Under the zero rating, the dairy producer can claim refunds on input costs; an option that will no longer be available to milk producers if dairy is exempted from GST. PHOTO: FILE
With the government likely to exempt dairy products from the general sales tax (GST) by withdrawing the current Zero Rating regime, the dairy industry warns of the negative impact this policy shift can bring about.
The consequences will include a price hike, low tax collection and a dent on farmers’ income, they warn.
The continuation of the Zero Rating regime is a necessary policy decision to sustain continuous growth of the dairy sector and to enhance rural livelihoods, but doing otherwise will have a negative impact on the dairy sector, states a policy document prepared by the Pakistan Dairy Association – the dairy sector’s representative body.
The PDA’s policy document – already shared with all stakeholders including the government – comes in response to the budget proposal 2014-2015, which recommends withdrawing zero rating from the dairy sector and exempting it from GST.
Exempting dairy products – such as milk, which is an essential food – from GST or taxing it at zero rating may look similar but they are not.
Under the zero rating, the dairy producer can claim refunds on input costs; an option that will no longer be available to milk producers if dairy is exempted from GST. However, consumers pay zero tax on milk purchases in either case.
“The new tax policy regime will increase costs for the milk processing industry by 7% and impact the net price by at least Rs5 per litre for packaged milk,” PDA document said, explaining the rationale behind seeking support for the continuation of the Zero Rating regime.
If dairy is exempted from GST, the dairy companies will not be able to reclaim input taxes paid at the procurement stage, resulting in a considerable increase in costs, said the document. As a result, consumers would be forced to consume unprocessed milk, which doesn’t ensure any quality control.
“If these costs are passed on to the consumer, a rise in inflation will be observed and simultaneously result in an over 20% decrease in the sale of packaged milk,” the document claims. This will translate into a substantial fall in tax revenues for the government.
It is relevant to mention here that only the formal dairy sector pays taxes, about Rs3 billion on their income, while unprocessed loose milk – that is more than 90% of the milk market – remains completely out of the tax net.
Besides a price hike and lower tax revenues, the document states that the proposed change in the policy regime will affect dairy farmers and discourage investment in the sector.
Any reduction in the sale of processed milk will notice a decrease in demand for the milk produced by 600,000 farmers – about 97% of whom are small farmers – mainly across Sindh and the Punjab, the PDA said. Their livelihoods will be impacted negatively, it added.
Likewise, the foreign and local investment in dairy farms and the dairy processing sector will suffer in the long term – the dairy sector has attracted $700 million investment over the last five years, according to the PDA.
Published in The Express Tribune, May 21st, 2014.
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Not a single nation in the World tax's milk ..l would stay away from creative models to tax instead bring the stolen wealth back to Pakistan ..
As usual no once wants to pay any tax. Soon there will be a quarter page ad on newspaper, from Dairy Industry, warning the government of imminent collapse of the dairy sector just as Automobile, Textile, Sugar etc etc sector do all along.