Beverage sector sits on $200mn investment plan on tax snags

LAHORE: Beverage sector has held back its plan to inject another bout of approximately $200 million in investment in Pakistan as it frets over government’s inconsistent policies and discouraging taxes, industry sources said on Friday.  

The sources said the industry has already invested more than $700 million in capacity expansion during the last five years. They said the federal government made a commitment to reduce and subsequently eliminate federal excise duty (FED) on beverage sector. 

“Government should act sensibly and understand that by providing beverage sector a little space to grow and invest further the national exchequer will be the biggest and ultimate beneficiary in shape of increased tax collection and duties,” said a source.

There are three key players operating in the country’s beverage sector. Pepsi Cola International holds the biggest chunk in market share with 51 percent. The company paid tax of Rs9.9 billion with a 55 percent share in tax contribution from the industry, according to latest estimates. Coca-Cola Beverage Pakistan Limited holds 38.8 percent market share and tax share of 43 percent. It paid Rs7.8 billion in taxes. Gourmet paid Rs0.3 billion in taxes with 10.8 percent market share and two percent tax share.

The sources said the current level or any further increase in FED would encourage more tax evasion, which is already destabilising the level-playing field.  They said higher tax rates are also encouraging the growth of counterfeit products across the country. 

“The growing prevalence of local brands with low quality, which are out of the FED net, along with the sector’s inability to increase prices, is depriving the sector of a sustainable and an investment-friendly environment,” a source said. “Further, the health and hygiene standards of such local brands are highly questionable.”

Overseas Investors Chamber of Commerce and Industry, in its budget proposals, said since carbonated soft drinks are no more luxurious products the government should exclude the beverage from FED regime. FED should be reduced from 11.5 percent to nine percent, which would give much-needed impetus to the industry for investment, it said. 

Pakistan ranks 5th in beverage consumption in the world and the country’s beverage sector is bearing second highest indirect taxes of 27.5 percent on retail price of carbonated soft drink, limiting the capacity of the industry to reinvest into the market to capture the growth opportunity. Comparatively, India has 21.5 percent taxes on beverage, while China slaps 17 percent. In Bangladesh, however, the rate is 40 percent.

Industry experts said the government, in 2011/12 budget, proposed a reduction of a number of items, especially from food and beverage sector, from the FED list, to attract foreign direct investment. In the first step, FED on soft drinks was reduced from 12 percent to six percent in the federal budget 2011/2012, but no further reduction was made in the subsequent budget, they added.

Instead, in the budget for 2013/14, FED rate was increased to 9 percent and this rate continued till 2014/15. The FED was raised to 10.5 percent, effective from July 1, 2015 and later to 11.5 percent in July 2016.