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The negative impact of FED on Pakistan's juice market

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In face of the need to broaden our tax net, the government imposed a flat 20% Federal Excise Duty (FED) on fruit juices beverages (100% fruit juices, nectars, and juice drinks) in efforts to bridge taxation revenue shortfalls. However, this view misses the forest for the trees, not taking into account the myriad impacts of increased taxation upon the juice beverages industry. Hence, rather than bolster the national exchequer, the decision has instead triggered a cascade of counter-productive outcomes, adversely affecting both the economy and public health.

Let us quickly review the highlights: since the implementation of the 20% FED on fruit juices in June 2023, the formal packaged juice beverages industry has experienced a staggering decline in volume by more than 40%. Rather than invigorating the economy, the government’s step has destabilized on of the country’s taxpaying sectors, with turnover and investments both in the billions of rupees, and endangered the employment of 100,000 people across its value chain. In a business environment riddled with challenges, from continually rising inflation to the constant presence of economic instability and ever-rising costs of doing business, it is essential that the government find ways to bolster those industries that are making positive contributions to the national exchequer.

Instead, the negative repercussions of this regressive tax have been far-reaching and damaging not just to the fruit industry, but to the country’s socio-economic indicators on a whole. Due to the reduced sales as a consequence of higher consumer prices, many industrial business operations are contracting their production, leading to massive unemployment across the value chain. Most companies have had to shrink their installed production capacity, with no new investments being made or planned for the foreseeable future. Daily wage workers have been hit the hardest, with some companies forced to lay off employees due to plummeting sales.

The effects go beyond urban areas; the adverse effects of the 20% FED on the formal juice beverages industry have rippled through to rural economies, impacting fruit growers and farmers. The procurement of fruit pulp, which once exceeded 100,000 tons from local farmers, has plunged, leading to significant losses in income for these already marginalised communities. Moreover, the intrinsic perishable nature of fruits means that improper handling, packaging, and transportation already create high incidences of wastage. By procuring fruits in bulk and in a timely fashion, the formal packaged juice industry is a key player in preventing said wastage and protecting farmers’ livelihoods.

When demand from the industry falls, fruit farmers are forced to sell their produce at extremely low prices, even during peak season, to avoid waste. The industry additionally facilitates rural farming communities with helping to adopt best practices, resulting in further development of the agriculture sector.

However, all these positive contributions have now slowed down considerably, if not completely come to a halt. Meanwhile, the regressive nature of this FED imposition has also inadvertently fueled the growth of the undocumented fruit juice sector. Market research shows that consumers, burdened by the increased costs of proper products, have shifted to cheaper, lower-quality alternatives offered by this informal sector.

These manufacturers, who operate without adhering to any government regulations or health and safety standards, have seen substantial growth in the past year. This has not only further exacerbated the plight of the formal juice beverages industry, but also to the deterioration of public health issue. Concerted efforts are needed to regulate and clamp down on the mushrooming growth of the juices informal sector. In order to achieve this, however, there needs to be commitment from the powers that be. Coordination between food authorities and law enforcement agencies is especially crucial in this regard. Establishing a task force comprising of representatives from the government and the formal juice beverages industry could play a pivotal role in identifying and addressing illicit manufacturers.

By cracking down on the informal sector, the government can not only help the formal sector promote healthier consumer options, it can also lead to increased tax revenue from a previously undocumented sector.

As such, a re-examination of the decision to increase FED on packaged juices is the urgent need of the hour. Its continuation threatens not only the viability of the formal juice industry, but also the socio- economic stability of rural communities. Rather than increase the tax burden on existing taxpaying entities, it is imperative that the government bring informal players into the tax net, so that the overall industry can once again flourish.

We as a nation must adopt a more progressive taxation policy, taking cues from countries that offer preferential tax treatment to large taxpaying companies that offer consumers healthier options such as fruit juices. As we move into a new budgetary year, let’s hope the government considers revising the FED on packaged juices, to the benefit of the entire country.
 

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