Milk, dairy processing industry: zero-rated tax regime must be continued, PDA tells government

Chairman, Pakistan Dairy Association (PDA), Babar Sultan, has expressed fear that the new tax policy regime will increase cost for the milk and dairy processing industry by 7 percent and increase net price of packaged milk by at least Rs 6 (per liter). The 2016-2017 budget's proposed recommendation to grant exemption from Sales Tax will have a negative impact on the dairy sector, he noted.
The new tax policy regime will increase cost of the milk and dairy processing industry by 7 percent and increase net price of packaged milk by at least Rs 6 (per liter). This is because the input taxes paid at the procurement stage have now become un-claimable, thus increasing costs considerably.
"If these costs are passed on to the consumers, a rise in inflation will be observed and simultaneously result in an over 20 percent decrease in the sale of packaged milk. Consumers will, therefore, be pushed to consume unhygienic/adulterated and unprocessed loose milk (with no quality assurance), which still remains completely out of tax net," he added.
Simultaneously, the revenues of the Government coming from the processed dairy industry will also fall substantially. 600,000 farmers engaged in the dairy value chain across the country will have their livelihoods negatively impacted and will notice a decrease in demand for the milk they produce. Most of these farmers are located in Punjab and Sindh.
By eliminating Zero Rating on packaged milk and dairy products, millions of farmers will see their livelihoods decline. Related industries for breeding, feeding and milking equipment will also shrink.
Direct investment in the dairy processing sector will decrease and the quality of milk for consumers will be lower as well as production capacity, discourage corporate dairy farming, and make value chains less efficient while simultaneously increasing rural poverty and decreasing GDP. Consequently, foreign and local investment in dairy farms and the dairy processing sector will suffer which amounted to $700 million over the last five years.
He proposed that government should:
-- Continue zero rating taxation regime
-- Re-transpose dairy products from 8th to 5th schedule of the Sales Tax Act 1990
-- Refund the full amount of outstanding sales tax refunds
A continuation of the Zero Rating regime is a necessary policy decision to sustain continuous growth of the dairy sector and to enhance rural livelihoods.
Pakistan is the third largest producer of milk in the world, with an estimated 40 billion liters of milk produced annually, with the dairy sector contributing 11 percent to Pakistan's GDP. Milk and dairy products account for 22 percent of kitchen expenditure (compared to wheat, which is 12 percent). Milk products also have 7.4 percent weightage in the Consumer Price Index, while wheat is 4.2 percent.
In spite of milk being such an essential commodity, packaged milk is only 6 percent of the total milk consumed in Pakistan. There is ample opportunity in this sector for improvement and growth, to improve the livelihoods of small farmers by strengthening the dairy value chain they are an integral part of and the PDA is entirely committed to the dairy sector and its development.
In order for the industry to expand and be competitive, the dairy sector has to come under the right regulatory fold. Turkey is a good example to learn from as their processed/packaged milk industry grew from 30 percent of the total dairy sector in 2002, to 70 percent in 2012. The Turkish government provides necessary support and assistance in the form of subsidies and enabling taxation regime to the dairy sector - including associated sub-sectors such as breeding, feeding, quality testing, processing and others. Similar scenarios can be observed in developing economies such as Sri Lanka, Egypt and India.