The main contributors to the 4.

8 percent growth during July-March 2007-08 were beverages

(30.5%).sugar (34.0%), tea blended (10.4%), cigarettes (5.1%).
Production of beverages (weight, 0.28%) declined by 3.7% as the prices of sugar, one of the key
inputs in beverages rose sharply in recent months. (Federal Bureau of Statistics)
http://www.accountancy.com.pk/frameit.asp?link=docs/economic-survey-pakistan-2008-09-
01.pdf

Major items showing decline in production included automobiles (-39.0 percent), electronics
(-31.3 percent), petroleum products (-9.2 percent), food & beverages (-10.5 percent), rubber
products (-4.0 percent), and iron & steel products (-5.6 percent). There was negative growth
all around in all major groups with one or two exceptions. This implies that the large-scale
manufacturing sector is exhibiting signs of moderation since 2004 on the one hand and acute
power shortages along with several other factors like the rising cost of doing business,
demand compression in the export sector, and deteriorating law and order situation in the
country. The negative growth of 20.7 percent in the month of March 2009 may have been
caused due to the massive disruption in economic activity because of the long-march for
almost two weeks. The LSM growth is adversely impacted by a sharp reduction in demand
from both domestic and international factors

Reiterating on the subject of tax concession, he said that the price elasticity of the industry
should be taken advantage of, to increase the tax base by gradual reduction and eventual phase
out of the CED. Siraj explained that the double taxation on the industry, be done away with.

He suggested that a roadmap be chalked out so that the industry be relieved of the dual taxes and
the sector be allowed to operate on the same footing as it does in other countries of the region.

Ahmed Dildar, Chief Sales Tax, Central Board of Revenue, assured the participants that the
government was moving in the direction of introducing Federal taxation. 'Large revenues are
involved and very complicated CED rules have to be simplified.

Slowly and gradually it will take place,' he said. Imran Moid, Chief Financial Officer at
PepsiCola International stated that the industry had experienced phenomenal growth at 30%
increase last year and said that the contribution to the exchequer was Rs 8 billion approx. in tax
revenues whilst Rs 10 billion spend on purchases from Allied Industries was also made.

'The policy in place should be revised with the rationale of reducing taxes to create growth' Moid
stated. The round table discussed that for the industry to be able to operate in a conducive
environment especially in the wake of the WTO and increased imports, the industry must be
made more competitive. 'The government must realise that the soft drink has moved from being
a luxury to being a part of common man's daily life', they said.

'The opportunities that arise with regards to domestic and international investment potential can
be utilised under conducive tax regulations', the stakeholders pointed out.
It was brought up that the elimination of CED on the overall finished product is also necessary
since the cost of raw materials eg soda ash for glass manufacturers and HDPE for plastic bottles
have increased to further impact the price of the cold product.

Joel Riefman, Economic Affairs Counsellor, US Embassy speaking on the taxation issue said,
'Reducing taxes to create growth is a very good argument. Small decreases in price can result in
big increases in sales. The other virtues that could happen would be increases in domestic and
international investment. This would not only lead to an overall increase in financial terms but
also in terms of technologies and methodologies.'

Mumtaz Ali, Former Commerce Secretary and Member, Central Board of Revenue, currently a
tax consultant, gave his assessment saying that the CSD industry was a prime mover for
economic development as it is one of the largest tax payers. He said that the prime movers must
be allowed to grow faster so that the multiplier affect becomes more material and concrete.

Ahsan Jameel, Managing Director, Ecopack Limited stated that the tax policies applicable must
be revised to broaden base and increase GOP revenues.

'The industry recommendation to abolish the CED has been put forward since the past 3-4 years
but the concession yet remains to be granted,' stated Mukhtar Ahmed Qadri, Director Operations,
Pakistan Mineral Water, representing Amrat Cola.

Imran Moid, stated that after tax reduction, Government revenues has the potential to increase by
3 times ie from 7 billion to over Rs 20 billion, approximately.

"A tax reduction in the beverage industry would result in a three fold benefit to the country. It
would lead to a winning situation for all, with the exchequer benefiting in the form of tax
revenue, being driven of increased volume growth, business gain of the players and consumer
gain at individual level," stated Senator Ahmed Ali, Chairman, Senate Standing Committee on
Finance whilst concluding the session.

Talking informally to the participants of the conference, Abdullah Yusuf, Chairman, Central
Board of Revenue said that the most important step towards progress was that policies which are
being formulated are geared in the right direction and although progress might not be very fast
paced but is certain.

The roundtable concluded recommending CED reduction and the players suggested a phase out
roadmap be chalked with details on the impact on GOP revenues.

Government Type: Federal Republic

Government Stability: Unstable

Freedom of Press, Rule of Law, Bureaucracy, Corruption:

Regulation/De-regulation Trends: Though the role of the public sector has been
drastically curtailed as a result of deregulation and privatization policies,
some industries continue to be dominated by state owned enterprises. Some
of these enterprises produce primary raw materials and intermediate inputs
and as a result the inefficiencies of the public sector have an adverse impact
on downstream industries.

Social/Employment Legislation:

Monopoly Legislation: Competition Commission of Pakistan (CCP) was established on 2nd

October, 2007 under the Competition Ordinance, 2007. Major aim of this Ordinance is to
provide for a legal framework to create a business environment based on healthy competition
towards improving economic efficiency, developing competitiveness and protecting consumers
from anti-competitive practices.
Prior to Competition Ordinance, 2007, Pakistan had an anti-monopoly law namely ‘Monopolies
and Restrictive Trade Practices (Control and Prevention) Ordinance’ (MRTPO) 1970. The
Monopoly Control Authority (MCA) was the organization to administer this Law.

Environment Protection Laws: Although, there is an existence of Environment Protection Act

1997, the government is unable to enforce the Environment Protection Laws.

Taxation Policy:

Foreign Trade Regulations:

ECONOMIC:
Business Cycle Stage: Economic downturn this year.

Domestic savings fall well below the desired level of investment; foreign capital has played an
important role in economic growth. In FY03 that the economic growth got momentum when the
real gross domestic product (GDP) grew by 5.10 per cent compared with 3.6 per cent in the
preceding year. The same year (FY03) FDI inflows jumped to $798 million from $485 million
during the previous year. Thenceforth, GDP growth was accompanied by increased FDI inflows.
This relationship continued until FY08, when GDP grew by 5.8 per cent and FDI was registered
at $5.15 billion. In FY09, economic growth shrank to two per cent and FDI decreased by 38 per
cent

Workers are widely regarded as the principal asset of a firm and the capital source of its
competitive advantage. That is why there is so much emphasis in developed countries on human
resource development. In Pakistan however development of human capital has been given a short
shrift, which is responsible for low worker productivity. While making investment decisions,
multinationals take into account both worker productivity and wages. In Pakistan wages are low
but productivity is also low.

Infrastructure, including rail, road and telecommunication network, and price and availability of
utilities also attract or inhibit FDI. Cost of water and power for business consumers is higher
than those in other neighbouring countries like India and China. Infrastructure is also not up to
the mark. Poor infrastructure and high cost of utilities increase the cost of doing business and
make a country a less attractive market for FDI. The electricity shortage, which assumed
dangerous proportions during last couple of years, has also contributed to the decline in FDI
inflows by pushing up the cost of doing business.

Finally, global recession has also contributed to the fall in foreign investment. For last more than
a year, the world’s leading economies, the major source of FDI for Pakistan, are in recession
resulting in capital crunch and reduced investment outflows. The United Nations Conference on
Trade and Development (UNCTAD) reports that global FDI inflows decreased by 21 per cent
during 2008. In case of Pakistan during FY09, FDI inflows from European Union countries went
down by 38 per cent, from the US by 31 per cent, from Japan by 43 per cent, and from Norway
by 63 per cent.

Taxation:
In excise regime, there are six major revenue spinners including cigarettes, beverages, POL
Products, cement and natural gas and special excise duty. Nearly 76% of excise duty
collection (domestic) is expected to be received from these six commodities.

FEDERAL EXCISE (Rs. in Millions)

2008-2009 2008-2009 2009-2010
Budget Revised Budget
1.Beverage 4,144.000 4838.000 5755.000
2.Beverage Concentrate 3,068.000 5,040.000 5996.000

Source: Revenue Receipts – www.finance.gov.pk

Beverages are subject to excise duty at the rate of 12.5 percent and sales tax at the rate of 15
percent on the retail price. (Business Recorder – 2006 – Leading Beverage Makers Audit Starts.)

Report revealed that US investors in Pakistan’s beverage sector, for instance, are targeted
with higher taxes than domestic companies and those from third countries that manufacture
competing beverages such as fruit juices, tea and bottled water. In addition to a 16 percent sales
tax, carbonated soft drinks are subject to double taxation with a 50 percent input tax levied on
soft drink concentrate and a 12 percent tax on finished carbonated soft drink beverages.
Therefore, high duties on machinery and raw materials, which are not available locally, are a
disincentive to companies that want to establish manufacturing facilities.
 POLITICAL ECONOMIC
1. Political instability may affect: the 1. The cost of raw materials e.g. soda ash
ability to acquire of form a strategic for glass manufacturers, HDPE for
business alliance with suppliers, plastic bottles and sugar have increased
activities that make necessary to further impact the price of the cold
infrastructure enhancements to product. Production of beverages
production facilities, distribution (weight, 0.28%) declined by 3.7% as
networks, sales equipment and the prices of sugar, one of the key
technology. inputs in beverages rose sharply in
2. The security measures taken by the recent months. (ESP - 2008-9)
government have increased the cost of
doing business. The anti-terrorism
campaign has caused inefficiency in
allocation of resources, as increasingly
resources have been diverted to security
matters at the expense of economic
development.
3. In addition to a 16 percent sales tax,
carbonated soft drinks are subject to
double taxation with a 50 percent input
tax levied on soft drink concentrate and
a 12 percent tax on finished carbonated
soft drink beverages. (High Taxation –
figures can be double checked)
SOCIAL TECHNOLOGY
1. Practice of “healthy life-styles” has led 1. New Marketing Techniques and E-
to a shift in consumption of Carbonated Commerce
Soft Drinks – switching to bottled 2. Introduction of bottling technology is
water and diet colas. hindered by duties on machinery and
2. High Population Growth Rate . raw materials – not available locally.