A fair and equitable tax system is essential for stimulating investment and economic growth. In Pakistan, however, tax policy primarily aims to maximize revenue collection, often at the expense of existing and potential investments and economic development.

As a result, there is an increase in regressive indirect taxes that are detrimental to the economy, particularly impacting specific industry value chains negatively. A notable example is the federal excise duty (FED) on the packaged fruit juice industry, according to a report published in Dawn on Monday.

Interestingly, despite clear evidence of its harmful effects on the industry’s entire value chain-including reduced sales volumes and revenues for juice producers, a decrease in government tax collection due to falling sales, fewer fruit purchases from farmers, and the emergence of cheaper yet unhealthier market alternatives from the informal sector-the government escalated the FED rate to an alarming 20% in this year’s budget, the newspaper cited.

Thi
s unpredictability and inconsistency in policy have also led many potential investors in the supply chain to pause their investment plans.

The industry witnessed a nearly 23% decline in sales, dropping from Rs53.3 billion to Rs41.2 billion in one year, due to a retail price hike triggered by a 5% FED implemented in the fiscal year 2018-2019. Sales rebounded after the FED was removed, leading to three years of growth, the report quotes.

By FY22, the industry achieved a turnover of about Rs62 billion and locally sourced an estimated 100,000 tonnes of mango, kinnow, apple, peach, and guava from farmers for pulp processing. The general sales tax (GST) collections increased, nearly offsetting the revenue loss from the removal of the FED. Consequently, industry sales were projected to exceed Rs71 billion in FY23.

However, the FED was reintroduced at a higher rate of 10% through a supplementary finance bill in February 2023 to meet one of the IMF’s conditions aimed at reinstating a suspended loan agreement, accor
ding to Dawn.com.

This led to a dramatic 45% drop in sales volumes over the subsequent two months, March and April, directly linked to the hike in FED. Despite this, tax authorities opted to double the FED to 20% instead of retracting it, aiming to achieve IMF-mandated revenue targets in the current year’s budget, according to the report.

As a result, tax-compliant juice producers saw their volumes shrink by 41%, with sales revenues tumbling to Rs49 billion in FY24, significantly below the previously forecasted Rs71 billion. This regression in revenue growth due to the steep FED rate has continued to negatively affect the government’s sales tax revenue across the supply chain, harming fruit farmers and pulp processors.

Decreased sales volumes and revenues have led to job losses throughout the value chain and reduced income for fruit farmers. The industry is not fully utilizing its installed production capacity because of the severe drop in demand caused by higher retail juice prices. Unsurprisingly, no new
investments were made during the current fiscal year, nor are any planned for the next.

Several companies have had to lay off workers to cut costs due to the declining sales. Fruit pulp purchases have also decreased in line with the recent drop in sales volumes. At its peak, the formal juice industry procured over 100,000 tons of various fruits from farmers, significantly reducing their post-harvest losses, which typically ranged from 30-40%.

With taxes, including an 18% sales tax, constituting approximately 42% of the retail price of juice, the regressive levy is driving inflation-stricken consumers towards cheaper, lower-quality alternatives offered by the undocumented sector.

It’s no surprise that these undocumented juice producers have captured 20% of the market share and are making substantial profits from selling low-quality products without paying any taxes. The impact of the FED has also turned out to be counterproductive, with no financial benefits accruing to the national exchequer due to plummet
ing sales and volumes.

The formal packaged juice industry holds significant potential for increasing exports, already reaching over 30 countries globally. However, this potential will not be realized if the industry cannot return to its growth trajectory.

Source: Pro Pakistani