PML-N’s last budget unlikely to offer comfort to business sectors

Officials say government in no mood to provide any significant relief to pharmaceutical, poultry, stationery etc

ISLAMABAD: The fifth budget of the PML-N government would not offer much solace to sectors that have been badly affected due to the constant tinkering with tax laws in the last four years, barring the dairy sector that may be offered sales tax refund on electricity consumed in production.

However, input adjustment on electricity consumed by the dairy sector would not be that sufficient, which could address the major concerns of the dairy players including new foreign entrant - FrieslandCampina.



Officials in the Federal Board of Revenue (FBR) said that the government was not in the mood to provide any significant relief to pharmaceuticals, poultry, dairy, agriculture, stationery, meat, and pesticides sectors.

The tax policies for all these sectors have remained subject to changes either in one or even more than one out of the four budgets that Finance Minister Ishaq Dar has so far presented in the Parliament.

This shows inconsistency in economic policies and the FBR’s over reliance on sectors that have been paying taxes. However, the real affected people are the consumers who are paying higher prices to buy these goods.

The stage has come where investors have put on hold their future plans due to inconsistent taxation policies, as revealed in a latest Business Confidence Survey of Overseas Investors Chamber of Commerce and Industry (OICCI).

The fifth budget of the PML-N government will put to test, for the last time, its claim of a pro-business government after its earlier four budgets have disappointed even the formal sectors of Pakistan’s economy due to constant tinkering with tax laws.

The corporate sector has started crumbling under heavy taxation. FrieslandCampina, the Dutch company, acquired 51% stake in one of the largest food companies, Engro Foods, last year at a price tag of roughly $450 million.

However, largely because of changes in tax laws and growing regulatory burden, Engro Foods’ profit for January-March quarter of this year dropped to Rs330.8 million as against Rs1.1 billion that the company earned in the first quarter of 2016, according to the company’s unaudited financial statement.

In the first quarter of this year, the company’s sales plunged to Rs8.8 billion as against Rs11.7 billion in the same period of previous year.

In its previous three budgets, the federal government had imposed sales tax and regulatory duties on various dairy products, which the industry is now demanding to be withdrawn from the next fiscal year.

The dairy sector is demanding restoration of zero-rating regime and withdrawal of 10% sales tax on milk products. Under the zero-rating regime, if a tax is paid on inputs used in manufacturing of goods, the manufacturer can subsequently reclaim the amount. This is different from the exemption status where the tax paid on inputs cannot be refunded.

Through Finance Acts of 2015-16 and 2016-17,  the government imposed 10% sales tax on concentrated powder milk, cream, yogurt, cheese, butter, whey whilst UHT and Fat Filled milk.

However, the officials said that it is highly unlikely that the government will again give the zero-rating sales tax regime to the sector. The only concession it is going to give is to allow input adjustment on the electricity consumed by the sector, which would provide only Rs1.5 billion relief to the entire sector.

Earlier, the FBR was also thinking to impose 10% sales tax on tea whitener, which it may not do now due to the constant hue and cry made by the dairy sector.

Same is the case with other sectors. Dar held separate meetings with delegations of Pakistan Poultry Association and Pakistan Kisan Ittehad to listen to their grievances.

The poultry association is also demanding zero-rating tax regime. In the previous budget, the government imposed 10% sales tax on the ingredients of the poultry feed. The sector representatives also demanded withdrawal of taxes on soybean oil but it is highly unlikely that they will get anything.

According to the International Budget Partnership (IBP), an international network dedicated to making public finance systems worldwide more transparent and accountable, public does not have input in the budget process.

Representatives of the farming community demanded the government to withdraw sales tax on fertilisers and in return they were ready to surrender right on subsidies. The finance minister heard their case but did not commit anything.  In the previous budget, the government had also imposed sales tax on input of pesticides that the sector players are demanding to be withdrawn.

The case of taxation of the education is even more interesting. In the previous budget, the FBR had abolished zero-rating regime for the stationery items and started charging taxes on these goods. It was the second change in two years.

After a hue and cry made by the parliamentarians and the manufacturers and consumers of education products, Dar had restored the zero-rating facility for the sector in his 2013 budget wind-up speech. But the facility was again withdrawn in the previous budget.



Since inputs make up about 80% of production cost of writing instruments, while the rest of the 20% is incurred on labour and other expenses, prices are highly sensitive to the taxation changes. Due to these constant changes local stationery sector has become uncompetitive as compared to the imported goods.

The proposal to restore the zero-rating for stationery is under consideration and it is not clear whether the finance minister would like to spare the education sector from his taxation measures.

The pharmaceutical sector is another one that is highly regulated, although the OICCI has even demanded zero-rating status for the pharmaceutical sector. All pharmaceuticals products are subject to sales tax on inputs.

Published in The Express Tribune, May 23^rd, 2017.

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