Packaged juice tax comes under scrutiny as formal market contracts

ISLAMABAD: Pakistan’s heavier use of consumption taxes and Federal Excise Duty on food items and fast-moving consumer goods is showing signs of the Laffer Curve effect, with higher rates appearing to squeeze documented sales instead of lifting revenue, according to a recent report by the Policy Research Institute of Market Economy (PRIME), an Islamabad-based economic think tank.

The think tank’s assessment on the packaged fruit juice industry suggests the government may revisit the sector’s tax structure after evidence indicated that the steep levy did not deliver the expected revenue gains and instead reduced the size of the formal market, hurt linked agricultural activity and encouraged undocumented business. The issue has gained relevance as policymakers work on the federal budget for FY27.

Tax burden and market contraction

A 20 per cent Federal Excise Duty was imposed on packaged juices in the FY24 budget on top of the existing 18 per cent sales tax, taking the overall tax burden to about 38 to 42 per cent of retail prices. Industry data indicates that sales, which had been projected to cross Rs72 billion in FY23, dropped by roughly 45 per cent to nearly Rs42bn after the duty was introduced.

Industry estimates indicate the market has since fallen further to around Rs40bn by 2025, while consumption has retreated to levels last seen in 2017. Industry representatives also said the contraction has halted investment activity, with no meaningful new investment taking place since the excise duty was introduced.

Impact on farmers and the documented economy

The decline in the formal juice sector has affected Pakistan’s wider agricultural value chain because packaged juice producers rely heavily on locally sourced fruit and support farmers, pulp processors and packaging businesses. Industry estimates showed mango procurement by the formal juice industry declined to a little over 20,000 tonnes in FY24 from about 31,000 tonnes in FY18.

Stakeholders said lower industrial demand has raised concerns about post-harvest losses and reduced earning opportunities for fruit growers. They also argued that the current tax regime has encouraged undocumented manufacturers selling cheaper, and often unregulated, beverages outside both the tax net and food safety framework. According to industry representatives, the higher tax burden reduced affordability for consumers and pushed some buyers toward informal alternatives, while tax-compliant companies continued to bear fiscal and regulatory obligations.

Possible budget changes

The government may consider abolishing or cutting the Federal Excise Duty on fruit juices in the upcoming budget. It also outlined proposals for a separate tax category for fruit-based beverages rather than treating them the same as carbonated soft drinks, along with a full excise exemption for a new category of juices containing no added sucrose or white sugar.

The formal industry has proposed that the existing 20 per cent excise duty on conventional juice variants be reduced to 10 per cent, while products without added sucrose or white sugar be fully exempted. Supporters of this proposal say such differentiation could promote healthier formulations, revive investment in fruit processing, support fruit growers and bring consumers back to regulated products within the documented economy.

Industry’s case for differentiated treatment

Economists and industry representatives said many countries distinguish between fruit-based beverages and high-sugar carbonated drinks in their tax regimes, particularly in relation to public health. Officials and industry representatives have also stressed that fruit-based beverages should not be taxed in the same way as fizzy drinks because packaged juices are tied to domestic agriculture and fruit processing and must meet mandatory fruit-content requirements under food regulations.

Fruit drinks, nectars and pure juices differ in fruit concentration, with some products containing up to 100 per cent fruit content. By contrast, the industry says carbonated drinks have little connection with the agriculture sector and do not help generate demand for locally grown fruit.

Industry representatives also referred to an earlier period when a 5 per cent Federal Excise Duty on juices was withdrawn, after which, they said, sales rose to around Rs60bn and nearly 10,000 jobs were created across the value chain. Stakeholders maintain that excessive taxation on a narrow formal base is weakening the tax-compliant sector instead of broadening the revenue base, undermining both long-term revenue generation and public policy goals.