Food taxes may further expand informal sector, say experts

KARACHI: Even though the government’s imposition of taxes on sugar and the proposed excise duty on ultra-processed foods is being marketed as a bold public health initiative, industry experts warn that these policies are less about reform and more about revenue, and they could be doing more harm than good.

The Rs15 per kilogram federal excise duty (FED) on sugar, already in place, and the proposed 5.0 per cent FED on over 50 categories of packaged and processed foods disproportionately impact Pakistan’s formal, tax-compliant sector.

Informal businesses accounting for roughly 30--35 per cent of the country’s economy largely escape such regulatory oversight and taxation. This results in an uneven market where compliant companies bear the burden, while unregulated sellers enjoy a competitive price advantage.

Zahid Iqbal, chairperson of the Pakistan Association of Food Industries (PAFI), echoed these concerns, saying, “The proposed 5.0 per cent [FED] on ultra-processed food places an undue burden on Pakistan’s formal food industry that complies with safety standards, pays taxes and sustains large-scale employment. This is a sector that contributes over Rs200 billion in taxes annually, generates more than Rs1,000 billion in turnover, and provides direct employment to over 100,000 individuals across the country. It also supports allied industries like packaging, logistics, and retail and plays a crucial role in earning foreign exchange through exports.”

“We are already seeing the damaging effects of the Rs15/kg FED on sugar, which has disrupted the confectionery industry by inflating input costs and reducing production viability,” he added. “Now, with another flat tax on top, the pressure on formal businesses will only intensify. Meanwhile, the informal sector and grey market channels continue to operate unchecked, distorting competition and undermining the compliant industry. If the objective is genuine reform, then the government must pursue targeted measures such as incentivising reformulation; enforcing tax compliance in the informal economy; and cracking down on grey market inflows. Without these structural actions, blanket taxes will harm the formal sector, limit consumer access to safe and affordable products and fail to achieve the intended health or economic outcomes.”

With inflation already squeezing household budgets, the new taxes are likely to push food prices even higher. For millions of low-income Pakistanis, affordable packaged foods are a primary and sometimes only source of consistent nutrition. A sudden price increase could push consumers toward cheaper, informal sector offerings that are neither regulated for safety nor monitored for nutritional content.

The implications go beyond domestic food access. The country’s processed food sector has been gaining traction as a potential export engine, particularly to regional markets in the Middle East and Central Asia. The sector also supports thousands of formal jobs across manufacturing, distribution and retail.

Industry insiders claim that new taxes, especially without accompanying policy reforms, could discourage investment, stifle innovation and reduce global competitiveness, undermining broader economic goals during a period when Pakistan urgently needs foreign exchange inflows and export-led growth.

Analysts say that rather than relying on blanket taxation, a more effective approach would be to incentivise the reformulation of products with high levels of sugar, salt and trans fats. Public investment in nutrition education, especially in schools and low-income communities, could help shift long-term consumer behaviour. Simultaneously, strengthening monitoring of the informal sector is crucial to ensure that health policies do not simply push harmful consumption underground.