CCP against levying capacity tax

ISLAMABAD: The Competition Commission of Pakistan (CCP) has issued a policy note to the government against imposition of ‘capacity tax’ on beverage industry, terming it discriminatory for the small and local industry.

The commission noted that the levy based on installed capacity results in imposition of a fixed tax on manufacturing units, but the level of actual production can vary, thus the tax discriminates against smaller manufacturers, and also results in a number of competition concerns.

CCP acting chairman Dr Joseph Wilson took notice of concerns by the beverages industry on imposition of Federal Excise Duty (FED) and Sales Tax on production/installed capacity instead of actual sales.

The tax imposed through SRO No. 649(I)/2013 (July 9, 2013), said that factories having foreign or mix of foreign and local origin filling machines have to pay Rs4.70 million, factories exclusively having local origin filling machines to pay Rs3.76m and factories having filling machines with less than 40 filling valves have to pay Rs1.175m.

Expressing concern over the fallout of the tax, the CCP traced the historic perspective of capacity tax, which was introduced in the first Nawaz Sharif-led government in 1991.

However, the following government withdrew it in 1994 on the grounds that it had become a major reason for bankruptcy and closure of many local beverages, as around 15 local beverage plants had ceased operations.

The CCP noted 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 utilisation (up to 80-100pc).

On the other hand, small manufacturers who have less demand in the market and are producing less than half of its production capacity will also have to pay the same fixed rate of tax.

“The fixed rate of tax would indirectly reduce tax burden of large manufacturers and shift it towards small manufacturers,” the CCP said.

“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.”

The CCP noted that the division of manufacturers into different categories was also unreasonable, as the tax slab jumps from Rs1.17m to Rs3.7m 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,” the CCP added.

Besides, the CCP has highlighted that 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 utilised below full capacity.

“It will 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 that is economies of scale.”

“But once the smaller manufacturers are driven out of the market, competition will be reduced for big players.”

This would eventually have a negative impact on national economy and limit choices for consumers.