Pulpy taxation

The government is lately imposing a tax on every item they can find in the formal sector. Government debt is becoming unsustainable, and there is no stoppage to the growing fiscal deficit. And in the process, decisions are being made regarding taxation that might not be good for the economy at large, the growth of the formal economy, and the creation of value chains.

One such case is the re-imposition of FED on fruit juices. Although it’s a nascent industry and is thriving lately and helping create the value chain in the agriculture sector where historically the wastage of fruit is significant, the emergence of the formal sector in it is helping in reducing the wastage through making pulp and, in turn, can help in generating export revenues as well.

In 2019-20, FED was 5 percent imposed on the sector, and industry sales dipped from Rs53.3 billion to Rs41.2 billion and were slowly growing. Then the FED was removed in 2021-22, and the industry started growing again faster. However, in the mini-budget in February 2023, FED was again imposed at 10 percent. And the initial impact of such a move is a 45 percent decline in the formal juice sector sales.

The sector’s revenues are close to Rs60 billion and contribute around Rs16 billion in taxes. The sector helps in creating a value chain in the fruit sector. The farmer engagements have resulted in a 15 percent reduction in fruit wastage and significant yield improvement – especially in mango and guava. Then there is development in fruit processing facilities, creating opportunities for SMEs to spur. And slowly exports are picking up in the sector. But, it’s a long journey to travel.

However, the economic slowdown and high inflationary pressure are already creating hurdles for the industry to grow at the sought pace. And now the high 10 percent FED imposition is denting its potential further. There is a decline of 45 percent in sales from March to May after the imposition of 10 percent FED. The plants, on average, are closed 10 days a month as the sales dipped.

And with this massive decline, the Laffer curve comes into play, and the government may not be able to collect as many taxes as it was getting before the FED imposition. So now the FED and GST collection will be lower than what the government was getting alone on GST when there was no FED.

This adversely impacts pulp purchases by the industry, as well. The industry was projected to buy 61,000 tons of pulp this fiscal year (51,000 tons Last year). However, based on recent volume reduction, the pulp purchase is expected to slash to 31,000 tons next year. That is not good. According to a player thriving in the mango pulp market, the total worth of mango waste yearly is around $1 billion if processed into pulp. And to convert this wastage to the potential pulp, the growth of the juice market is imperative.

However, the big muscles of the formal market are being cut by the imposition of higher taxes. And that is helping the informal smaller players to grow. Last year, over 80 percent of the market share was in the formal market. But with higher FED and 40 percent plus sales reduction, the market for the undocumented is up for grabs. That sector may not conform to quality standards and may have a limited impact on growing the value chains.

The government must reconsider its step and revisit the FED on the formal juice sector to help the industry to develop and let the value chains grow. The industry is advocating for it for the right reasons. The commerce and industry ministries support the formal sector’s stance and advocate the differentiation of this sector from the carbonated drink sector. And the finance ministry is showing sympathy for the cause and may revisit the FED if there is some fiscal space.