The imposition of taxes by the government on various items in the formal sector has raised concerns about the sustainability of government debt and the growing fiscal deficit. Unfortunately, some of these taxation decisions may have adverse effects on the overall economy, hinder the growth of the formal sector, and impede the creation of value chains.

The reintroduction of the Federal Excise Duty (FED) on fruit juices is one example. Although the fruit juice industry is relatively new and has been thriving, it plays a vital role in creating value chains within the agriculture sector. The emergence of the formal sector in this industry has helped reduce fruit wastage by converting it into pulp, which, in turn, has the potential to generate export revenues.

In the fiscal year 2019-20, a 5 percent FED was imposed on the sector, resulting in a decline in industry sales from Rs53.3 billion to Rs41.2 billion. However, when the FED was removed in 2021-22, the industry experienced a renewed growth. Unfortunately, in the recent mini-budget of February 2023, a 10 percent FED was once again imposed. Consequently, the formal juice sector witnessed a sharp decline of 45 percent in sales.

The sector currently generates revenues close to Rs60 billion and contributes approximately Rs16 billion in taxes. It plays a crucial role in establishing a value chain within the fruit sector, with farmer engagements leading to a 15 percent reduction in fruit wastage and significant improvements in yields, especially for mangoes and guavas. Additionally, fruit processing facilities have been developed, creating opportunities for small and medium-sized enterprises (SMEs) to thrive. The sector has also shown promise in terms of export growth, although there is still a long way to go.

However, the industry is already facing challenges due to economic slowdown and high inflationary pressures, hindering its desired growth rate. The imposition of a high 10 percent FED further dampens its potential. Since the introduction of the 10 percent FED, there has been a 45 percent decline in sales from March to May, leading to an average closure of plants for 10 days per month.

This situation also negatively impacts pulp purchases by the industry. Initially, the industry projected purchasing 61,000 tons of pulp this fiscal year, compared to 51,000 tons in the previous year. However, due to the recent decline in volumes, it is anticipated that pulp purchases will drop to 31,000 tons next year. This is worrisome because processing fruit wastage into pulp has the potential to convert around $1 billion worth of mango waste annually.

Regrettably, the imposition of higher taxes is disadvantaging the formal market players, allowing informal smaller players to seize opportunities. Last year, the formal market held over 80 percent of the market share. However, with the increased FED and more than a 40 percent reduction in sales, the undocumented sector is now gaining ground. However, this informal sector may not conform to quality standards and may have limited impact on the growth of value chains.In light of these concerns, it is essential for the government to reconsider its decision and review the FED imposed on the formal juice sector. Supporting the industry’s development and facilitating the growth of value chains should be a priority.