Unfattening the milk industry

For its third straight year, we are told that the government is planning to levy more taxes on the dairy sector and this time, the target product will be tea whitener. Faced with revenue shortfalls, tax authorities have proposed to slap a ten per cent sales tax on tea whitener from fiscal year 2017-18. The Pakistan Dairy Association, which represents the documented dairy sector in Pakistan, has protested this move and said that the tax-paying industry continues to be taxed while the undocumented segment of the dairy industry is not brought into the net.

If the Federal Board of Revenue’s (FBR) proposal passes through, it will be the third straight year when the PML-N government brings any kind of change in the taxation regime of the dairy sector. In its last two budgets, the government imposed sales tax and regulatory duties on various dairy products. It may be recalled that in 2006, the then government had declared the dairy sector a zero-rating regime where any tax paid by the sector was refundable. However, after coming into power, the PML-N government used the refunds to inflate its revenues and resultantly, an amount of Rs20 billion of the dairy sector was blocked.

The solution the FBR found was the withdrawal of zero-rating regime and imposing 10% sales tax on milk products. Through Finance Acts of 2015-16 and 2016-17, sales tax zero rating status had been abolished. The government imposed 10% sales tax on concentrated powder milk, cream, yoghurt, cheese, butter, UHT and fat filled milk. Now tea whitener will be added to this list.

The Pakistan Dairy Association has said the removal of a zero-rated tax policy drastically increased costs of the milk processing industry, which eventually results in the increasing trend of prices of packaged milk and milk-based products. This affects the middle class population. The other issue is that of consistency of policies. By reverting to short-term measures to gain revenues, the government is affecting the long-term prospects of the milk industry, which is already at a disadvantage because the undocumented sector remains out of the tax net and is able to offer a cheaper alternative to the public at a time of rising consumer prices.

Published in The Express Tribune, April 24^th, 2017.

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