Well-intentioned, poorly timed: The risks behind proposed 5% FED on ultra-processed foods

Syed Waqas Ali Kazmi

As Pakistan approaches the federal budget announcement for FY2025–26, policymakers are expected to introduce a 5% Federal Excise Duty (FED) on ultra-processed foods.

This follows the Rs.15/kg FED on sugar introduced earlier. Framed as public health interventions, these taxes are intended to discourage unhealthy consumption habits.

But a closer look reveals fundamental problems in both timing and design and problems that may ultimately weaken the very sectors that uphold safety, employment, and tax compliance.

A Heavy Burden on the Formal Economy

While the policy’s stated goal is health reform, its practical effect has been to squeeze formal, tax-paying businesses.

The informal sector which operates outside the reach of taxation and safety regulations remains largely untouched.

By imposing blanket duties, the government is effectively increasing the cost of doing business for the regulated sector.

Legitimate companies are forced to pass these additional costs on to consumers, while unregulated competitors retain an unfair pricing advantage.

Instead of leveling the field or promoting reformulation, this creates the opposite effect: formal players struggle, while informal vendors grow.

Consumers Face Higher Prices With No Better Alternatives

With inflation already running high, any further increase in retail food prices will hit consumers particularly low-income households.

These products offer the only accessible and affordable way to meet basic dietary needs, especially in areas with limited access to fresh or diverse food options.

Most of these products are regulated, labeled, and fortified, ensuring a minimum level of safety and nutrition.

When taxes drive up their prices, consumers are likely to reduce consumption or switch to cheaper, informal products that lack nutritional oversight.

This undermines the policy’s health objectives and increases public exposure to unsafe, low-quality alternatives.

No Infrastructure for Health-Driven Taxes

Unlike countries where food taxes have successfully contributed to better public health outcomes, Pakistan lacks the necessary support systems.

There are no national awareness campaigns, no mandatory front-of-pack labeling laws, and no meaningful subsidies for healthier alternatives.

This absence of infrastructure makes the current policy resemble a revenue-collection exercise more than a genuine reform effort.

Without regulatory mechanisms, incentives, or education in place, taxes alone are unlikely to shift consumption patterns or improve dietary behavior.

More Pressure on a Sector Already Under Strain

Pakistan’s formal food industry is already grappling with high utility costs, currency volatility, and shrinking consumer demand.

Adding another tax layer risks weakening the sector’s viability. This doesn’t just mean reduced margins — it could lead to:

• Lower production capacity
• Factory closures
• Job losses across supply chains
• Declining investments in food innovation
• Further setbacks to export ambitions

At a time when Pakistan urgently needs to boost formal employment and foreign exchange earnings, undermining one of its most structured consumer industries seems counterintuitive.

What Should Be Done Instead?

Rather than defaulting to flat taxation, there should be explored more targeted, reform-oriented solutions:

• Incentivize product reformulation to reduce added sugars, sodium, and trans fats.
• Strengthen oversight and taxation of the informal sector, ensuring fair competition.
• Invest in public nutrition education to encourage informed choices.
• Support access to affordable healthy alternatives, especially in underserved regions.

A policy rooted in long-term public health improvement must go beyond tax collection it needs structure, support, and behavioral strategy.

What’s at stake here isn’t just the cost of chips or cookies it’s the broader question of how Pakistan governs its food economy.

Tax policies must reflect real-world constraints: inflation, inequality, and the dual structure of formal and informal markets. Well-intentioned reforms that ignore these realities risk backfiring.

If the goal is better health outcomes, stronger industries, and more sustainable revenue, then the path forward lies in strategic reform, not blunt instruments.

The writer is Director Strategy at a leading communications firm, specializing in strategic planning and policy advocacy. He can be reached at syedwakkas@gmail.com.