The central theme of proposed federal budget for FY20 is documentation; and that’s not merely lip service. Actual changes in tax laws have indeed been proposed for effective documentation FY20 onward. Kudos for that! But one of the measures proposed in this budget goes against that theme.
The proposed finance bill seeks to remove the sales tax exemption currently available to packaged meat “if sold in retail packing with brand name”. The government’s premise: that “consumers of these goods can bear the burden of taxes.” If this change goes through, packaged meat – for example sausages, meat and similar products of prepared frozen or meat offal including poultry, meat and fish – will be pricier by 17 percent – which are the general sales tax rate.
The government is right in its understanding that consumers of these goods can bear the burden of taxes. Most of those who currently demand packaged meat can better afford such price increases. But among those who do not currently demand packaged meat sold under a brand name are two major types of consumers.
There are those who prefer the flesh and blood of the wet market, where chicken is slaughtered live and dropped to die in that stinking blue drum that hasn’t been washed for ages. And there are those who would like to eat hygienic packaged meat but cannot afford to purchase them because they already find it slightly expensive than what’s available at the butcher shop.
The proposed withdrawal of sales tax exemption from this segment will make packaged meat more expensive, and further discourage the latter category of consumers to buy from the formal branded sector instead of the unhygienic corner shop with flies buzzing all around.
Recall that cost of packaged meat – red or white – is many times over and above the costs of the corner shop that operates in the informal unregulated sector. This is because everything that the packaged meat player is better regulated; they pay taxes for feed and medicine at import stage; hire competent manpower such as veterinarians with heavy salaries; and they have to have cold storage, power supply, hygiene operational floor from production premises to the retailer. A packaged poultry player, for instance is competing with the person sitting on the sidewalk, who has a few knives and a drum, gets a ‘kunda,’ pays some money to local law enforcers.
The government is already not getting revenue from the agriculture sector; the value chain happily hides in the fog of informality. Instead of discouraging branded formal sector meat players, the government needs to promote formalization and value addition. It will not only result in additional tax revenues but also increase the yield of agriculture produce, and create a demand for health experts, agriculture credit, and so forth.
Growth of branded meat market within Pakistan will also help these players to increase economies of scale, lower their average production costs, experiment with value added products, and thereafter sell the same outside Pakistan.
The removal of exemptions is necessary. But all exemptions are not created equal. In a sector, where formal sector (branded meat industry) is no more than 5 percent of total market size (where packaged meat can be imported from China and Malaysia duty free under FTA); and the market is somewhat price sensitive, the removal of exemptions from domestic frozen meat will further distort the competition landscape in favour of the informal sector. This distortion needs to be addressed.
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