Squeezing the juice industry

AN equitable and fair tax system is crucial for boosting investment and growth. In Pakistan, however, the sole purpose of tax policy is to collect revenues, even if it is at the cost of existing and future investments and economic growth.

Consequently, we see the proliferation of regressive indirect taxes, some of which are economically harmful because of their negative effects across the value chains of particular industries. One such example is the case of federal excise duty (FED) on the packaged fruit juice industry.

It is interesting to note that the government raised the FED rate on the fruit juice industry to a whopping 20 per cent in the current year’s budget despite empirical evidence about the levy’s adverse impacts on the industry’s entire value chain in terms of drop in sale volumes and revenues of the juice producers, loss in government tax collection owing to falling sales, reduced fruit purchases from farmers, and — last but not least — induction of cheaper but far less healthy alternatives in the market by the informal, undocumented sector.

This lack of predictability and policy consistency has also compelled many looking to invest their capital in the supply chain to put their investment decisions on hold.

The packaged fruit juice industry experienced a 45pc plunge in sales in March and April last year after the enhanced FED was imposed

The industry reported a drop of almost 23pc in sales from Rs53.3 billion to Rs41.2bn in one year due to a retail price increase in the wake of a 5pc FED imposition in the fiscal year 2018-2019. After the FED was removed, the industry grew for three years.

As a result, in FY22, the industry had an annual turnover of nearly Rs62bn and locally purchased an estimated 100,000 tonnes of mango, kinnow, apple, peach and guava from farmers for pulp conversion. The general sales tax (GST) collection again rose and almost fully covered the loss from FED removal. Based on the pace of recovery, the industry sales were projected to grow to more than Rs71bn in FY23.

However, the levy was re-imposed at a higher rate of 10pc through a supplementary finance bill in February 2023 to collect additional tax revenues to meet one of the conditions of the International Monetary Fund (IMF) in the hopes of reviving the suspended loan agreement.

The industry experienced a 45pc plunge in volumetric sales in the following two months, March and April. The evidence shows that the drop in sales was directly linked to the implementation of the enhanced FED.

Nonetheless, that did not stop the tax authorities from doubling the FED rate to 20pc instead of withdrawing it when the levy was again imposed on fruit juices, nectars and juice drinks to meet the IMF-mandated revenue goal in the budget for the present year.

Consequently, the tax-compliant juice producers have witnessed their volumes plunge by 41pc, with sale revenues plummeting to Rs49bn in FY24. The juice industry’s curtailed revenues compared to the earlier revenue growth forecast of Rs71bn. However, that revenue growth projection was made on the back of growth experienced by the industry before the tax authorities decided to juice it through the regressive levy at a very high rate.

The shrinking business size has had and will continue to have an unfavourable impact on the government’s sales tax revenue across the supply chain, negatively impacting fruit farmers and pulp processors.

Reduced sale volumes and revenues have also led to job losses across the value chain and dented the incomes of fruit farmers. The industry is not fully utilising its installed production capacity due to a sharp contraction in demand for higher retail juice prices. No wonder no new investment was made during the present fiscal year and no plans are planned for the next year, either.

Some companies have even let go of workers to save costs due to plummeting sales. The fruit pulp purchases are also declining proportionate to the recent plunge in the volumetric sales. At its peak, the formal juice industry was procuring more than 100,000 tons of fruits — mangoes, peaches, oranges, bananas, guava, etc — from farmers, which had helped them significantly curtail their post-harvest crop wastage that used to be in the range of 30-40pc.

With consumers effectively paying around 42pc of the price as taxes, including 18pc sales tax, on a pack of juice, the regressive levy is fast pushing inflation-stricken consumers away from healthier but more expensive juice options to the low-priced and low-quality alternatives being marketed by the undocumented sector.

It mustn’t be surprising that the undocumented juice producers have increased their market share to 20pc of the industry size and are minting huge profits, without paying any taxes, from low-quality products. The impact of FED has also proven to be counterproductive, with no gains for the national exchequer owing to sinking sales and volumes.

The formal packaged juice industry has shown great potential for increasing exports. Currently, packaged juices are exported to more than 30 countries worldwide, with the potential to increase shipments. However, exports will suffer if the industry fails to get back on the growth trajectory.

Published in Dawn, The Business and Finance Weekly, May 13th, 2024