The Competition Commission of Pakistan (CCP) has issued a Policy Note to the government recommending it to withdraw the imposition of ‘capacity tax’ on the beverage industry. Soon after Dr. Joseph Wilson taking charge as Acting Chairman, the CCP became functional again and took notice of various news items raising concerns by the beverage industry on the imposition of Federal Excise Duty (FED) and Sales Tax, vide notification SRO No. 649(I)/2013 dated 9th July, 2013 on production/installed capacity instead of actual sales. As per the SRO, factories having foreign or mix of foreign and local origin filling machines have to pay PKR 4,700,000, factories exclusively having local origin filling machines to pay PKR 3,760,000, and factories having filling machines with less than 40 filling valves have to pay PKR 1,175,000. The Commission noted that the levy based on the installed capacity results in imposition of a fixed tax on manufacturing units with varying levels of actual production and thus, discriminates against the smaller manufacturers. This also results in a number of competition concerns. The Commission noted that the Capacity Tax, which was introduced in 1991, and later withdrawn in 1994, had become a major reason for bankruptcy and closing down of many local competitors, as around fifteen local beverage plants had ceased operations. Today, production in the beverage industry is confined to a few cities, i.e., Lahore, Multan, Lala Musa and other areas, and it is not viable for them to reach out and market their products all over Pakistan. The Commission believes that Capacity Tax results in gains for large scale manufacturers, who hold a major share in the market, use high speed fillers, and produce at higher rates of capacity utilization (up to 80-100 per cent). On the other hand, a small manufacturer who has less demand in the market and is producing less than half of its production capacity will also have to pay the same fixed rate of tax. Therefore, a fixed rate of tax would reduce the tax burden of large manufacturers and increase it for small manufacturers. This imbalance of tax imposition is anti-competitive, as it puts small competitors at a cost disadvantage, resulting in unfair competition, and eventually could squeeze the small competitors out of the market. Furthermore, the division of manufacturers into different categories also seems to be unreasonable, as the tax slab jumps from PKR1.17 million to PKR3.7 million if the number of valves goes up from 39 to 40. This raise in tax is exponential and would only encourage fixing capacity at 39 valves. Moreover, the Capacity Tax regime creates barriers to entry and exit. Under the given tax slabs, a potential competitor will be reluctant to increase capacity, as this would result in a higher incidence of tax in the earlier years of the usage of the machinery, when it is typically utilized below full capacity. Even otherwise, it would be difficult for any new competitor to compete with the larger manufacturers who have a stronghold in the market and take the benefit of cost advantage (economies of scale) under the Capacity Tax. Not only this, even if any existing manufacturer intends to expand its production, tax slabs given in the SRO will curtail machinery investment. The current situation is unlikely to yield higher revenue to the government. Moreover, the Capacity Tax regime makes the exit from the market also difficult. All those manufacturers who are not able to compete will have no buyer in the markets for their plants/machinery. Finally, once the smaller manufacturers are driven out of the market, competition will be reduced, and the consumers will be left with limited choices. Also, low profile brands having a small market share help in creating choice in favor of the consumer. These brands cannot sell at the same price as the high profile brands, but they do compel a high profile brand to maintain a proportionate price, otherwise it would start losing market share. The Commission noted that Capacity Tax is a regressive way of revenue collection and gives unfair and unnecessary competitive cost advantage to those manufacturers who have high rate of capacity utilization over those who have less demand in market and are not able to fully utilize their installed capacity. Such a discriminatory tax regime stifles competition in the beverage industry, and as a result, small local manufacturers will be forced to close down because they will no longer be able to compete in a tax environment that overwhelmingly favors large manufacturers. This is against the nation’s professed aim of building and growing businesses and encouraging investment. The Commission’s mandate includes ensuring free competition in all spheres of commercial and economic activity and to enhance economic efficiency. Section 29 of the Act stipulates that the Commission shall promote competition by, inter alia, reviewing policy frameworks for fostering competition and making suitable recommendation to the Federal Government or Provincial Governments to amend any law that affects competition in Pakistan.
The Competition Commission of Pakistan (CCP) has issued a Policy Note to the government recommending it to withdraw the imposition of ‘capacity tax’ on the beverage industry. Soon after Dr. Joseph Wilson taking charge as Acting Chairman, the CCP became functional again and took notice of various news items raising concerns by the beverage industry on the imposition of Federal Excise Duty (FED) and Sales Tax, vide notification SRO No. 649(I)/2013 dated 9th July, 2013 on production/installed capacity instead of actual sales.
As per the SRO, factories having foreign or mix of foreign and local origin filling machines have to pay PKR 4,700,000, factories exclusively having local origin filling machines to pay PKR 3,760,000, and factories having filling machines with less than 40 filling valves have to pay PKR 1,175,000. The Commission noted that the levy based on the installed capacity results in imposition of a fixed tax on manufacturing units with varying levels of actual production and thus, discriminates against the smaller manufacturers. This also results in a number of competition concerns.
The Commission noted that the Capacity Tax, which was introduced in 1991, and later withdrawn in 1994, had become a major reason for bankruptcy and closing down of many local competitors, as around fifteen local beverage plants had ceased operations. Today, production in the beverage industry is confined to a few cities, i.e., Lahore, Multan, Lala Musa and other areas, and it is not viable for them to reach out and market their products all over Pakistan.
The Commission believes that Capacity Tax results in gains for large scale manufacturers, who hold a major share in the market, use high speed fillers, and produce at higher rates of capacity utilization (up to 80-100 per cent). On the other hand, a small manufacturer who has less demand in the market and is producing less than half of its production capacity will also have to pay the same fixed rate of tax. Therefore, a fixed rate of tax would reduce the tax burden of large manufacturers and increase it for small manufacturers. This imbalance of tax imposition is anti-competitive, as it puts small competitors at a cost disadvantage, resulting in unfair competition, and eventually could squeeze the small competitors out of the market.
Furthermore, the division of manufacturers into different categories also seems to be unreasonable, as the tax slab jumps from PKR1.17 million to PKR3.7 million if the number of valves goes up from 39 to 40. This raise in tax is exponential and would only encourage fixing capacity at 39 valves.
Moreover, the Capacity Tax regime creates barriers to entry and exit. Under the given tax slabs, a potential competitor will be reluctant to increase capacity, as this would result in a higher incidence of tax in the earlier years of the usage of the machinery, when it is typically utilized below full capacity. Even otherwise, it would be difficult for any new competitor to compete with the larger manufacturers who have a stronghold in the market and take the benefit of cost advantage (economies of scale) under the Capacity Tax. Not only this, even if any existing manufacturer intends to expand its production, tax slabs given in the SRO will curtail machinery investment. The current situation is unlikely to yield higher revenue to the government. Moreover, the Capacity Tax regime makes the exit from the market also difficult. All those manufacturers who are not able to compete will have no buyer in the markets for their plants/machinery.
Finally, once the smaller manufacturers are driven out of the market, competition will be reduced, and the consumers will be left with limited choices. Also, low profile brands having a small market share help in creating choice in favor of the consumer. These brands cannot sell at the same price as the high profile brands, but they do compel a high profile brand to maintain a proportionate price, otherwise it would start losing market share.
The Commission noted that Capacity Tax is a regressive way of revenue collection and gives unfair and unnecessary competitive cost advantage to those manufacturers who have high rate of capacity utilization over those who have less demand in market and are not able to fully utilize their installed capacity. Such a discriminatory tax regime stifles competition in the beverage industry, and as a result, small local manufacturers will be forced to close down because they will no longer be able to compete in a tax environment that overwhelmingly favors large manufacturers. This is against the nation’s professed aim of building and growing businesses and encouraging investment. The Commission’s mandate includes ensuring free competition in all spheres of commercial and economic activity and to enhance economic efficiency. Section 29 of the Act stipulates that the Commission shall promote competition by, inter alia, reviewing policy frameworks for fostering competition and making suitable recommendation to the Federal Government or Provincial Governments to amend any law that affects competition in Pakistan.
© CCP 2023, Competition Commission of Pakistan ©All rights reserved
