LAHORE - The PML-N government, on recommendation of the FBR, is considering to impose 17 per cent General Sales Tax in the upcoming budget 2014-15 on dairy products, including yogurt, cream, cheese etc while milk, accounting for almost 22 per cent of kitchen expenditure compared to 12 per cent of wheat, is being excluded from zero rating regime.

The new tax policy regime, formally communicated by the top officials of the FBR to a delegation of the industry, will increase costs for the milk and dairy processing industry by 8%, raising net price of packaged milk by at least Rs.7 per liter which is already not in the access of majority of public due to its high rate and as a result its market share is negligible in the country, market sources said.

According to industry experts, all efforts of Punjab government, which is providing necessary support to the associated sub-sectors of dairy such as breeding, feeding, processing and others, will be frustrated following the elimination of Zero Rating on packaged milk.

It seems the FBR is committed to hit the masses by escalating inflation which is already high, as the elimination of zero rating will definitely lift CPI sharply owing to milk products 7.4% weightage in the Consumer Price Index, against wheat share of 4.2%, warned Faisal Imran Hussain Malik, Senior Vice Chairman of Pakistan Dairy Association.

“The continuation of the Zero Rating regime as a part of the Finance Act is a necessary policy decision to sustain continuous growth of the dairy sector, enhance rural livelihoods and ensure food security for all Pakistanis,” he said. According to dairy industry expert, the 2014-2015 Budget recommendation to withdraw SRO 670(I)/2013 (pertaining to Zero Rating) and the granting of exemption from Sales Tax will have a negative impact on the dairy sector.

Faisal Malik, who is also CEO of Haleeb Foods, said that this is because the input taxes paid at the procurement stage will become un-claimable, thus increasing costs considerably. If these costs are passed on to the consumer, a rise in inflation will be observed and simultaneously result in an over 20% decrease in the sale of packaged milk, he added.  Consumers will therefore, be pushed to consume unhygienic and unprocessed loose milk (with no quality assurance), which still remains completely out of tax net.

“Presently 3 million farmers and their families, majority of them landless, are linked to milk business. The 20 per cent cut in sale, after the zero rating withdrawal, to lower milk collection by at least 20 per cent, affecting directly economy of the rural class.”  Pakistan Dairy Association SVC claimed that the revenue of the government coming from the processed dairy industry will also fall substantially due to elimination of zero rating.

Criticizing the tax collecting authorities, he said the attitude of FBR, as evidenced by consistent opposition to the zero-rating regime on dairy products, is negative towards industry and formal sector, which never thinks about bringing informal sector into tax net rather increasing burden on those who are already paying tax.

The milk industry leader said that the FBR should take measures to bring the untaxed sectors of the economy into the tax net instead of squeezing those who were already in the tax net and paying all their dues. He said that the FBR which was established with an objective to facilitate the industry, has been unfortunately turned into a money making machine and the people sitting at the helm are not only unaware about the ground realities but are least concerned about the problems of real taxpayers.  Faisal Malik said that PDA understood well that a quantum jump in Tax-to-GDP ratio was in dire need but it also believed that this objective could only be achieved through level-playing field and facilitation of existing businesses.

Quoting the figures, he stated that in most developing and developed countries milk is subsidized because it is considered an essential food item. He lamented that only 4% of the formal sector pays taxes of about Rs. 3 billion, whereas 96% of the country’s milk industry, represented by unprocessed milk producers, do not pay any tax.

According to him, more than 70 percent of UHT milk is sold in smaller packs (including quarter litre), which is purchased by the poor for their daily consumption.

These statistics challenge the myth that the packaged milk is used by the middle class only.

Faisal Malik said that foreign and local investment in dairy farms and the dairy processing sector will suffer. To put this assertion into perspective, he stated that formal dairy sector has made an investment of over $700 million over the last five years. Hence, any measure which is detrimental to the growth of formal sector will really hamper the growing investment.