Pakistan’s growing reliance on higher consumption taxes and punitive Federal Excise Duties (FED) on food items and fast-moving consumer goods (FMCGs) for revenues is increasingly showing signs of the Laffer Curve effect.
The Laffer Curve is the economic theory that, beyond a certain point, higher tax rates begin to squeeze rather than increase government revenue.
Instead of broadening the tax base, steep indirect taxes have reduced affordability, suppressed documented sales, encouraged tax evasion and accelerated the shift of consumers towards the undocumented economy.
From packaged juices and processed foods to other heavily taxed consumer products, businesses argue that the government’s strategy of extracting higher revenues from a narrow formal sector is beginning to undermine industrial growth, investment and the state’s own revenue objectives.
The government’s experiment with taxing packaged fruit juices appears to have become a textbook case of the Laffer Curve, according to a recent report by the Policy Research Institute of Market Economy (PRIME), an Islamabad-based economic think tank. The report suggests that the government will likely reconsider the taxation regime on the packaged juice industry after evidence showed that the steep levy failed to generate the expected revenues while simultaneously shrinking the formal sector, hurting farmers and fuelling undocumented businesses.
Market contractions stall investment activity, with industry representatives saying no significant new investment has occurred since the FED was introduced
As policymakers finalise the federal budget for FY27, the PRIME report says, the government may propose to eliminate or slash FED on fruit juices, create a separate taxation category for fruit-based beverages distinct from carbonated soft drinks, and grant complete FED exemption to a new category of juices with no added sucrose or white sugar.
The move comes after the imposition of a 20 per cent FED on packaged juices in the budget FY24, in addition to the existing 18pc sales tax, which pushed the overall tax burden on packaged juices close to 38-42pc of retail prices.
Industry data suggests the policy triggered a sharp contraction in the formal market. Sales, which were projected to exceed Rs72 billion in FY23, fell sharply by around 45pc to nearly Rs42bn after the duty was imposed.
Industry estimates show the market has since contracted further to around Rs40bn by 2025, while consumption levels have fallen back to those last recorded in 2017, effectively wiping out years of expansion in a single fiscal cycle.
The contraction has also stalled investment activity, with industry representatives saying no significant new investment has taken place since the FED was introduced. Industry stakeholders argue that the experience reflects the limits highlighted by the Laffer Curve theory.
The decline in the formal industry has had spillover effects across Pakistan’s agricultural value chain. The packaged juice sector is heavily dependent on locally sourced fruits and plays a major role in supporting farmers, pulp processors and packaging industries.
Industry estimates show mango procurement by the formal juice sector fell to just over 20,000 tonnes in FY24 from around 31,000 tonnes in FY18. Lower industrial demand has increased concerns about post-harvest losses and reduced income opportunities for fruit growers.
Stakeholders argue that the taxation structure has unintentionally encouraged the growth of undocumented manufacturers producing low-cost and often unregulated beverages outside the tax net and food safety framework.
According to industry representatives, the heavy tax burden reduced consumer affordability, pushing many toward cheaper alternatives offered by informal players. They argue that while documented companies continue to comply with taxation and food safety standards, the undocumented sector has rapidly expanded without regulatory obligations.
Industry representatives also point to an earlier episode when a 5pc FED on juices was withdrawn, after which sector sales reportedly rose to around Rs60bn and nearly 10,000 jobs were created across the value chain.
The industry maintains that the current policy is undermining both public health objectives and long-term revenue generation by weakening the tax-compliant sector instead of broadening the tax base. Economists note that many countries differentiate between fruit-based beverages and high-sugar carbonated drinks in their tax policies, particularly where public health is concerned.
Officials and industry representatives are also emphasising that fruit-based beverages should not be treated the same as carbonated soft drinks for taxation purposes. Unlike fizzy drinks, packaged fruit juices are directly linked with the domestic agriculture and fruit-processing chain and are subject to mandatory fruit-content requirements under food regulations.
Fruit drinks, nectars and pure juices vary in their fruit concentration, with some products containing up to 100pc fruit content. The industry says carbonated drinks, by contrast, have little linkage with the agriculture sector and do not contribute to demand for local fruit production.
The formal industry has also proposed introducing a new category of juices containing no added sucrose or white sugar as part of efforts to encourage healthier consumer choices and product innovation. The proposal suggests exempting this category entirely from FED while reducing the existing 20pc FED on conventional juice variants to 10pc.
Supporters of the proposal argue that such differentiation could encourage healthier formulations, revive investment in fruit processing, support local farmers and help shift consumers back towards regulated products produced within the documented economy.
The question then is: how to balance revenue mobilisation with economic sustainability? Excessive taxation on a narrow formal base often ends up shrinking documented activity while incentivising informality, ultimately weakening the government’s own revenue objectives.
With budget deliberations underway, policymakers must rationalise tax rates to generate stronger economic activity and a broader, more sustainable tax base than the current high-rate regime.
Published in Dawn, The Business and Finance Weekly, June 1st, 2026