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Milking taxes


May 30, 2019

Lately the dairy and packaged milk industry is frequently being reflected in the news. Commerce Advisor Abdul Razak Dawood has indicated that the government is planning to rationalize taxes on the milk supply chain in the upcoming budget.

Similarly adulterated and unhygienic loose milk has also recently been highlighted in the media. It might be bad news for the adulterers involved but it definitely seems to be good news for the dairy and livestock sector as it has put the sector in the spotlight so as to introduce reforms at the policy level as well as in terms of its implementation.

Also referred to by Prime Minister Imran Khan in his recent speeches, adulteration of loose milk and its impact on stunted child growth cannot be ignored. Reforms in terms of system changes and regulation are essential but ensuring a friendly tax regime is also a must for promoting the consumption of safe and pasteurized packaged milk. According to reliable estimates, more than $50 billion of investment is required to modernize and grow the dairy industry, which could come from the private sector.

An irrational and inconsistent tax policy is significantly obstructing the inflow of the required investment in the dairy sector. According to the principles of taxation, a tax policy should provide a level playing field to all the players, be consistent over the long run and promote broader public policy objectives. Sadly, the present tax regime doesn’t reflect all these principles in terms of the dairy industry.

First, the practice of moving packaged dairy products from the ‘zero rating category’ to the ‘exempt category’ in 2016 is keeping the packaged dairy products beyond the purchasing power of the general public. Through the Finance Act 2015-16 and 2016-17, the zero rating status was abolished and a reduced rate tax at 10 percent was imposed on dairy products (powder milk, cream, yogurt, cheese, butter and whey) while UHT and fat-filled milk were categorized as ‘exempt’ under the Sales Tax Act 1990. This discourages the consumption of safe milk due to high prices.

Second, under the Finance Act 2017, a regulatory duty of 25 percent has been imposed on milk and whey powders which not only negatively impacts the dairy industry but also the overall food industry and consumers. Since milk powders are also used as ingredients in a range of food products, its import is imperative for the food industry, the dairy industry in particular. On top of this, the climatic conditions in Pakistan are such that the milk supply goes through two phases in a year – flush and lean. It is during the lean season that the import of powder milk goes up to meet the fresh milk deficit in the local market. Lowering the regulatory duty on powder milk will ensure access to high quality products, whether it is dairy related or any other food products.

Third, whereas liquid milk is exempted from sales tax, locally produced full cream milk powder is taxable at 10 percent. However, both are alternatively usable products. Inconsistency in terms of taxation for the interchangeable products is depriving full cream milk powder a fair and level playing field. Since retention of milk in powder form is imperative for consumers located in far-flung areas and those who have none or limited access to refrigeration, the current tax regime is hurting the consumer base.

The dairy and livestock sector’s contribution to GDP is more than crops’ contribution at 12 percent. Being among the fourth largest milk producing countries in the world, Pakistan is still far behind in terms of its efficiency. Out of the entire annual milk production in the country, five percent is processed and packaged, 15 percent is wasted due to inadequate refrigeration facilities and 80 percent is sold in loose form. A small market share of packaged milk (due to the factors discussed above) is a leading cause of malnutrition and nutritional disorders among children. The consumption and easy access of adulterated loose milk is seen to be significantly associated with child stunting and nutritional deficiencies among women and children.

We can clearly see that the growth of the dairy industry is inversely correlated, with a tight fiscal policy followed by the consumption of packaged milk also inversely correlated with the milk prices. In such circumstances, reducing the duties/taxes will reduce the cost of packaged dairy products, increasing its demand and sales volume which in turn will attract more investment to this sector.

From the health economics point of view, increasing the market share of packaged milk will prove to be optimum to achieve most of the public health objectives set and talked about by the government – ie improving maternal and child health indicators.

The writer is a public health expert with specialization in health economics.