotic claim guide, safety guideline

An industry body and standards matter more than anything right now because without clear definitions and classification, the tax and regulatory authorities will continue to view kombucha under the same lens as sodas and energy drinks. An industry body can assert standards so kombucha is no longer mis‑classified.

What should kombucha brands do immediately?

Consult with GST legal/tax experts to create an optimised product line based on the new classification.

• Avoid Mass Retail Expansion Until Policy Clarity Emerges.
• Launch variety packs to reduce price shock per bottle.
• Shift a Portion of Sales to Non-MRP Channels for flexible pricing.

Next step

Policy change only comes with pressure and proof. Kombucha’s low sugar, fermented, probiotic-rich profile needs better representation at the policy table and it begins with

• Forming an Indian Kombucha Brewers Association for lobbying and for representation at national level.
• Submit formal representations to the GST Council requesting a distinct GST slab or reclassification as a “functional health food/beverage.
• And/or advocate for a more nuanced categorisation of beverages under ‘other non-alcoholic beverage’ (water-based, tea-based) to separate them from aerated drinks or colas with differential GST treatment based on nutritional properties.
• Collaborate to commission a white paper on health benefits, sugar content, and fermentation science.
• Introduce a Micro‑Brew/Artisanal Kombucha Special Tier.
  • Because many kombucha producers are small or medium scale, often producing in micro‑batches, they should be protected via a special tier.
  • This tier would recognize artisanal production methods, smaller volumes, traditional techniques, etc., and provide preferential GST rates or tax credits.
  • Drawing from international examples: Kombucha Brewers International (KBI) in the U.S. has a Code of Practice that defines what counts as “authentic kombucha,” including categories like “traditional,” “processed,” “hard”, etc., to protect product integrity.

To protect the kombucha industry from regulatory overreach and ensure it continues to grow as a health-positive, small-business-driven sector, India must adopt a smarter, more nuanced policy approach. Key recommendations include reclassifying kombucha under a functional food or wellness beverage category, implementing sugar-indexed GST slabs, and creating a micro-brew tier for artisanal producers. Establishing a national kombucha standards body modeled after the U.S. is also critical to define ingredients, fermentation processes, alcohol thresholds, and labeling norms.

These steps, along with supportive tax incentives and infrastructure alignment, will not only safeguard small businesses but also reinforce kombucha’s place in India’s clean-label, preventive health movement.

Disclaimer

The views and opinions expressed in this posting are solely those of the original author. These views and opinions do not necessarily represent those of this publication.