ST zero-rating facility for dairy sector: Hafeez agrees to look into matter of restoration

Adviser to the Prime Minister on Finance and Revenue Dr Abdul Hafeez Shaikh has agreed to look into the policy matter of restoration of sales tax zero-rating facility for the dairy sector in the upcoming budget (2020-2021).

Adviser to the Prime Minister on Finance and Revenue Dr Abdul Hafeez Shaikh chaired a meeting here at the Finance Division with the members of the Pakistan Dairy Association via video link, here on Thursday.

Sources told Business Recorder that the tax authorities of the Federal Board of Revenue (FBR) has asked the dairy sector to submit the examples of other countries and practices in different tax jurisdictions for reconsidering the proposal of restoring zero-rated facility for the dairy sector.

Responding to this, industry informed the FBR that the developed economies such as the UK and Australia have zero-rating sales tax regimes for dairy products.

Hafeez Shaikh conveyed to the dairy sector that the government is fully committed to support the dairy sector and need to analyze the pre-Covid and post-Covid industry data by the concerned departments/ministries.

The representatives of the dairy association discussed with the adviser the issues the industry has been facing in the recent years, and put forth suggestions that could help the industry flourish and expand its base in the near future.

They particularly requested the relief in taxation matters, which could make the industry more compatible with the informal sector.

The adviser said that he is aware of the importance of the industry and the foremost objective of the current government is to support businesses and provide employment.

The adviser directed that a special committee may be formed under the chairmanship of secretary Finance with representatives from the FBR and the dairy industry.

This committee shall give its report within a fortnight week and will provide information/data regarding the profit and loss situation of the dairy business across the country, the current rate of utilization of its full capacity and future possibilities of growth, the cost of relief requested for the government, the overall implications of the relief measures for the industry's growth, institutional arrangements that could help in the discharge of their liabilities any other factors that should be considered.

The adviser said that the government shall consider the requests of the dairy association with an open mind after reviewing all the facts and related data that could help in taking the best decision in favor of the economy and well being of the people.

The Pakistan Dairy Association proposed that the zero tax rating (removed in 2017) to be re-instated for all dairy products with immediate effect in order to keep the prices of finished products competitive and in the reach of consumers.

Secondly, the government should reduce or waive all duties on the import of powder milk, and raw materials necessary to produce packaging material.

The government should invest and waive duties to widen the infrastructure for milk collection at the farmer's level.

The government should take measures taken quickly, it will not only save the spread of the pandemic, but will also provide safe and nutritional milk to the common man.

Industry informed the Finance Ministry and the FBR that all dairy companies sales are down, profitability is going into negative zone and production capacity is decreasing. The basic principles of indirect taxation not being followed and tax burden shifted upon businesses, sales tax has become major consideration for investment.

The demand for processed milk is highly elastic due to availability of low-priced loose milk.

Un-adjustable Input Sales tax causes double whammy - lower sales and lower profit margins.

The decline in sales and profits of processed milk industry: Sales have declined by more than 30 percent and profits have declined by more than 80 percent over last three years.

If these things are facts, the government is ready to look into the issue of restoring zero-rating facility.

It has been decided to form a committee to analyze the industry data.

If things are verified, the government would be very happy to look into the issue of restoration of zero-rating facility for the dairy sector in budget (2020-2021).

Industry informed the meeting that adulteration of loose milk is not safe for human consumption in Pakistan. (Milk is a source of nutrition, and safe milk is even more important for improving public health and addressing malnutrition).

Being among top five milk producing countries in the world, Pakistan's gross production of milk was estimated to be 56 billion liters, only five percent of which is sold in packaged format.

This shows the potential of the processed milk and dairy sector in the country.

The country requires a two-pronged approach.

Firstly, implementation of minimum pasteurization law before milk reaches the consumer in a packaged format.

Secondly, restoration of zero (sales tax) rating facility for the dairy sector in upcoming budget is key for the sector growth, as it reduces the impact on input costs and minimizes price gap between packaged and loose milk.

Even a one percent increase in market share of processed (packaged) milk means a positive impact on rural livelihoods (engaging farmer and buying more milk), new jobs creation, increased tax revenues, an improvement in allied industries and potential exports.

All of this will lead to new foreign direct investments in the country, the industry added.

In the current health crisis driven by the Covid-19, the PDA sees a duty to alert the government on the risks going forward and what actions could be taken.

If the virus starts to spread like elsewhere, the Pakistan dairy landscape will most certainly face major problems.

The current distribution system relying on an estimated 100,000 people delivering milk to millions of households will become unsustainable.

In such a situation, the loose milk distribution will collapse; as such inevitable person-to-person contacts could spread the disease.

The milk is highly perishable, and the country does not have the infrastructure to replace the capillary-type loose milk distribution system in a safe way.