Budget 2015-16: Govt to drop ‘white bomb’ in next budget

Milk consumers to bear the brunt of change in dairy tax structure


Shahbaz Rana May 31, 2015
PHOTO: REUTERS

ISLAMABAD: The government may change the tax structure of the dairy sector for just Rs8 billion in revenue but the move would force consumers to pay an extra Rs280 billion next year that will go into the pockets of owners of milk processing units and milkmen.

It has also proposed to increase the tax incidence on income earned from dividends and interest by one-fourth to 12.5% for those who file income tax returns and by 16% to 17.5% for those who don’t file the returns, said sources.



To plug a lacuna exploited by the mutual funds, the government is also proposing to charge a flat rate of 25% on shares and dividends issued by the mutual funds. According to another proposal, the government is going to tax the sales of Pakistan Mercantile Exchange (PMEX) at 0.1% of the total turnover. The PMEX deals in gold, silver, commodities and crude oil.

All the proposals are part of the 2015-16 budget, which the government will unveil on Friday.

Dairy sector

Sources said the federal government has proposed to abolish zero-rating facility to the dairy sector under which the milk producers were entitled to claim refunds that they pay while procuring inputs.

The government is planning to recommend to parliament that it grant tax exemption status to the dairy industry, which will result in the discontinuation of tax refunds facility and will hike per litre milk price by Rs7, said sources in the finance and revenue ministry.

The Federal Board of Revenue (FBR) will earn Rs8 billion tax in the process.

This has been done on the behest of the largest market players that had initially proposed the changes in the tax structure to avoid dealing with the FBR.



The FBR is withholding Rs11 billion refunds of the dairy industry of the last two years that the sector paid at input stage but the FBR never refunded the amount.

The move to change the tax structure of the dairy sector would be tantamount to punishing the milk consumers for the inefficiencies of the FBR that is using refunds to inflate its revenues.

The FBR owes over Rs5 billion to Nestle Pakistan, around Rs3.5 billion to Engro Foods, Rs1 billion to Haleeb Foods and Rs1 billion to other players, according to figures provided by the dairy industry.

The industry pays 17% sales tax on raw material and packaging materials and another 27% on freight and energy costs. The FBR subsequently refunds this amount to the dairy sector producers that ranges between Rs5 billion and Rs8 billion annually.

The Rs7 per litre increase in prices of packaged milk would also give milkmen an excuse to increase prices of their unprocessed milk. Pakistan, the world’s fourth largest milk producer, produces nearly 51 billion litres of milk annually.

Only 6% of this milk is processed. The annual milk consumption is estimated at 41 billion litres and 39.5 billion is in the informal sector. As a result of the change, the processed milk industry will gain advantage of Rs10 billion while the informal sector will reap benefits of Rs270 billion.

Fresh milk constitutes roughly 7% of the total consumer price index (CPI) basket and any change in milk prices would fuel inflation.

“Pakistan Dairy Association and Nestle Pakistan are in favour of continuation of zero-rating facility,” said Nestle Pakistan’s head of corporate affairs Waqar Ahmad.

Withholding tax

Sources said the FBR has proposed to increase withholding tax rates on income earned by individuals from dividends and profit on debt. At present, the government charges 10% tax on dividend income from return filers that is proposed to be increased to 12.5%. For non-filers, the new proposed rate is 17.5% -- up from 15%.

There are persons who are earning up to Rs4 billion annually in dividend and interest incomes that must be taxed at reasonable rates, said the FBR officials.

In an effort to plug a loophole, the government has decided to charge a flat rate on dividend income and shares issued by the mutual funds, sources said.

At present, the dividends issued by mutual funds are charged at 25% but in order to avoid taxes, they redeem their units and pay only 12.5% Capital Gains Tax.

Published in The Express Tribune, June 1st, 2015. 

COMMENTS (3)

Hussain | 8 years ago | Reply FBR is corrupt because of wasted interest of the politician, establishment, businessmen’s and even common men taking one pretex or another to mint money, benefits because of unaccountabliity, lose and lopsided tax collection system. As evident through media every day corruptions are advertised and supresed by exposure of another corruption other day, there is no outcome of any such exposed corruption.
asim | 8 years ago | Reply FBR is the most corrupt department; Only two industries Telecom and Power (electricity) can generate 3000-5000 billion RS tax. But corruption among 20,000 FBR employees is rampant. A revolutionary citizens committee (Not the corrupt courts) should audit the assets of all FBR employees.
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