Engro hints at closing milk plant in Sukkur as tax policies bite

Development comes as govt refuses to restore zero-rating tax facility for dairy industry

ISLAMABAD: Engro Foods hinted at closing down its Sukkur milk production plant if the government did not change its adverse tax policies, which had adversely affected the company’s profits.

“Our profitability has gone down dramatically after sales volumes plunged 20% for the first time in 10 years due to a sudden spike in tax liabilities,” said Ali Ahmad Khan, Managing Director of Engro Foods, while explaining the plight of the dairy industry.



He was speaking in a meeting of the Senate Standing Committee on Finance that completed its proceedings on tax proposals for 2017-18.

Over the past three years, the dairy industry has experienced constant changes, notably the change in its tax structure that withdrew the facility of refund of taxes paid on input purchase.

On behalf of the Pakistan Dairy Association, the Engro Foods managing director asked the government to restore the zero-rating regime - a tax classification where companies are entitled to the refund of taxes paid on inputs.

Ahmad also demanded that the government should abolish the regulatory duty on the import of skimmed milk being used in tea whiteners.

Net profit of Engro Foods Limited plunged 70% to Rs330.81 million in the quarter ended March 31, 2017 primarily due to a significant decline in sales, according to a bourse filing in April this year.

The dairy company had recorded a profit of Rs1.10 billion in the same quarter last year. Earnings per share dropped to Rs0.43 from Rs1.45 in the corresponding period of last year.

“Sukkur and Sahiwal milk production plants are working below 50% of their capacity,” said the managing director. “Sooner or later, we will be looking at closing one of these two factories.”

He said because of the government’s tax policies, milk products had become expensive and the people had started shifting to unhygienic loose milk. Engro Foods General Manager Corporate Affairs Rehan Saeed Khan told the committee that the company could close down its Sukkur plant and was also considering winding up its 300 milk collection centres that would affect 30,000 farmers.

He went on to say that FrieslandCampina - the Dutch company that recently acquired 51% stake in Engro Foods at a price of $450 million - may also think of winding up due to the unpredictable tax policies.

“Today, the foreign investor is in shock over the changing tax policies,” said Ahmad.

“We know that the dairy sector is in trouble, but we cannot restore the zero-rating facility,” said Federal Board of Revenue (FBR) Chairman Dr Mohammad Irshad.

He, however, promised that the FBR could consider zero-rating facility for one major input, like packaging material. Sources said the FBR had also proposed to grant zero-rating facility on the electricity consumed by the dairy sector, but Finance Secretary Tariq Bajwa and Special Assistant to Finance Minister Tariq Pasha did not agree.

Sales of the dairy sector had been adversely affected by a negative social media campaign and the companies should try to improve its image instead of blaming the tax regime, said Dr Mohammad Iqbal, Member Policy Inland Revenue of the FBR. He argued that the packaged milk was consumed by the affluent class that could afford high prices.

Tax disparity under CPEC

The standing committee recommended that the government should provide equal tax treatment for the domestic industries adversely affected by the special treatment given to China under the Free Trade Agreement and China-Pakistan Economic Corridor (CPEC).

Representatives of cable manufacturers complained during the meeting that their competitive advantage had been eroded by the duty-free imports of cables under CPEC.

“Owing to the preferential treatment under CPEC, we are treated as second-grade citizens in our own country,” said the industry’s representative.



The FBR chairman acknowledged that industries were suffering in the wake of duty-free imports from China under the FTA.

The FBR had pointed out to the Ministry of Commerce that Pakistan did not get anything in return for giving huge tax concessions to China under the FTA, said Iqbal, FBR’s member policy.

Published in The Express Tribune, June 6^th, 2017.

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