Dairy products: FBR mulling replacing ST zero-rating with ST exemption

The Federal Board of Revenue (FBR) is planning to replace present sales tax zero-rating with sales tax exemption on the supply of dairy products in the coming budget (2015-16). Sources said on Monday that under SRO 670(1)/2013, finished goods and input materials of dairy, stationery and bicycle industry were zero-rated subject to specific conditions.
In budget (2015-16), the facility to be continued by incorporating the items in the Fifth Schedule to the Sales Tax Act, 1990 and the conditions, limitations and restrictions transposed into the new Chapter XIV of the Sales Tax Special Procedure Rules, 2007. Ministry of National Food Security & Research has expressed serious concern over the replacement of sales tax zero-rating with sales tax exemption on the dairy products in budget (2015-16). According to the Ministry, Pakistan is one of the leading milk producing country with estimated annual production to the tune of 51.0 million tons. Despite having huge domestic milk production, presently less than 5 percent of the total milk produced in the country is being processed at 25 milk processing plants producing approximately 2.5 million tons of processed milk and mill products annually. Higher frequency of milk collection due to inadequate chilling facilities, inefficient processing and costly packaging and distribution are the key limiting factors to consumption of processed milk and milk products in the country. The domestic demand, diversification of dairy products and export avenues provides good opportunities for investment in dairy sector. The private/ corporate sector has realised the potential of the sector and made significant investments. The private sector's investment has resulted in significant increase in domestic milk production.
The corporate dairy sector has approached this Ministry and informed that, FBR is planning to exempt the supply of milk and milk products from sales tax. Currently, the supply of milk and milk products is zero rated under the sales tax regime and the sales tax paid by the companies involved in supplies of milk and its related products at the time of purchase is claimed as input sales tax refund.
Ministry has examined the case and observed that, if the existing exemption facility on tile supply of milk and milk products will be withdrawn, its likely implication will affect both the milk processors and the dairy farms supplying the raw milk to these processors. The milk processors will compensate the increase in cost of production by reducing the price of the milk procured from dairy farms. Likely the cost of production at dairy farm level will increase and their profit margins will drop due to decrease in milk price by the milk processors. In the light of above situation and to encourage and promote the dairy sector, Ministry is of the view that, the existing exemption facility on the supply of milk and milk products may not be withdrawn, if it is under consideration for aforementioned exemption, it added.