For the third straight year, the government is planning to milk more taxes from the dairy sector and this time, the target product is tea whitener – a liquid or granular substance that is used as substitute for milk or cream as an additive to coffee and tea.
If the Federal Board of Revenue’s (FBR) proposal passes through, it will be the third straight year when the PML-N government brings any kind of change in the taxation regime of the dairy sector. In its last two budgets, the government imposed sales tax and regulatory duties on various dairy products, which the industry is demanding be withdrawn from the next fiscal year that will begin from July.
Companies to be affected
Nestle Pakistan, Shakarganj Food Products, Haleeb Foods, Noon Pakistan and Engro Foods are the companies that are going to be affected directly by the proposal since they are involved in the manufacturing of dairy drink and tea whiteners.
Liquid and powder tea whiteners are distinct products that are separate from milk under the food regulatory regime. The federal government-run Pakistan Standard Quality Control Authority (PSQCA) defines liquid tea whitener with minimum 6.5% milk fat or vegetable fat and minimum 3% Milk SNF, and other permissible food additives.
Tarang, produced by FrieslandCampina that recently acquired 51% stake in Engro Foods, has the largest market share in the liquid tea whitener segment, while Nestlé’s Everyday heads the way in the category of powdered tea whitener.
The changes in tax rates in the last budget at one point threatened the $450-million planned acquisition of Engro Foods.
Government’s tax grab
In 2006, the then government had declared the dairy sector a zero-rating regime where any tax paid by the sector was refundable. However, after coming into power, the PML-N government used the refunds to inflate its revenues and resultantly, an amount of Rs20 billion of the dairy sector was blocked.
The solution the FBR found was the withdrawal of zero-rating regime and imposing 10% sales tax on milk products. Through Finance Acts of 2015-16 and 2016-17, sales tax zero rating status had been abolished. The government imposed 10% sales tax on concentrated powder milk, cream, yogurt, cheese, butter, whey whilst UHT and Fat Filled milk.
Sources said that the FBR was planning to add the tea whitener in the list of items charged at 10% sales tax.
However, the industry is already complaining about adverse impacts of taxation on its revenues and sales. The Pakistan Dairy Association (PDA), the representative body of the dairy sector, has said the removal of zero-rated tax policy drastically increased cost of the milk processing industry, which eventually resulted in the increasing trend of prices of packaged, hygienic milk and milk-based products.
It said that removal of zero rating policy is also hampering the growth and development of documented industry, resultantly, the undocumented segment of the economy is flourishing.
The PDA has demanded that from the next fiscal year the government should restore the zero-rating regime for the dairy sector. It has also asked the federal government to reduce 17% sales tax on packaging material such as laminate to 10% to boost the packaged food industry and reduce waste of milk and fruit pulps.
Dairy sector retaliates
The PDA is also seeking reversal of the decision of imposing 25% regulatory duties on imported powdered milk, which has effectively increased the cost of import to 45% due to 20% custom duties already being charged on these items.
The industry wants abolishment of regulatory duty on import of whey and milk powders and also to reduce the customs duty from 20% to 10%.
The federal government in Finance Act 2015 had also reduced the sales tax on import of agricultural machinery from 17% to non-adjustable sales tax at 7%. The industry is also seeking that the reduced rate of 7% should also be adjustable.
Moreover, the industry is also seeking reduction in regulatory duty on skimmed milk powder from 25% from to 5%.