FMCG Companies Voice Concerns over Proposed Excise Duty in Pakistan’s FY26 Budget

As Pakistan prepares to unveil its budget for the fiscal year 2025-26, prominent fast-moving consumer goods (FMCG) firms are expressing significant apprehension regarding a suggested implementation of a 5%–20% Federal Excise Duty (FED). This duty would affect a wide array of processed food products, including items like biscuits, sweets, beverages, and ready-to-eat meals.

Industry representatives are cautioning that this potential measure could trigger extensive adverse effects for consumers, manufacturers, and the overall economy.

While the government is reportedly considering excise taxation to enhance revenue, industry sources contend that the proposal lacks sufficient consultation and sound economic reasoning, potentially causing more harm than benefit.

Impact on Low-Income Households

Processed and packaged foods, particularly biscuits, constitute essential food items for numerous lower-income households across Pakistan. Data from Foresight Household Panel Research indicates that approximately 70% of biscuit consumption originates from socioeconomic classes C, D, and E, with rural areas accounting for nearly 50% of the total consumption volume.

The imposition of an excise duty would likely translate to increased prices for consumers, making everyday necessities more costly. As highlighted by an industry official, such a tax would disproportionately impact vulnerable, low-income families already struggling with food inflation.

Biscuits are commonly consumed in Pakistan as an affordable energy source, frequently serving as a meal substitute in low-income households. Analysts argue that designating these everyday items as luxury goods and subjecting them to excise duties akin to sin taxes overlooks their crucial socio-economic role, particularly for the underprivileged.

According to Pakistan’s recent Economic Survey 2024–25, the nation’s per capita income has risen but remains among the lowest globally at $1,824. In comparison, Bangladesh’s estimated per capita income stands at approximately $2,800, nearly $1,000 higher. The proposed taxation measures seemingly disregard the economic constraints faced by a large portion of Pakistan’s population.

Risk of Boosting the Informal Sector

The suggested FED carries the risk of steering price-sensitive consumers toward unregulated, untaxed options. Industry insiders point out that the informal sector, which often disregards food safety and tax regulations, could benefit significantly from this shift.

The formal food sector is already burdened with an estimated 46% tax rate, compounded by increasing utility and compliance expenses. Additional taxation could diminish its competitiveness, thereby bolstering the already expanding informal sector.

For example, the juice sector experienced a volume decline exceeding 40% following the introduction of FED last year, while the informal sector’s market share surged from under 10% to over 25%.

Industry experts project that a 20% FED could trigger a 25% reduction in packaged food revenues, a 20% job loss in downstream sectors, and a 15% decrease in tax revenues. One executive cautioned that the fiscal implications might not be favorable, potentially resulting in marginal or even negative net gains for the exchequer when factoring in lost income tax and sales tax contributions.

A contraction within the formal sector would also stifle investment, impede R&D, and undermine efforts to enhance productivity. Packaged food factories, already operating below their potential, may be compelled to curtail production further or even cease operations entirely.

Ripple Effects Across Various Sectors

The packaged food industry underpins an extensive supply chain encompassing agriculture, packaging, transportation, and retail. A downturn in this sector would directly impact various stakeholders, including fruit growers, dairy farmers, packaging manufacturers, and cold-chain logistics providers, thereby amplifying the economic repercussions across multiple sectors.

Supermarkets and smaller retail outlets could also face reduced customer traffic and declining sales of packaged goods with higher profit margins, consequently affecting overall business profitability.

Moreover, the FED could have detrimental effects on public health. Packaged foods, such as biscuits, fortified snacks, and processed dairy products, are often enriched with vital nutrients and offer safer alternatives compared to unregulated options.

Rising prices could lead consumers to opt for street-vended or unhygienic alternatives with limited nutritional value, potentially worsening public health outcomes, particularly among children and working adults.

The industry is advocating for the government to reevaluate the FED proposal or embrace a more measured, collaborative policy approach. An industry spokesperson emphasized the need for revenue sustainability rather than solely focusing on revenue generation, cautioning against imposing taxes that could cripple the sector and undermine long-term fiscal benefits.

Given Pakistan’s already fragile economic state, experts caution that ill-conceived tax measures could undermine the very recovery they aim to facilitate. A poorly structured FED on essential packaged foods could erode the formal sector, harm public health, disrupt the supply chain, and ultimately decrease government revenues rather than increase them.