reassessing food taxation policies
As the Federal Budget for FY26 approaches, the implementation of specific fiscal measures – such as the Rs.15/kg Federal Excise Duty (FED) on sugar sold to manufacturers and the proposed 5 percent FED on over 50 ultra-processed food items – requires re-evaluation.
These financial strategies, which may initially appear as initiatives to promote public health or boost revenue, may unintentionally create an unbalanced competitive landscape. By imposing such taxes on the formal sector, yet allowing the informal economy to evade them, these levies create detrimental consequences for both the economy and consumers.
Formal sector businesses are already grappling with the weight of a direct tax burden nearing 46 percent, in addition to municipal taxes, utility costs, and regulatory obligations. The imposition of an additional excise duty on inputs like sugar or processed food items further escalates their operational burden.
In an economy marked by high inflation and diminishing consumer spending power, levying these taxes risks strengthening the informal sector – one that neither contributesto the government’s tax revenue nor complies with regulatory standards. As tax-compliant companies struggle to stay competitive, they may be driven out of the market by their tax-evading counterparts.
The impact of these taxes on consumers is multifaceted. Increased taxes on basic staples such as sugar and processed foods will result in price hikes, hurting individuals and households most vulnerable to economic instability. Moreover, if the goal of these taxes is to improve public health through healthier food consumption, the absence of affordable alternatives for lower-income Pakistanis may ultimately exacerbate the problem rather than solve it.
While some developed nations, including France, the UK, and Chile, implement taxes on sugary drinks and ultra-processed foods to combat obesity and lifestyle-related diseases, Pakistan lacks the safety nets necessary to support such an approach. In the absence of subsidies for healthy food options and a robust public healthcare infrastructure, these taxes could potentially worsen public health instead of improving it.
Although reducing the consumption of sugar and ultra-processed foods may have long-term health benefits, the majority of the Pakistani population lacks affordable access to healthier alternatives. In light of this, increasingly prices on widely consumed, calorie-rich items like biscuits may inadvertently force consumers towards less nutritious, unregulated options. In addition, it's essential to recognize that biscuits are not ultra-processed foods – they are baked items commonly consumed for their affordability and energy content.
The formal food sector, which prioritizes quality control, supply chain integrity, and employment, faces direct disadvantages under such taxation policies. A shrinking consumer base and declining sales resulting from the price hikes will reduce profitability, restrict investments, lower tax contributions, and potentially lead to job losses and a decline in industrial activity within the sector.
Countries adopt different approaches when taxing processed foods – health-based taxes are imposed in developed countries to reduce consumption of harmful ingredients, while revenue-based taxes in developing economies like Pakistan often prioritize collection without a clear link to health policy. The prevailing approach in Pakistan exhibits a revenue-collection focus, lacking the health infrastructure needed to ensure that the taxes are not only fair but also benefit the public.
The recent indication that the government may abolish the sugar FED in FY26 signifies a step in the right direction. If the government acknowledges the detrimental effects of the sugar FED on businesses, jobs, and prices, it must also reconsider the plan to tax ultra-processed foods.
The long-term health argument may hold validity; however, in its current form, the tax policy must balance raising revenue with Pakistan’s economic realities. To minimize the negative impact on businesses, consumers, and the broader economy, the government should opt for intelligent, targeted policies rather than flat taxes that can unintentionally benefit the untaxed informal sector.
In an effort to balance fiscal measures, such as the proposed excise duty on ultra-processed food items, with the country's economic realities, it's crucial to consider the potential consequences for businesses and consumers. The implementation of these taxes may create an unbalanced competitive landscape between formal and informal sectors, potentially driving tax-compliant businesses out of the market due to increased costs. Additionally, the impact on lifestyle choices, such as food-and-drink consumption, should be evaluated carefully, as higher taxes on basic staples like sugar and processed foods may worsen public health rather than improving it if affordable alternatives are not available. Therefore, it's essential to adopt intelligent, targeted policies that raise revenue while minimizing harm to businesses, consumers, and overall economic stability.
