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June 25, 2019

Dairy industry crisis simmers on high taxes


June 25, 2019

Memosh Khawaja, vice chairman, Pakistan Dairy Association and CEO Haleeb Foods is an international business leader with 25 years’ experience of creating superior value with top global corporations

He said, in an interview on dairy industry, that higher taxes on dairy products will only result in shifting the burden upon the common man.

Q. What steps should be taken to rationalize taxes on organised dairy sector?

A. There is a need to ease tax regime as heavy taxation on packaged dairy products is severely hurting the industry. At this moment in time, the 5 percent organised milk sector versus the 95 percent unorganized milk sector leads to a heavy burden of taxes on the packaged milk industry. The dairy industry was already struggling to undo the damage caused by The Finance Bill 2016-2017 (withdrawal of zero rating to exempt category of sales tax) resulting in unprecedented decline of sales in the last three years.

Additionally, in Finance Bill 2019-2020, it has been proposed to impose 10 percentsales tax on Fat Filled Milk products by classifying it under Eighth Schedule of the Sales Tax Act, 1990. Major products categorized under Fat Filled Milk category in Pakistan encompasses Tea Whiteners and fortified milk based solutions for growing up children. Imposing tax on fat filled milk products will not only hurt the dairy industry but will also force consumer to go back to adulterated & unhygienic loose milk due to increase in price of tea whitener and other fat filled milk products of basic nutrition. Higher taxes on these products will only result in shifting the burden upon the common man.

Government should review and reformulate its fiscal policy towards the dairy industry in terms of its broader socio-economic and public policy objectives.

Q. What steps needed to develop the processed milk market?

A. The government needs to implement business-friendly policies, rationalize taxes and offer a conducive environment. It must establish a trustworthy supply and value chain. It should also monitor and provide stability to the prices of milk, so that all segments of the population can enjoy the benefits of safe and high quality milk. A better tax regime would attract new investors and encourage existing players as well. There should be no duty and sales tax on livestock feed for dairy farms, zero rating should be imposed on local semen production, no sales tax on local and imported semen and tax benefits for improvements in breeding and training.

There is a need to modernize livestock farms, strengthen research and development, introduce education programmes on sustainable livestock and dairy production systems and

provide credit facilities to rural farmers. Micro and macro-nutrients and chemicals used in feed industry must also be imported. There should be a tax holiday on some items essential for livestock and dairy industry while long and short-term training to livestock breeders and dairy farmers should be provided.

Q. How the proposed taxation regime hurt the dairy sector?

A. Despite milk being such an essential commodity, formal sector providing safe and hygienic milk has been only limited to 5 percent of the total milk consumption in Pakistan. There is ample opportunity in this sector for growth, and to improve the livelihoods of millions of small farmers associated with it.

The surge in animal feed prices will hurt the small farmers. The government needs to abolish the duty and taxes imposed on animal feed to help uplift this lot. But in order for the industry to expand and be competitive, the dairy sector has to come under the right regulatory and taxation regime.

Therefore, the proposed 10 percent sales tax on fat filled milk products should be removed and exempt sales tax regime should be reinstated. As any restricted policies would not only penalize the industry but also hinder further investments in the sector.

Moreover, Pakistan’s annual milk production capacity is over 40,000 million tonnes but out of this milk production, 5 percent is processed and packaged, 15 percent is wasted due to inadequate refrigeration facilities and 80 percent is sold in loose form. With government backing, the organized milk sector can make a big difference to the public health indicators.

Q. How can the dairy sector help in attracting FDI?

A. A robust dairy sector attracts foreign players to benefit from the vibrancy of the industry. Foreign Direct Investment (FDI) in the dairy sector is mostly termed as a ‘game changing event’ because of its all-encompassing gains.

In the last five years, FDI in the dairy industry was recorded at $1 billion whereas in the next five years, investments of around $1.5 billion are due in allied industries, expansions and new FDI. Pakistan’s dairy sector enjoyed the zero-rated regime from 2006 to 2016, when the sector saw a massive growth of around 130%, from around 600 million liters to around 1.4 billion liters.

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