LAHORE: The formal juice industry bears the brunt of federal excise duty (FED) in terms of 30 percent revenue loss, as off take of the informal sector surges, consequently harming the sales of fruit farmers by about 75 percent.
The five percent FED imposed on formal juice industry in July 2019 worked in favour of the informal sector. The tax differential allowed the informal juice industry to increase its share to 40 percent from 36 percent in less than a year, with underlying revenue loss to government, industry representatives said on Tuesday.
Several leading juice manufacturers including Nestle, Coke, Pepsi, Shakargunj, CitroPak, and Haleeb have also written to the Federal Board of Revenue about the adverse impact of FED. According to top management of these companies, the direct and indirect tax contribution by the formal sector stood around Rs10 billion, which might not sustain in days to come due to multiple reasons.
This industry has a narrow profit margin ranging from six percent to nine percent. Based on dip post-FED and recent COVID impact, the industry foresees a massive downturn both in volumes and value. This was also reflected in recent consolidated quarterly results bringing not only the formal sector on the brink of collapse, but also envisaged sharp decline in government tax revenues.
The manufacturers were of the view that after levy of FED, some formal businesses increased their prices to shift burden on consumer and lost substantial market share in terms of quantity to the informal sector and other formal sector units.
One the other hand, some formal players while maintaining the sale volumes, continued prices, retaining market share by sacrificing the profitability. They are left with no option but to increase their prices to reverse the negative profitability trend.
Ultimately, both type of businesses would not sustain juice manufacturing and might result into loss of revenue to government along with increased unemployment.
The market share of formal business was on positive trajectory before July 2019, which might be rerouted by omission of FED, making the formal businesses more competitive with informal businesses. Consequently, removal of duty would enable growth of formal business, which would compensate the revenue loss in few years by capturing the market share back from informal businesses, they observed.
This levy has also impacted pulp and fruit buying by a drastic 75 percent, causing severe loss on the agricultural economy. As volumes drop, further purchases from local farmer communities and injection in rural economy would decrease, as existing stocks would suffice.
Raising similar concerns, Nestle CEO Samer Chedid said the juice industry was working closely with the farmer community for their uplift and prosperity by buying and using surplus quantities of fruits like mango, kinnow, apple, guava, etc in large quantities.
“Just last year, our industry procured 100,000 tons of mango for conversion into pulp from local farmers, hence positively impacting livelihood of thousands of farmers,” he said, lamenting the imposition of FED in 2019. “(FED) has negatively impacted our industries sales volume, and resulted in loss of livelihood for thousands of fruit farmers in our value chain.”
In a letter written to FBR, Mazhar Iqbal, CFO, Tops Food and Beverages, a brand of Murree Brewery, said, “The juice industry is fragmented with a higher concentration of smaller players most of whom are not paying sales tax, and FED. Retaining continuous FED on juices will encourage the business of non-tax paying players resulting in loss of tax revenue hence widening the price gap.”
Sheezan International Chairman Muneer Nawaz apprehended that any imposition or indirect taxation would induce, encourage and strengthen the unregistered producers and tax evaders to further expand their presence in the market by attractive rates to the middle man.
“The taxpaying fruit drinks and juices industry will become uncompetitive due to the huge burden of taxes and their major chunk of market share will fall into the lap of tax evaders. The overall sales tax collection on fruit drinks and juices products will also decrease due to the loss of business volume,” he maintained.
He urged the government to withdraw five percent FED on the juices industry, as it was negatively impacting business growth and consequently rural economy.
It may be noted that the estimated annual turnover of the juice industry is around Rs57 billion.
The formal sector owns approximately 60 percent of market share. They include multinational enterprises and reputed local corporations/listed companies, however, a substantial segment of around 40 percent consists of small or seasonal players neither declaring sales nor paying any sales tax.