By Rida Ahmed
The key policy question facing newly established Tax Policy Unit (TPU) of the Ministry of Finance ahead of the upcoming federal budget is how to plug a multi-billion revenue shortfall without further shrinking the documented corporate footprint. At the same time, fiscal managers face the immediate challenge of eliminating marketplace distortions where compliant sector is penalized and unmonitored informal enjoys impunity.
Sources close to the matter state that to meet steep revenue targets, government has historically focused on formal sector, particularly fully compliant, heavily regulated multinational companies and large corporate taxpayers. While this strategy yielded immediate revenue in past, it has come to a point of diminishing returns, according to analysts.
Compliant players in sectors such as beverages, cigarettes, and pharmaceuticals must either absorb escalating costs or pass them on to consumers, resulting in a loss of market share to undocumented competitors operating outside the tax net in the informal economy. These substandard operators not only evade taxes but also put consumer health at serious risk due to a complete absence of regulatory oversight.
Nowhere is this fiscal pressure more pronounced than in the formal beverage industry. Currently, the cumulative tax burden on the formal beverage sector stands at an estimated 38 per cent when combining General Sales Tax (GST), Federal Excise Duty (FED), and other direct and indirect levies.
A senior industry leader shared that formal beverage industry possesses immense potential to attract further Foreign Direct Investment (FDI), which remains critical for stabilizing Pakistan’s balance of payments. The current 38 per cent tax matrix acts as a deterrent for foreign capital. Global beverage giants, such as Coca-Cola and Pepsi, could regain long-term investment confidence in the Pakistani market if rational fiscal measures are implemented.
Implementing a viable, phased strategy in the upcoming budget to unlock FDI is seen by experts as a more pragmatic approach.
According to an economic expert, “The government can introduce a phased, downward tweaking of the FED by anywhere between 3 to 5 per cent on high-yielding sectors. Projections indicate that such a reduction can lower barriers to consumption, reverse the volume contractions, and expand sales.”
A beverage association representative estimates that this volume expansion within the beverage sector alone could contribute 8 to 10 billion rupees to the national exchequer across the supply chain, provided the macroeconomic environment remains stable.
Market analysts suggest that if the government implements this reduction in the FED and subsequently observes a decline in revenue rather than the intended volume-driven increase, it can revisit and reverse the policy in the following fiscal review. This mechanism gives the industries the necessary room to prove their revenue-generating capacity while keeping the state’s revenue interests secure.
As the budget session draws closer, the TPU must utilize this opportunity to correct operational anomalies across industries. Moving eligible consumer goods into the Third Schedule of the Sales Tax Act allows the state to collect revenues upfront based on printed retail prices. Combined with an experimental, phased rationalization of the FED on high-volume corporate sectors, this approach offers a sustainable path to maximizing revenue, documenting supply chains, and securing long-term investor confidence.
Rida Ahmed is a LUMS graduate and communications professional whose work focuses on social, economic, and public policy issues. She writes extensively on business, governance, sustainability, and their impact on communities and markets.