Already reeling under the impact of an ongoing wheat crisis, the farming community is set to suffer another blow in the form of reduced fruit purchases by juice and nectar extracting companies, apparently because of the imposition of higher taxes on the industry.

Reports from the countryside suggest that juice makers have reduced their footprint in the local fruit markets by slashing their procurement and contract-farming targets. At its peak, the formal juice industry procured more than 100,000 tonnes of fruits from local farmers. The volumes have gone down considerably.

Normally, fruit pulp-making units approach orchard owners and exporters a couple of months before fruit harvesting and sign an informal contract to lift fruit supplies that do not meet export standards. However, the trend has abruptly declined this year as orchard owners continue to pensively wait for industry representatives.

“Not a single company has contacted me so far for the purchase of the mangoes left over from export,” says Mubashar Durrani, a mango grower from Multan. “This is very different to their past practices when they would try to sign contracts for the fruit supplies even 20 to 30 per cent over their requirements to ensure their purchase target is not affected in case of default by a few suppliers.”

High and unfair taxation of 20pc FED on top of an 18pc GST has diminished fruit procurement by 50pc in a year

The purchases by the pulp, nectar, and juice-making units would help stabilise the local market, leading to a fair return for the growers. However, the diminished role of these players means that prices of various fruits will also tumble in the local market, to the disadvantage of orchard owners.

Mr Durrani says that they are already very hard hit by limited fruit exports to Russia, Ukraine, and Central Asian states due to trouble on the two available trade routes passing through neighbouring Afghanistan and Iran.

“The evaporation of the fruit juice industry as a major player from the market and falling fruit prices will force us to stop planting new trees, particularly in the wake of higher power, diesel, fertiliser and labour rates. We’ll rather be compelled to uproot the existing ones to sell them as fuel wood to partially recover losses.”

Disturbed by the reports, Ebadur Rehman, a guava grower from Sheikhupura, regrets how the government is hurting the fruit value chain instead of fostering it as it is the only viable option to improve the agriculture sector’s productivity and strengthen the rural economy, currently grappling with unemployment-led migration of people towards urban centres.

“Only value addition can save the national economy. Otherwise, we will remain a raw material producing nation, always relying on other countries for processed, finished goods,” Mr Rehman says.

Due to the levy of 10pc Federal Excise Duty (FED) in the 2022-23 budget, industry sales plummeted to Rs43 billion, which would have increased to more than Rs70bn, considering the industry’s growth trajectory in the previous years. In the 2023-24 budget, the government raised the FED to 20pc to meet revenue shortfalls.

However, this has proved counterproductive, with no gains for the national exchequer due to dipping sales and volumes. It has also opened the field for mushroom growth of the tax-evading undocumented sector due to cheap, low-quality, and possibly unsafe products, while adversely affecting the rural economy of fruit farmers who are associated with this value chain.

According to industry representatives, the imposition of 20pc FED has shot their sales down by around 50-70pc, slashing their new procurement targets. “We are carrying inventory from the last year due to the dip in sales in the wake of our products becoming costlier since the imposition of 20pc FED disallowing us to consume our previous stocks,” says Zulfikar Gondal, the chief executive officer of one of the major brands of fruit juices.

“Given our inventory, current sales trends and other factors, at least mangoes may not be purchased this season, and there shall be a substantial drop in the procurement of peaches, apples and other fruits.”

A shrinking business size has created more unemployment within the industry. After the imposition of the FED, the industry has not been utilising its full production capacity. As a result, no new investments were made in 2023-24 and aren’t planned for 2024-25 either.

After the imposition of the 20pc FED, industry volumes have crashed by 41pc, and fruit procurement has gone down by almost half. This has affected pulp processors as well as the local farmers. As a result of dipping sales, some companies have had to lay off workers, especially daily wage workers.

“The whole industry is in crisis, and many players are considering downsizing their sales and production teams to cut down expenses,” says the general manager of another unit, who is requesting not to be named. As the drop in sales has led to a shortfall in the revenue the government expected to collect, he wonders what the government achieved in this trade-off.

Fruits have a high wastage rate because of their intrinsic perishability and improper handling, storage, packaging and transportation. This causes farmers to sell their produce very low prices, especially during peak season.

A Fruit Juice Council spokesperson says the formal packaged juice industry prevents significant food wastage and protects farmers’ livelihoods. The industry has also been helping farmers adopt best practices, which has resulted in uplifting farmers’ development, she claims, requesting not to be named.

She advises the government that Pakistan should follow progressive taxation, like other countries that offer preferential tax treatment to packed fruit juices. This is because packed fruit juices contain natural fruit, which makes them healthier.

“The government should focus on allowing the formal industry to flourish by at least bringing down the FED rate. 18pc GST [general sales tax] already exists in the category. Contrary to it, there is no cess on juices in India, where pure fruit juices have only 12pc GST.”

The packaged fruit juice industry also has great potential for exports, as our fruits are highly demanded worldwide. However, to realise that potential, we need a strong base and presence in the local market. That’s what will attract new technology and investment and spur exports.

If the last year has shown anything, she argues, it is that the FED has made the formal juice business unviable, and this is a cause for alarm for economic growth, particularly in the rural economy. Only the documented sector pays these double taxes.

“Consumers conscious of the high prices have been buying products manufactured by the undocumented sector. Their low pricing suggests that they don’t pay the taxes and are also compromising on the product standards. They aren’t registered with food authorities either.

“The informal players must be brought into the tax net because economic stability won’t be achieved by burdening those already paying the taxes,” she adds.

Published in Dawn, The Business and Finance Weekly, May 13th, 2024