Taxing business: FBR reviewing capacity tax on beverage industry

Companies ‘being forced’ to shut down operations.

KARACHI:

The government is facing an increasing pressure to review a controversial tax regime concerning the beverage industry that threatens revenue collection and force half a dozen companies to shut down operations, industry officials said on Monday.

Federal Board of Revenue’s Large Taxpayer Unit (LTU) for the Lahore region has already reported a loss of Rs2 billion during the first quarter since the tax was imposed in July this year, they said.

“We will see companies wrap up operations and the market will be controlled by multinational brands,” said a manufacturer of aerated drinks who has cut his capacity by half.

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

From Pakola in Karachi to Murree Brewery in Rawalpindi, all the Pakistani beverage makers have been seriously affected with their sales at less than installed capacity.



Some companies have taken stayorders against the tax but continue to remain under constant uncertainty. “We have to scale down production anyway because the decision might hold in future hearings.”

Federal Board of Revenue has taken notice of the situation. Its spokesman Shahid Hussain said that other LTUs have also faced similar losses. “This is not working out to be the way we had hoped for,” he said.

“Revenue loss is not acceptable for the government, since there hasn’t been any improvement; we are considering the tax.” Hussain said.  He further added there was an understanding with multinational beverage companies that the tax collection will increase by 25% under the new method.

Multinational brands control 97% of the beverage market. First introduced in 1990, it is widely believed that this method of tax collection 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.

The government aims to raise Rs33 billion through the capacity tax in comparison with last year’s Rs28 billion it earned from the beverage industry.

Amrat Beverages, a beverage company that makes drinks like Amrat Cola and Amrat Lime, had the privilege of being the bottler of both top multinationals from 1989 to 2003.

“The market looked so good during the early 2000s that the company decided to come out with its own products,” Mukhtar Ahmed Qadri, Amrat’s director operations, told The Express Tribune a few months ago explaining that there was a sudden rush of patriotism. People wanted Pakistani products and the sales picked up, but the situation changed in a matter of a few years. “Project viability was designed considering the sugar price which was at Rs30 per kg. It went up to Rs80, carbon dioxide (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 the capacity tax will make things worse for Amrat, he said. “It is almost impossible to sell anything in northern Pakistan during winters, drinks are not preferred between November and February. With little production, we’ll still be paying the tax as though we are running the plant at full capacity.”

Small bottlers point out that the entire regime is tilted in favor of the multinational companies. “Those dispensers in restaurants are directly competing with bottles, but they have been exempted because we know which two brands have complete monopoly over this market,” said a Punjab-based beverage maker.

As a consequence of the capacity tax regime machines have been dismantled and transported to warehouses at least one kilometer away from the plants. Tax officials are regularly monitoring the implementation of the tax.

Published in The Express Tribune, December 3^rd, 2013.

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