The budget-making process is not well thought out. The government must largely comply with the IMF revenue and deficit targets whilst at the same time the intent is to not put too much burden on existing base while somehow ‘sacred cows’ are still protected. In the process, the axe falls on numerous segments. The balance is missing.
One such area is packaged dairy products(including sensitive products like infant formula, baby food, and fortified child nutrition products) where the zero-rating on sales tax is proposed to be withdrawn and a full 18 percent GST is being imposed. The story doesn’t end here, as there are some additional hidden costs for non-fillers- such as a 4 percent additional sales tax on retailers and a 2.5 percent (increased from 1%) advance income tax on the supply chain. Overall, tax is compounded to around 25 percent. That could pretty much kill the packaged dairy products market.
Although the additional tax on non-filers in the retail and wholesale supply chain has nothing directly to do with the dairy sector, a big majority of the value chain operators are non-filers, and they simply pass on the impact to consumers. This would result in an increase in the prices of a wide range of consumer products. The impact on dairy is to be compounded by the imposition of GST.
The government must reconsider this option. Even in days of extreme import restrictions (2022-23), SBP had categorically asked banks to prioritize infant formula infant formula-related specialized raw materials imports. The government should keep this priority in letter and spirit by reviewing the taxation proposal.
How can a country having one of the worst rankings on malnutrition and stunting let the prices increase by almost a quarter for healthier food options including infant formula, baby food, and fortified child nutrition powders? How can a finance minister mentioning the importance of nutrition in the first 1,000 days of a child’s life impose a hefty tax on products catering to the issue in the same breath?
This heavy taxation will worsen malnutrition amongst infants and young children because parents choose to shift to unsuitable, unhealthy, and inappropriate alternative feeding solutions.
The dichotomy tells us the process is not well thought out. It’s understandable that the IMF pressure is immense upon ending the sales tax exemptions. However, the rates are too high and the price impact would certainly lower the purchasing power of the middle class whose disposable income is already squeezing.
In the case of dairy products, this would seriously dent the journey towards having healthier milk and dairy products. In Pakistan around 90 percent of the milk market is loose where ensuring quality standards are simply missing. When the PM SS was CM Punjab there seemed to be a resolve towards moving to minimum pasteurization law in Lahore and other cities. However, the new taxes surely encourage the loose and substandard dairy products market to penetrate more.
The to be impact on the consumer welfare is estimated at Rs250 billion. However, only a small fraction of it would go into the government kitty while the rest is to be pocketed by the informal players. The equation is simple – the packaged milk prices to go up at least Rs50/liter and that would give room for the loose milk market to increase by a similar amount to maintain the delta.
It’s a loss-loss formula. The formal dairy market shrinks. The consumer pays even more for unhealthier options. The government to not get revenues as envisaged. And most importantly malnutrition and stunting situation could further worsen.
It is pertinent to note another misconception that packaged milk is only serving the affluent class. According to industry sources, 70 percent of packed milk is in quarter-liter packs and used by those who have refrigeration constraints. Then infant formula and baby food are being used by all types of consumer categories dominated by the middle class whose income is squeezing anyway.
The issue is being discussed by the Senate Committee on Revenue and Finance where the majority of participants from all the major political parties spoke against the hefty imposition of GST on dairy products, especially infant formula. They showed concern of this adversely impacting the nutrition indicators.
The industry players told them that the companies are already squeezing margins by not increasing the prices proportionate to unprecedented inflation in the last two years. There is no more room to further absorb the cost.
Now the sudden increase in GST from 0 to 18 percent will have negative implications for consumer pricing. The consensus seems to be appearing on having a phased approach to the GST increase, starting at 5% in Year 1, followed by 10% in Year 2, and finally 18% in Year 3 for infant and child nutrition-fortified milk, which would be a win-win situation.
The finance ministry should take note and make the necessary changes in the Finance Act.