Karachi, May 26, 2024 – Foreign investors operating in Pakistan have called for the protection of the beverage industry and demanded a level playing field comparable to other sectors within the food industry.
In their budget proposals for 2024-25, these investors highlighted the disproportionate taxation on aerated waters and fruit juices under the Sales Tax Act, 1990, which taxes these products on a retail price basis. This tax structure prevents manufacturers from deducting trade and bulk discounts on invoices, forcing them to allocate substantial cash flows for tax payments rather than investing in market expansion and production capacity.
The investors recommended the deletion of specific serial numbers in the taxation acts to alleviate these issues:
1. Serial No. 1 and Serial No. 3 of the third schedule of the Sales Tax Act, 1990
2. Serial No. 4, 5, and 6 of the First Schedule of the Federal Excise Act, 2005
In particular, they argued for rationalizing the high rate of Federal Excise Duty (FED) on soft drinks. The recent increase in the FED rate on carbonated soft drinks from 13% to 20%, introduced through the Supplementary Finance Bill, 2023, should be adjusted to align with the rates applied to other sugar-containing beverages.
Regarding the FED on sugary fruit juices, the foreign investors expressed concern that the 20% FED would severely impact the juice industry, which generates approximately Rs 60 billion in annual revenue and has Rs 40 billion in investments. The imposition of FED would likely reduce business volumes, diminish sales tax collection for the national exchequer, and enable the tax-evading informal sector to strengthen its market presence. Additionally, the juice industry significantly contributes to Pakistan’s agricultural economy by sourcing 100,000 tons of fruit from local farmers. The FED could disrupt fruit procurement, adversely affecting the pulp market, reversing industry growth, and jeopardizing the livelihoods of local farmers, thereby creating direct and indirect unemployment for thousands of families.
The foreign investors proposed removing the term “sugary fruit juices” from Sr. No 59 of Table 1 of the First Schedule to the Federal Excise Act, 2005. They recommended the withdrawal of the 10% FED on the juice industry, which was imposed in the Finance Supplementary Act, 2023. The original clause includes:
“sugary fruit juices, syrups and squashes, waters whether or not containing added sugar or artificial sweeteners excluding minerals and aerated water.”
By implementing these changes, the foreign investors believe that the beverage industry will be better positioned to thrive, contribute to the economy, and support local agriculture. They argue that such measures will not only promote industry growth but also enhance government revenue through increased economic activity and fair taxation practices. Furthermore, creating a fair tax environment for the beverage sector will ensure sustained investment, innovation, and employment opportunities within Pakistan.
The proposed adjustments are aimed at fostering a healthier economic environment for the beverage industry, ensuring that legitimate businesses can compete on an equal footing, and preventing the market from being overrun by informal, tax-evading entities. This, in turn, will secure the beverage sector’s continued contribution to Pakistan’s economy and agricultural sector.
