Bleeding green: Pakola fizzles out as capacity tax reintroduced

Is among the first local brands to cut production, others may soon follow.

KARACHI:

After more than 60 years, production of locally made soft-drink Pakola may come to an end as the government reintroduces the infamous capacity tax, which is blamed for devastating Pakistani beverage makers in the early 1990s, industry officials told The Express Tribune.

“Production and distribution of all the bottles, including 300 millilitres and 1.5 litres, has stopped,” said Qamar Pervez, a marketing manager at Mehran Bottlers, which owns Pakola along with brands like Bubble Up, Apple Sidra and Double Cola.

“We are only supplying the product in cans. We can’t afford the risk because of the nature of this tax. What if we go to court, lose, and the tax is implemented? Who is going to pay the penalty then?” asked Pervez. The company markets the cans mostly in foreign markets.



Pervez didn’t say when exactly production was stopped and couldn’t confirm if it was a permanent decision. Managing Director for the company Zeeshan Habib wasn’t immediately available to comment.

The government imposed a capacity tax on the manufacturers of aerated waters in Budget 2013-14. This basically means companies will pay sales tax and federal excise duty on production potential of the machinery instead of actual output.

The tax ranges from Rs1.17 million per valve to Rs4.7 million per valve. The valve is the nozzle of the machine used to fill bottles.

Some local beverage makers have already taken stay orders from courts to stop government from enforcing the tax, industry official said.

However some claim there is an uglier side to this story. Industry members say owners of local beverage companies have thrived on tax evasion.

“They pay sales tax on one truck instead of the three which leave the factory gates. Then they complain they aren’t doing well,” said a businessman affiliated with Lahore Chamber of Commerce and Industry.

Small vs multinationals

The capacity tax was first introduced in 1991 during Nawaz Sharif’s first government. The industry was made to pay Rs650,000 per valve until the decision was revoked in 1994. But by then the damage had already been done.



“Many companies had to shut down factories because of that tax. Until the early 1990s, local beverage companies had 40% market share while the rest was controlled by multinationals. After a few years, we only had a 10% share,” said an industry official who requested anonymity since his company is involved in litigation.

Although multinational firms will end up paying the most because of the size of their factories, they are in a much better position to afford such a hit, claim local producers. Everything comes down to efficiency of the machine and demand for the product in market.

“If they have the latest machine, and mine is 20 years old, how can you compare the two when the owner of the new efficient machine can easily produce more?”

When capacity tax was imposed for the first time in 1990s, the multinational beverage giants had to pay phenomenal amounts in freight to airlift the heavy machinery to Pakistan. The new machines were imported in a matter of days.

There is the problem of power breakdowns and the law and order situation, which often reduces the working hours. “The big company has the muscle to pay all but we can’t,” said the official.

Local producers warn that the shutdown of local manufacturers will give multinationals a commanding edge in the ‘price war’

“They are not vying to get the competition. It’s a price war instead. If they sell a bottle for Rs75 instead of Rs85, it’s because we are there in the market selling our product at Rs65. This is what they want to eliminate,” said the industry official.

Retail and wholesale shops have started to feel shortage of Pakola, which usually sees growth in sales during in the month of Ramazan. Consumers and industry members reacted strongly to the news, which has already been doing rounds on the social media.

Correction: Manufacturers was misspelled in an earlier version of this article. The correction has been made.

Published in The Express Tribune, August 1^st, 2013.

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