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April 14, 2019

‘Improper taxation hurting the dairy industry’


April 14, 2019

A dynamic individual, with a corporate experience nearing two decades, Aamir Khawas, chief operating officer, Fauji Foods Limited, and chairman, Pakistan Dairy Association, speaks about the contribution of the dairy sector in Pakistan’s struggling economy. Khawas has been associated with the dairy industry for 13 years.

Q. What are the key challenges that Pakistan’s dairy industry is facing?

A. Milk production is the least commercialised enterprise in Pakistan’s agricultural economy. One of the major challenges is the seasonality of milk production. The two seasons, namely flush season and lean season have a direct impact on milk supply. Managing too much and too little is a major challenge for the industry. Unregulated suppliers have no proper means to store the excess milk and hence a lot of it is either discarded or is sold to consumers in a substandard form (posing a cost to the system).

As the economy is going through recession, with inflation as high as nine percent and rupee depreciation by 30 percent, the price of energy is going up which impacts the input cost towards higher end, the business environment turns out to be challenging.

In addition, there is a fragile production base, financial insecurity, untrained manpower and lack of quality assurance faced by the industry. All these factors, collectively, result in an inefficient and unorganised market as 95 percent of milk industry in Pakistan is unregulated. From the government point of view, provision of quality and hygienic milk to the consumers is currently a big challenge.

Q. What is the consumption ratio of packaged milk versus loose milk?

A. The milk industry in Pakistan is split. There are five percent packaged milk processors whose product prices are higher. The remaining 95 percent are loose milk sellers. There is a huge price differential between loose milk and packaged milk.

Q. How will you explain the ‘informal dairy industry’ in Pakistan?

A. Being among top five milk producing countries in the world, Pakistan’s gross production of milk was estimated to be 56,080,000 tons, according to figures published in Pakistan Economic Survey 2016-17. Out of this number, 95 percent is supplied as ‘loose’ and is therefore cheaper.

Pakistani consumers spend 26 percent of their food budget on milk. About 80 percent total milk production comes from rural areas, 15 percent from semi-urban and five percent from urban areas. Nearly 40 percent of the total production is marketed through informal channels.

The entire value chain, from production to consumption, suffers from poor sanitation of livestock sheds, unclean animals, milking by hand, collection in small quantities from milk producers and use of non-recommended additives and preservatives such as formalin, cane sugar, glucose, benzoic acid, and alkaline products.

Quality assurance is the most neglected aspect of the informal dairy system which creates health hazards for consumers and raises indirect system cost in terms of poor health outcomes.

Q. Why is there a need for a Minimum Pasteurisation Law?

A. All around the world, milk is recognised as key source of nutrition and governments are increasing regulation to safeguard consumers’ interest by introducing Minimum Pasteurisation Law to ensure baseline milk quality.

It means minimum standard of quality which all sellers have to adhere to in order for milk to be fit for human consumption. A Minimum Pasteurisation Law ensures the quality of milk.

If a Minimum Pasteurisation Law is enforced, it will help the dairy industry to produce nutritious milk products, also increasing the exports.

Q. How important is the packaged milk industry for maximising Pakistan’s dairy potential?

A. Packaged milk, with its five percent contribution to the overall industry, is important for the dairy sector. The country is already moving towards modernisation and even though the consumption ratio is low, processed milk industry has huge potential to grow. This chunk also ensures employment generation and poverty alleviation through training and empowerment of dairy farmers and gawalas, as well as safety of the livestock animals.

Q. In your opinion, how can a better tax regime facilitate the formal dairy industry?

A. Taxation on dairy items is divided in two fronts, first is the imposition of regulatory duty on skimmed milk powder and the second is the discontinuity of sales tax zero-rated regime on dairy products. The processed industry accounts for about 33 percent of powder imports, primarily for managing the milk supply during the lean season.

Secondly high imports of skimmed milk powder are due to low quality of local milk powder required for specialised categories like infant milk etc. Presently regulatory duty is 25 percent and in addition to this customs duty is 20 percent, and additional customs duty is two percent.

Secondly, abolition of zero-rate tax policy has drastically increased the cost of the milk processing industry, which is eventually resulting in increasing trend of prices of packaged/hygienic milk and milk-based products. Both of these factors are severely affecting the packaged dairy Industry.

After the zero-rating regime, the gap between the prices of processed and loose milk is even greater, which has not only resulted in sharp decline of the packaged dairy industry, but is also making it difficult for the loose milk market to come under the formal dairy sector.

Lower profitability and decline in volumes have severely impacted the investments in the packaged dairy industry and has negatively affected the initiatives aimed to promote milk farming communities and cool chain infrastructure.

The improper taxation is hurting the dairy industry with a price hike leading to a decline in the demand of the dairy products and shifting the burden towards the consumers. In order to address this issue and provide some relief to the sector, the government should review its fiscal policy towards dairy industry; no duty or sales tax on animal feed, zero-rating on local semen production, no sales tax on local and imported semen, and zero rated tax policy on dairy products.

Q. How is the dairy sector contributing to the country’s economy?

A. The dairy sector comprises an important component of Pakistan’s economy, which is primarily agri-based. It represents 97 percent of the informal sector (loose milk) and three percent organised sector (packaged milk).

The contribution of agriculture sector to Pakistan’s gross domestic product (GDP), with its declining trend, still stands at 23 percent. The livestock sector contributes 49 percent of value-addition in the agriculture sector and about 11.6 percent to Pakistan’s GDP. Some 30–35 million rural population is engaged in raising livestock and it derives 30–40 percent of its income from this sector.

Dairy sector has also contributed thoroughly in terms of generating employment, as 11 percent of the total employment is coming from livestock and dairy producers. Moreover, the sector has also created opportunities for women workers. Around 34 percent of total women employment is in various livestock sectors, as against nearly five percent in the case of total employment of men.

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