Daily Times

In the coming budget, the government is reintroducing Federal Excise Duty (FED) on fruit juices. This will decline juice sales, leading to a negative impact on the fruit industry and those employed by it and fruit farmers. In the past, a 5 percent FED was imposed on the fruit juice sector in 2019-20, resulting in a decline in industry sales from Rs53.3 billion to Rs41.2 billion. After the FED was removed in 2021-22, the industry started growing again. However, in the February 2023 minibudget, a 10 percent FED was reintroduced, leading to an initial 45 percent decline in sales in the formal juice sector.

Despite being a relatively new industry that has begun contributing to the value chain in the agriculture sector, it has been able to reduce fruit wastage through pulp production. This, in turn, has the potential to generate export revenues.

The sector currently generates revenues close to Rs60 billion and contributes around Rs16 billion in taxes. It plays a crucial role in creating a value chain in the fruit sector, reducing fruit wastage by 15 percent and improving yields, particularly for mangoes and guavas. Furthermore, it has facilitated the development of fruit processing facilities, creating opportunities for small and medium-sized enterprises (SMEs) to thrive. The sector has also witnessed a gradual increase in exports, but there is still a long way to go.

However, the industry is facing challenges due to the economic slowdown and high inflationary pressure, which are hindering its desired growth rate. The imposition of a high 10 percent FED further damages its potential. Since the introduction of the 10 percent FED, sales in the formal juice sector have declined by 45 percent from March to May, resulting in plants being closed for an average of 10 days per month due to reduced sales.

This significant decline triggers concerns related to the Laffer curve, suggesting that the government may not be able to collect as much tax revenue as it did before the FED was imposed. As a result, the government’s overall collection from FED and GST will be lower than what it received from GST alone when there was no FED.

These circumstances also have a negative impact on pulp purchases by the industry. The projected pulp purchase for this fiscal year was 61,000 tons (compared to 51,000 tons last year). However, due to recent volume reductions, it is expected to decrease to 31,000 tons next year. This is unfavorable because, according to a major player in the mango pulp market, the yearly value of mango waste is approximately $1 billion if processed into pulp. The growth of the juice market is essential to convert this waste into valuable pulp.

Unfortunately, the imposition of higher taxes is affecting the established players in the formal market while inadvertently benefiting smaller, undocumented players. Previously, over 80 percent of the market share belonged to the formal market. However, with the higher FED and a sales reduction of over 40 percent, the undocumented sector is gaining market share. This sector may not comply with quality standards and might have limited impact on value chain development.

It is crucial for the government to reconsider and review the imposition of FED on the formal juice sector to support industry development and encourage the growth of value chains.