European envoys caution Dar against new taxes

Increased taxes on packaged milk could threaten $500 million investment

ISLAMABAD: In an unprecedented move, two European ambassadors on Friday jointly cautioned Finance Minister Ishaq Dar that the proposed 17% sales tax on inputs of the dairy sector could threaten both the existing as well as planned $500 million foreign investment in the sector.

Ambassador of Switzerland, Marc George and Charge d’affaires, Embassy of Netherlands, Mrs Renate Pors jointly met with Dar to convey their concerns about the proposed changes in dairy sector’s tax structure, according to officials of the Federal Board of Revenue.



The diplomats met Dar just hours before finance minister’s planned departure to the United Kingdom where he would discuss the final budget with Prime Minister Nawaz Sharif in light of the recommendations received from various quarters.

The companies of these countries have direct stakes in Pakistan’s top two dairy firms. A Switzerland company has 61% stake in Nestle Pakistan - the largest market player, and a Dutch company is in the due diligence process to acquire 51% stake in Engro Foods - also a big market player.

In the budget for 2016-17, the government has announced taxing the inputs of the dairy sector at 17% standard rate by withdrawing the zero-rating regime with effect from July 1. It has also proposed to slap additional 25% regulatory duty on imported powdered milk, which will increase overall duty on the product to 45%.

Despite being world’s fourth largest milk producer, Pakistan is still milk deficient country.

The decision to charge 17% sales tax on inputs of milk, butter and other dairy products is being taken to hide the inefficiency of the FBR that has been showing the sector’s about Rs8 billion annual sales tax refunds as part of its revenues.



The change in tax structure will have two striking implications. The Pakistan Dairy Association - the representative body of milk producers - has indicated increasing the packaged milk prices by Rs8 per litre that will affect every household, as the milkman will also increase the price of loose milk.

This will force the consumers to pay extra Rs250 billion in the next fiscal year alone.

Sources said the Dutch charge d’affaires cautioned the finance minister that his country’s company may reverse the decision of investing in Pakistan. FrieslandCampina, one of the leading global companies, is in the process of due diligence to acquire a majority stake in Engro Foods. The estimated cost of this transaction is about $500 million.

The sources said Switzerland ambassador also stressed that the Swiss company may also review its decision to work in Pakistan. Nestle has 61% stake in Nestle Pakistan, followed by 26% stake of Syed Baber Ali family and 10% stake of Sultan Chawla family.

The sources said the finance minister apprised the European diplomats that he was under pressure from various stakeholders to change the tax regime of the dairy sector. Dar promised to review the possibility of giving a relief but did not make a firm commitment.

Over three-dozen parliamentarians have joined hands and were pushing the government to change the tax regime, as the proposed changes would directly benefit them.

The European ambassadors discussed with the finance minister the current investment portfolio as well as future investment plans of Swiss and Netherlands companies in Pakistan, according to an official hand-out issued by the finance ministry.

“The minister assured Marc George and Mrs Renate Pors all possible support to the companies from the Netherlands and Switzerland in setting up their business ventures and investment in Pakistan,” it said.

Published in The Express Tribune, June 11^th, 2016.

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