Rethinking food taxes

Business Recorder

26-05-2025

As the Federal Budget FY26 approaches, existing and proposed fiscal measures—such as 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—warrant reconsideration.
While such measures may be presented as public health or revenue-generating tools, their real-world impact on the economy, consumers, and the formal sector tells a different tale. At their core, these levies create a critically uneven competitive landscape—penalizing the tax-compliant formal sector while rewarding the tax-evading informal economy.
They make it harder for tax-paying companies to compete, while giving an advantage to informal businesses that don't pay taxes. This ends up harming the very goals the taxes are meant to achieve.
The country's formal sectoralready operates under a direct tax burden nearing 46 percent, in addition to municipal taxes, utility hikes, and regulatory compliance costs. Imposing an additional excise duty on a basic input like sugar—or processed food items in general—only amplifies their operational burden.
This is especially problematic at a time when inflation has been high and consumer spending power is shrinking. The unintended consequence of these taxes would be strengthening of the informal sector, which neither pays taxes nor complies with regulatory standards.
As formal manufacturers are forced to raise prices to absorb higher input costs, they are priced out of the market, losing ground to unregulated competitors offering cheaper alternatives. This shift erodes not only formal employment and quality assurance but also reduces the overall tax base.
The excise duty on processed foods will inevitably be passed on to consumers—raising prices of everyday staples like biscuits, juices, frozen foods, and ready-to-eat meals. In a country where the average household spends a disproportionately large share of its income on food, these increases are economically damaging. The price sensitivity of Pakistani consumers in a volatile economic is likely to provoke dissatisfaction and pushback.
Yes, many developed countries—such as France, the UK, and Chile—have imposed health-based taxes on sugary drinks and ultra-processed foods to address obesity and lifestyle-related diseases. However, those countries have robust public healthcare systems, subsidize healthier food options, and use revenues to fund health and education programs. In contrast, Pakistan currently lacks such safety nets.
While the long-term health rationale may be valid, the majority of Pakistanis do not have affordable access to healthier alternatives. Increasing prices on accessible, calorie-rich staples like biscuits may push low-income households toward even less nutritious, unregulated options, worsening public health rather than improving it. It's also important to note that biscuits are not ultra-processed foods—they are baked items, commonly consumed as affordable energy sources, especially by lower-income groups.
The formal food sector, which invests heavily in quality control, supply chain integrity, and employment, is placed at a severe disadvantage. A shrinking consumer base and falling sales due to price hikes will reduce profitability and investment capacity, leading to lower tax contributions, job losses, and a potential contraction in industrial activity.
Globally, countries take two main routes when taxing processed foods: health-based taxes in developed countries aim to reduce consumption of specific harmful ingredients (such as the UK's Soft Drink Levy and Hungary's public health tax), while revenue-based taxes in developing economies often prioritize collection over outcomes, lacking a clear link to health policy.
Pakistan's current approach seems to fall in the latter category—revenue-driven without the health infrastructure to support its goals. More concerning is that it targets a sector already under pressure, without introducing complementary policies.
The recent news that the government may remove the sugar FED in FY26 is a positive move. If the government recognizes how harmful this tax is for businesses, jobs, and prices, then it should also reconsider the plan to tax ultra-processed foods.
Pakistan's tax policy needs to balance raising revenue with the country's economic realities. Flat taxes on sugar and processed foods hurt formal businesses, push up prices, make life harder for consumers, and give an unfair edge to the informal sector. Without affordable healthy options in place, these taxes end up doing more harm than good. This isn't the time for quick fixes in the name of health. Pakistan needs smart, targeted policies—not broad, harmful taxes.