Govt considers reducing excise duty on beverages to attract foreign investment

The government is reportedly considering a reduction in the federal excise duty (FED) on beverages, including aerated water, in the upcoming federal budget for fiscal year 2025-26. The move is being discussed as part of efforts to attract foreign investment into the sector, which has seen little new investment since 2023. The proposal is under active consideration as budget preparations are underway, according to a news report.  

Since 2018, multinational companies, including those with Turkish and Korean franchises, have invested over $2 billion in Pakistan. However, no new investments have been made since 2023 due to the current fiscal environment.

The beverage industry, which contributes more than Rs 175 billion in taxes annually, has been severely affected by recent tax hikes. In 2023, the government increased the FED from 13%0 to 20%, resulting in a significant decline in the sector’s volume over two consecutive years. 

Despite strong infrastructure and historical growth, industry volume has reverted to 2018 levels, and plant capacity utilisation has dropped to 60%. Additionally, a $300 million investment has been on hold since March 2023.

The high tax burden, now exceeding 38% due to the combination of FED and GST, has led to reduced consumption, particularly in a price-sensitive market. Industry stakeholders argue that reducing the FED to 15% would unlock PKR 38 billion in additional tax revenue over the next two years, compared to maintaining the 20% rate.

Now, foreign investors, including Turkish investors, have indicated that a reduction in taxes would encourage more foreign direct investment (FDI) in the beverage sector. 

The beverage sector is interconnected with more than 16 industries, including transport, advertising, tourism, and retail. A decline in the sector risks job losses and could further harm the livelihoods of approximately 500,000 households. Industry representatives also emphasize that the sector is not seeking subsidies but rather a fair tax policy that encourages growth and investment.