The beverage industry needs a stable long-term tax policy to grow

Due to the effects of climate change, the demand for beverage products is expected to increase in the future. Collected

The beverage industry manufactures different types of ready-to-drink products, including bottled water, soft drinks, energy drinks, milk products, coffee and tea-based products, nutritional products, carbonated beverage drinks etc. 

Drinks are especially popular both in urban and rural Bangladesh due to its hot climate. Carbonated beverages are considered a luxury good, however, due to habitual practices, it has almost turned into an essential food item. 

The industry has been growing at a compound annual growth rate (CAGR) of 20% (Bangladesh Beverage Manufacturers Association), reflecting the change in consumer lifestyles, as consumption of food and drinks outside becomes more common. 

According to Statista, the market size of the global carbonated beverage industry in 2023 was about USD 400 billion and the CAGR was 5.3%. In 2024, the market size of carbonated soft drinks in Bangladesh was US$0.9bn, representing 0.27% of the world's carbonated soft drinks. The expected annual growth of the market between 2024-2028 is around 10%. 

The industry's future growth and success depend largely on a favourable regulatory environment as well as proper navigation of the emerging environmental, social and governance issues. The sector has been growing steadily for the last few years, creating employment and establishing several new retail outlets in both rural and urban areas.

There is also massive potential to generate revenue from this sector if allowed to grow in the required manner, while maintaining standard compliance and quality. Due to the effects of climate change, the demand for beverage products is expected to increase in the future. A long-term and consistent tax policy can ensure sustainability and growth. 

According to a technical report on Policy Options for Taxing Sugar-sweetened Beverages in Bangladesh by the World Health Organisation (WHO) in collaboration with Director General of Health Services (DGHS) under the Non-Communicable Disease (NCD) Control Program published in April 2021, consumption of soft drinks was only 2.4 litres per capita per year in 2004 and by 2018 it had increased to 5.6 litres per person per year (a 126% total increase at an annual average rate of 6.1%). 

Such an increase is projected to continue, and per capita consumption is expected to reach 6.4 litres per person per year by 2023. 

The sector has received both local and foreign investment. Although foreign investment is about one-tenth of the total investments, it has facilitated the technology transfer for local companies. The sector is led by international market actor Coca-Cola which pioneered cola drinks in this country. 

Coca-Cola has three different units in Bangladesh: Coca-Cola Bangladesh Ltd (CCBL), International Beverages Private Ltd (IBPL) and Abdul Monem Ltd (AML). According to several sources, Coca-Cola holds around 42% to 45% market share, making them the market leader. The Coca-Cola bottling is done by different franchisees like Pran Dairy (5%) and Abdul Monem Ltd (40%-45%), mostly in the Chattogram, Sylhet, Khulna and Barisal regions.

Among other actors, there is Pepsico represented by Transcom Beverages Ltd, which holds the second position in the market, as well as local soft drinks like Mojo produced by Akij Food & Beverage Ltd with around 9% market share. 

Coca-Cola has created more than 22,000 jobs in the country, including more than 800 direct jobs. Its value-added impact in terms of the sum of all incomes to households, businesses and the government represents about 0.11% of the country's GDP.

The carbonated beverage companies were charged with a minimum tax of 0.60% on their gross income in the past. This was on par with other industries. Recently, however, taxation has become more cumbersome for the industry. The Income Tax Act 2023, effective from 1 July 2023 introduced a minimum tax of 5% on the gross income of carbonated beverage companies under Section 163. 

Subsequently, the rate was brought down to 3% through SRO No. 259—Act/Income Tax—08/2023. The new tax rate marks a minimum tax hike of 400% over the earlier rate. As a result, the carbonated beverage companies have been negatively affected by the hike, affecting the companies' sales, profits, as well as government revenue, in addition to consumer satisfaction.

Even considering the health hazards of carbonated beverages, the policy treatment is quite harsh especially when compared to similar products. Taxes for carbonated beverages are 48.2%, which is higher than tobacco's 45%. There are no taxes for other sugar-based products which have a higher sugar content compared to carbonated drinks. Sweetened products like honey, chocolate and jelly contain 30% sugar content, whereas carbonated beverages have 11% sugar content.

The tax on carbonated beverage products is also the highest in the region compared to India (40%), Nepal (38.43%), Sri Lanka (29.2%) and Bhutan (30%). 

The beverage industry has a high dependency on imported raw materials. Consequently, the industry pays taxes on an import level, a supply stage level as SD+VAT and finally as minimum income tax. To make up for this, the sector had to shift the incidence of the taxes onto the retailer, thus, the maximum retail price (MRP) has gone up beyond the affordability of consumers, resulting in decreased demand and a reduction in government revenues.

An estimation of the revenue drop in the last six months (July 2023-Dec 2023) has shown a shortfall of approximately BDT 100+ crore on a yearly basis. 

This was compounded by the global economic downturn, high inflation, higher supplementary duty in the region, and high raw material costs due to the dollar crisis. If the tax structure can be rationalised then an additional BDT 140 crore can be annually generated from carbonated beverages. 

According to the NBR, the amount of tax collected between July 2022 - June 2023 was BDT 1,482 crore. This figure reduced to BDT 864 crore between July 2023 - March 2024, which is a 41.70% decrease. 

It may be noted that the country's carbonated beverage sector has grown at an average rate of 30-35% per annum in the past years, and the growth has slowed down to 20-25% due to the increased rate of minimum tax and high rates of supplementary duty. 

A downturn in the sector due to higher turnover taxes could lead to job losses, affecting income levels and social stability, particularly for low and middle-income families. The beverage industry is a significant contributor to Bangladesh's economy, offering employment opportunities (3.5 lakh direct and 15 lakh indirect) and contributing to GDP growth. Contrasting tax policy could hamper the industry's ability to invest in expansion and innovation, ultimately slowing economic growth in this sector. 

The beverage industry is interconnected with various other sectors such as agriculture (for raw materials), manufacturing and retail. A downturn in the beverage industry could therefore have a domino effect, impacting these related sectors and further amplifying the negative economic consequences.

Higher duties can make formal market products more expensive, potentially giving rise to a parallel market of smuggled or counterfeit beverages. While the immediate effect of increasing the supplementary duty might appear to increase government revenue, the longer-term impact could be diminished. 

The government can collect an additional BDT 227 crore annually if a rational policy can be initiated with the introduction of a segment-based taxation structure that scales according to sugar content level.

 A long-term tax policy can be chalked out for the sector so that investors can plan for their investments. A Corporate Income Tax of 27.5% instead of a 3% minimum tax on gross sales could be an option. A uniform rate of value-added tax, supplementary duty and rationalisation taxes on imported raw materials could be helpful for the industry sector. 

The rationalisation of the duty structure on carbonated beverages would eventually increase sales and reduce the overall cost of production. As a result, the selling price of the product will be reduced, thereby increasing the demand for soft drinks among consumers, which will in turn increase revenue for the government. 

An acceptable and justified long-term tax policy for the beverage industry sector is much needed to ensure that they can sustain their investment, bring innovation and at the same time satisfy their consumers.

Ferdous Ara Begum is the CEO of Business Initiative Leading Development (Build)

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.