Proposed 18% Sales Tax on Milk Sparks Concerns: Impact on Consumers and Food Industry

Introduction:

In a move that could significantly impact consumers and the food industry, the Pakistani government is considering implementing an 18% sales tax on packaged milk in the upcoming budget. The Federal Board of Revenue (FBR) has proposed this tax measure, aiming to generate over Rs30 billion in additional taxes annually. However, concerns have been raised by Finance Minister Ishaq Dar regarding the potential impact on consumers in a country already grappling with high inflation. This proposed tax comes at a time when the food industry is still recovering from the burden of heavy taxation on juice products.

Challenges for the Food Industry:

The food industry has been hit hard in recent months, with the imposition of a 10% federal excise duty and now the proposed sales tax on milk. This double blow has had adverse effects on businesses and farmers, leading to reduced demand for products such as mangoes. The timing of these tax policies raises concerns, as Prime Minister Shehbaz Sharif’s government engages in diplomatic efforts to promote Pakistani mangoes while simultaneously implementing taxation policies that harm domestic farmers and the food industry.

Implications for the Dairy Sector:

The FBR’s proposal includes abolishing the zero-rating facility for the dairy sector, which currently allows milk producers to claim refunds on their purchased inputs. If the proposed 18% sales tax is implemented, packaged milk prices could increase by Rs46 per litre, potentially impacting both consumers and milkmen who may have to raise prices to compensate for the tax burden. Recognizing these concerns, the government is unlikely to endorse the FBR’s proposal, as per sources.

Inflation and Nutritional Challenges:

With Pakistan experiencing historically high inflation, imposing taxes on essential food items, particularly in an election year, could have significant implications for the government. The zero-rating facility for the dairy industry was introduced to support its growth, and taxing these products would increase costs for consumers, potentially reducing demand and affecting dairy farmers and the industry as a whole. This comes at a time when Pakistan already faces considerable challenges of malnutrition, particularly in rural areas where access to nutritious food is limited.

Plight of the Fruit Juice Industry:

The food industry’s struggles extend beyond the dairy sector. The imposition of a 10% federal excise duty on fruit juices has led to a decline in sales, adversely affecting the packaged juice industry. This decline has resulted in losses for farmers and risks closure or reduced production capacity for fruit pulping units in Punjab. The juice industry, a significant contributor to tax revenues and employment, has been severely affected, hampering investments and growth plans.

Supporting the Food Industry:

Market players in the value chain emphasize the need for the government to withdraw the federal excise duty on the packaged juice sector to revive the industry and support medium-sized fruit growers. Proper storage facilities and initiatives that reduce fruit wastage are crucial for the fruit value chain, as Pakistan is known for producing high-quality fruits, some of which are exported. By addressing the concerns of the food industry, the government can foster growth, generate employment, and bolster the country’s economy.

Conclusion:

The proposed 18% sales tax on milk and the existing federal excise duty on fruit juices present significant challenges for consumers, farmers, and the food industry as a whole. Balancing the need for revenue generation with the impact on consumers and industry players is crucial. As the government finalizes the budget, it is essential to consider the implications of these tax measures on inflation, nutrition, and the overall economy. Finding a sustainable solution that supports the growth of the food industry, ensures affordable access to essential food items, and addresses the nutritional needs of the population should be a priority for policymakers.

 

Published in The Express Tribune, June 6th, 2023.