Poor tax revenues below 10 per cent of GDP, one of the lowest in the world, are a major reason for Pakistan to run high fiscal deficits year after year, feeding into its balance of payments and overall economic crisis.
However, none of the successive governments have been able to boost the tax-to-GDP ratio mainly because of a lack of political will to expand the tax net by bringing in powerful lobbies: retailers, wholesalers, real estate owners, big farmers, and so on.
So whenever a government is in need of money to finance its burgeoning budget deficit, it imposes more taxes or raises the rates of existing taxes on the easier target: organised industry and businesses.
How these changes in tax policies affect the businesses and their entire supply chain can be gauged from the cash-strapped government’s decision to reimpose 10pc Federal Excise Duty (FED) on the packaged juice (including juices, nectars and juice drinks) industry in a supplementary finance bill, passed in February, on the demand of the International Monetary Fund to cover its revenue gaps.
The FED imposed this year has led to a 45pc slump in the sale volumes of the formal packaged juice industry in March and April
This action has led to a 45pc slump in the sale volumes of the formal packaged juice industry in March and April. That decline is more than significant. The shrinking business size also means an unfavourable impact on the government’s sales tax revenue, as after the reimposition of the hefty excise tax, the industry’s sales are now projected to plummet from around Rs60 billion to Rs43bn in 2023 from the earlier industry projections of increasing to more than Rs71bn, considering the industry growth rate in the recent years.
This dip in sales will substantially impact the government’s sales tax revenues from the industry, contributing almost Rs14bn in taxes. Interestingly, the government did not learn from the impact of its earlier decision to impose 5pc FED on the packaged fruit-based juice industry in July 2019. That resulted in a sharp decline of 22pc in sales, leading to a loss of revenue for the government and an increase in the market share of the informal juice industry.
The excise tax increase reduces sales and causes significant job losses for workers who manufacture, distribute, and sell these products.
The industry’s backward linkages with the rural economy helps fruit growers get a good price for their products and reduce waste.
“Fruits have a high rate of wastage because of their intrinsic perishability and improper handling, storage, packaging and transportation. This causes farmers to sell their produce at very low prices, especially during peak season.
“The formal packaged juice industry, by procuring fruits timely, prevents significant food wastage and protects farmers’ livelihoods. The industry has also been helping farmers adopt best practices, which has resulted in the farmers’ uplift and development,” Rao Ejaz, a mango grower from Multan, says.
The drop in sales of fruit-based beverages means the manufacturers would slash their purchases from farmers. In 2022, the industry procured an estimated 100,000 tonnes of mango from farmers, apart from other fruits like oranges and peaches, for conversion into pulp.
A drastic reduction in fruit pulp purchase (from 61,000 tonnes to approximately 31,500 tonnes) is also anticipated post-FED in 2023, affecting the rural economy and its formalisation.
With an investment of Rs40bn in the organised fruit juice industry and over 5,000 people employed directly, the organised packaged Juice industry is a source of safe and healthy fruit-based juices and drinks to consumers.
“The imposition of 10pc FED is impacting the affordability of the products being produced by documented players, resulting in a large proportion of consumers shifting to low-priced, low-quality and possibly unsafe alternatives offered by the undocumented sector,” a juice industry alliance spokesman said.
“This will also impact the government through a loss of tax revenue as the undocumented share of the industry stands at 20pc of the total industry size and is expected to grow further if the FED is not reversed. Besides, a shrinking business size would create unemployment within the industry as, after the imposition of the FED, the industry is not utilising its installed production capacity in full.
“The contraction will also force the industry to shelve or new planned investment for 2023-24. At a time when the purchasing power of people is severely hampered by record soaring prices and jobs are being lost left, right and centre due to economic stagnation, the government must reconsider the FED on juice-based drinks and beverages and remove it,” he said.
The stopgap measures to increase tax revenues through indirect taxation and increasing the burden on the formal and organised sector have not helped the government boost tax to GDP rate. Instead, it has had very negative effects on the organised sector, resulting in the expansion of informal markets, loss of better-paid jobs and reduction in tax revenues.
The government, therefore, must take a long view of the situation and work on widening the tax base to raise the tax to GDP as many other nations have done instead of squeezing the existing taxpayers at the expense of contraction in the organised industry.
Published in Dawn, The Business and Finance Weekly, May 22nd, 2023
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