From Dil Bola Pakola to Amrat Cola – the beverage makers’ tragedy

Industry people believe capacity tax will not pay off in the long term .

KARACHI:

It appears to be a small issue. A new way of collecting tax imposed on the beverages industry through an SRO. It deals with just 1.27% of the total taxes that the government intends to collect in fiscal 2013-14. But it has set off an extraordinary chain of events!

The infamous capacity tax has pitted local and foreign beverage producers against each other, forced popular Pakola to cut production, pushed the CFO of a multinational bottler to impersonate a tax official before court and the tax has now opened up old wounds in a powerful business dynasty. All this has happened in a matter of a few weeks.

Under capacity tax, companies producing aerated water drinks will have to pay 17% sales tax and 9% excise duty on the potential of machines instead of actual production. This means the tax has to be paid on the number of valves, the nozzles used to fill bottles.

“This is not the right way to collect tax. It will only benefit the companies, which have huge marketing budgets,” said Isphanyar Bhandara, the CEO of Murree Brewery. “This would completely push us out of the market.”

Murree Brewery, the country’s largest liquor producer, receives 50% of its revenue from non-alcoholic beverages, which include carbonated drinks and fruit malts. Its carbonated products have also been affected by the new tax system. The company has already taken a stay order from court against it.

“Strikes, floods, technical breakdowns – there are so many issues which restrict us from running the plant at full capacity,” said Bhandara, who is also an MNA of the ruling PML-N. “Ideally, there should be a choice for bottlers to opt for either the new system or the old one. But that would be too hectic for the FBR to deal with.”

Industry officials say that government’s main purpose is to shore up revenue. However, they insist that a regressive way of collecting tax, which has already been tried in the past, wouldn’t bear any fruit.

Dil Bola Pakola tragedy

Pakola came into existence in 1950 when Haji Ali Muhammad created the country’s first soft drink brand, which became popular with the slogan ‘Dil Bola Pakola’. Known as the Teli family or Pakolawalas, his children expanded the business, setting up enterprises like the Gul Ahmed Group. Everything was managed by the family.

In 1985, family members decided to part ways. “It was all mutual and cordial,” said Siraj Kassam Teli, who is director of Pakistan Beverage Limited, the largest bottler of Pepsi in Sindh.

“Under the family agreement, we got to keep the Pepsi bottling plants in Karachi, Hyderabad and Sukkur. This also included Gul Bottlers, which produced Pakola and had rights to manufacture it in rural Sindh,” he said. Gul Bottlers was sold to the Leghari family in 2007.

The family of his uncle Haji Habib Haji Muhammad got Mehran Bottlers, which has the rights to produce Pakola for the Karachi market. “But the Pakola brand is registered with Pakistan Beverage. It is still our brand,” he said.

Since the imposition of capacity tax, Mehran Bottlers has stopped producing Pakola in bottles, something that has annoyed Teli.

“Use my name in the paper and tell them that we will take action if they don’t resume production. Under the family agreement, they can’t shut it down like that. We might even take it over,” he said.

Teli even alleges that his nephews are using the plant to produce products of Pepsi’s main multinational competitor.

Despite repeated attempts for comments, Zeeshan Habib Teli, the CEO of Mehran Bottlers, didn’t respond.

Siraj Teli however wasn’t able to explain how justice can be done with a local brand which is owned by the producer and marketer of a popular foreign carbonated drink.

Tax history

Multinational brands control 97% of the beverage market. They are represented by bottlers who have territorial control – each brand has multiple bottlers like Teli in southern Pakistan while the rest meet the demand of other regions. Not all multinational bottlers are happy with the new taxation system and at least one has gone to court.

First introduced in 1990, it is widely believed that this mode of collective tax was the result of aggressive lobbying by the multinationals. It was rolled back in 1994 but by then 10 beverages and 13 juice plants had been closed.

Newspaper clippings of March 1994 show the extent to which multinationals went in favour of capacity tax. Protests, rallies and strikes were staged from Karachi to Lahore by the bottlers of large brands. Pakistan Beverage’s Teli was also a part of those protests.

“We weren’t actually agitating against any taxation system. It was more for the funds which were stuck with the government. We finally received the payments six years ago,” Teli said.

The government expects to raise Rs33 billion through capacity tax against last year’s Rs28 billion it earned from the beverages industry.

This time even Teli has opposed it. “It’s regressive taxation. Even the IMF has opposed it. We might benefit in short term but in two years we will also take a hit. This is a cyclic business and there are ups and downs,” he said. These points are also part of a letter he sent to Finance Minister Ishaq Dar.

It is hard to say how many companies actually succumbed to the capacity tax. Mitchells is one of the firms, which closed its juice plant during the period. But Ramzan Bhatti, a factory manager, says there is more than one reason.

“Basically margins are very low in the juice division. Other players would cheat, avoid tax and use low quality ingredients. We couldn’t do that. That is the main reason for closing down the division,” Bhatti said.

Local woes

Amrat Beverages, which makes drinks like Amrat Cola and Amrat Lime, has the privilege of being the bottler of both top multinationals from 1989 to 2003.

“Things looked so good in the early 2000s that the company decided to come out with its own products,” recalled Mukhtar Ahmed Qadri, Amrat’s Director Operations. “There was a sudden rush of patriotism. People wanted Pakistani products and our sales picked up.”

But everything changed in a matter of years. “Project viability was designed considering sugar price of Rs30 per kg. It went up to Rs80. CO2 was available at Rs30 per kg and then we had a gas shortage and it shot up to Rs250,” Qadri said.

The added burden of capacity tax will only make things worse for Amrat. “It is almost impossible to sell anything in northern Pakistan during winters. Drinks are not preferred even at marriage ceremonies held between November and February. With negligible production, we’ll still be paying the tax like running the plant at full capacity. This is unfair.”

Published in The Express Tribune, August 15^th, 2013.

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