The post-budget press conference declared that the objective of the finance bill was elimination of exemptions, not revenue generation. Yet, the poultry industry is up in arms, claiming that taxes and levies proposed in the money bill will have a snowball effect on consumer prices, which have already witnessed an upward pressure over the past year.

To help answer what’s really going on, BR Research met with Khalil Sattar, founder and CEO of K&N’s, a fully vertically integrated poultry enterprise. Formed in 1964 by Sattar, K&N’s success has been featured in a Harvard Business School case study. Beyond K&N’s, Sattar has also been extensively involved in efforts for industry’s promotion, and is considered a pioneer. He has also served as a consultant for FAO in Pakistan.

Sattar is also the Chairman of Pakistan Poultry Association (PPA), the representative trade body of all segments in the poultry value chain. He helps unpack the measures proposed in the supplementary finance bill, explaining the price impact hidden behind HS codes and PCT headings. Below are the edited excerpts from the conversation:

BR Research (BRR): Finance Minister has reportedly said that the money bill seeks to withdraw tax exemptions that primarily benefit the country’s elite, and will not place undue burden on the common man.

Are poultry industry’s protestations justified if prices of essential kitchen commodities will remain insulated?

Khalil Sattar (KS): Finance ministry’s claims that the ‘mini-budget’ is not inflationary and protects the common man against rise in food prices. This is an eyewash.

The Finance (Supplementary) Bill, 2021 proposes imposition of a flurry of new taxes on poultry industry’s inputs. These proposed measures will affect most inputs from vaccines to micronutrients such as vitamins, enzymes, grandparent stock, and feed inputs such as meals and oil cakes, to name a few!

Seventeen percent GST has been proposed on a list of 50+ items at import stage, which were previously either sales tax exempt or faced lower tax. This is in addition to custom duty, additional CD, and regulatory duty that is already applicable on many imported items. Total tax impact on many of these inputs will now range between 22 – 32 percent!

What impact pray tells will these measures have on final prices of poultry products? Remember, poultry products are the cheapest source of protein for ordinary Pakistanis in terms of nutrition value per rupee!

BRR: Compared to past governments, the current administration has made alleviation of hunger and poverty its top priority agenda. Is there not just cause to believe that measures will be taken to protect bottom quintile of the population from any resultant price increase of food products?

KS: According to World Food Programme, 60 percent of Pakistan’s population is facing food insecurity, while 44 percent of children are chronically malnourished. Poultry products – eggs and meat – are the most economical way to fill the protein gap in average Pakistani’s diet.

The country needs to raise production of poultry rapidly at low input cost, in line with the prime minister’s vision to eradicate stunting and wasting, laid out in his inaugural speech 3.5 years ago. The proposed measures go against the very grain of PM’s vision to fight food insecurity and malnourishment. If fighting food insecurity is truly on federal government’s agenda, it appears to have been misled on the likely impact proposed budgetary measures shall have on food prices.

BRR: Which proposals specifically shall have the most drastic effect on prices of poultry products?

KS: Let me offer few examples. Prior to the proposed bill, a grandparent day old chick - that currently costs $54 C&F - attracted three percent custom duty and two percent additional custom duty - a tax impact of Rs 486 per chick. Proposed imposition of 17 percent GST would cost an additional Rs 1,735. Total tax impact of GST and custom duties would rise to Rs 2,221 per grandparent chick.

It must be emphasized that without grandparent stock, domestic poultry production cannot take place. Furthermore, the increase in levy will raise the cost of Day-Old Parent stock chicks as well!

BRR: What would be the per unit price impact of additional levy on feed inputs and vaccines? Will it have a far more substantive impact than GST on grandparent stock?

KS: Currently, average local market price of poultry feed is about Rs 86,200 per ton. Of this, imported components constitute 60 percent of the total cost of feed. These imported components include many micro- and macro- ingredients, from soybean-, sunflower-, and canola meals, to vaccines, vitamins, enzymes, essential amino acids, and dietary supplements.

At present, duties and taxes on imported raw materials amount to Rs 8,000 per ton. Now, the money bill proposes to impose a uniform GST rate of 17 percent on raw materials for poultry feed, which would rase the taxes on feed input alone by additional Rs 900 per ton.

Similarly, the mini-budget also proposes to withdraw sales tax exemption on vaccines for live birds. Currently, average cost of medicines and vaccines per bird is roughly Rs 475, which would increase to Rs 560 if the proposed measures are implemented.

The rise in cost of inputs – whether it is through additional taxes on grandparent stock, vaccines, or feed inputs - will have a snowball effect across the poultry value chain, which will sooner or later culminate into rise in prices for the end consumer. The inflationary impact of the proposed measures is a matter of ‘when’ not ‘if’.

BRR: The proposed levies seem to impact the entire poultry value chain, not just players in the formal sector. Why then does the industry claim that proposed measures shall disincentivize formalization?

KS: If the current administration is truly committed to the cause of fighting malnourishment, it must help promote formalization in the industry, not disincentivize it. For example, the money bill proposes 17 percent sales tax on incubators, which optimize production of day-old chicks. Similarly, all other poultry and feed milling machinery and equipment – such as automatic feeders and drinkers – will now face higher tax on machinery import.

These draconian measures will have many adverse consequences. First, they will disincentivize modernization of plant and machinery by raising the initial investment outlay. It may not shut down the industry altogether, but small- and mid-scale farmers may find themselves less inclined to invest in ‘controlled sheds’ for example, and instead go for open houses. In turn, this may hurt their productivity, as open houses do not achieve the same results. Moreover, poultry farmers may no longer be able to control spread of disease in the same way as before. If the incidence of disease rises, bird flocks will have to be culled, eventually raising price for the final consumer.

More importantly, unlike other industries poultry farmers will not be entitled to input adjustment on machinery imports, as the output (eggs, and meat) are sales tax exempt.

The administration claims that the objective of the money bill is not revenue generation, but to increase documentation. It won’t achieve much in the name of documentation either, considering the proposed measures primarily target players that are already documented. Smaller players will be pushed back into the unorganized sector, raising the incidence of underreporting.

BRR: The rise in taxes on import stage shall raise cost of inputs for both unorganized and organized segment. Why then is the formal sector particularly at a disadvantage?

KS: The proposal to levy 17 percent GST on processed chicken meat, packed and branded products will direct benefit the unorganized and undocumented sector. Currently, formal sector players are at a disadvantage in pricing compared to the meat sold in the wet market.

The sum total of all overheads borne by formal players is anywhere between Rs 20 – 40 per kg. In contrast, the street-side slaughterhouses/wet market bears no more than Rs 4 per kg in terms of overheads.

Evidently, the cause of converting consumers to safe and healthy meat products is at a major disadvantage in terms of price competitiveness. If the proposal to impose 17 percent GST on final price of processed and branded products goes through, the price differential shall expand – further pushing consumers back to wet market sellers, which sell unhygienic, disease prone, poor-quality meat.

BRR: Which specific recommendations in your opinion must be incorporated in the bill currently tabled in the parliament?

KS: Poultry products are part of essential commodities list, and thus the final price borne by consumer is GST exempt. This means that poultry processors cannot seek input tax adjustment against output tax. Previously, processors in the dairy sector also faced a similar tax anomaly, which was removed through the federal budget 2021-22.

Just like dairy, poultry industry also offers a low-hanging opportunity to help fight malnourishment and hunger, and to close the protein gap for Pakistan’s growing population. Increasing formalization in the poultry industry should be top of the agenda for the prime minister’s office, which shall help achieve price stability and increase access to safe, hygienic, and disease-free food for the general consumers.

To this end, we recommend that proposal to raise import-stage taxes on various inputs of poultry industry such as grandparent day old chicks, fertilize (hatching) eggs, feed inputs, vaccines, and machinery imports be withdrawn immediately. Moreover, the proposed levy on packed and branded chicken meat must also be withdrawn to promote formalization in the industry.