The government has set up a committee to review a budget proposal seeking zero sales tax on milk products as blindsided taxation policies of the previous government have caused heavy losses to dairy companies due to increase in cost of doing business.
The increase in interest rate during the Pakistan Tehreek-e-Insaf (PTI) government also adversely affected their balance sheets.
The committee would be chaired by the finance secretary and would analyse financial statements of dairy firms aimed at evaluating claims of business losses due to the withdrawal of zero-rated sales tax facility by the previous Pakistan Muslim League-Nawaz (PML-N) government.
The dairy sector was one of the worst hit sectors during the PML-N tenure as the previous government thrice changed taxation policies for the sector.
Adviser to Prime Minister on Finance and Revenue Abdul Hafeez Shaikh held a meeting with members of the Pakistan Dairy Association (PDA) via video link.
The finance adviser directed that a special committee may be constituted under the chairmanship of finance secretary with representatives from the Federal Board of Revenue (FBR) and the dairy industry, according to the finance ministry.
The committee would give its report within a fortnight and would provide information about the profit and loss situation of the dairy business across the country, said the finance ministry.
PDA has claimed that its 30% capacity remains unutilised and restoration of the pre-2017 taxation status will help it enhance the business.
The government would consider the request of the dairy association with an open mind after reviewing all the facts and related data that could help in taking the best decision in favour of the economy and wellbeing of the people, said Shaikh.
The dairy sector has been on the decline since the abolition of the zero-rated facility. In 2006, the then government declared dairy a zero-rated sector where any sales tax paid by the sector was refundable.
Through Finance Acts of 2015 and 2016, the sales tax zero-rated status had been abolished. The last government imposed 10% sales tax on concentrated powder milk, cream, yogurt, cheese, butter, whey, UHT and fat-filled milk.
In 2019, three major companies registered a reduction in their profits and some had been booking losses. FrieslandCampina, which acquired a majority stake in Engro Foods, sustained a Rs955-million loss after tax.
Nestle Foods earned profit of Rs7.4 billion last year but it was 50% or Rs7.3 billion less than the 2017 earnings when the government abolished the zero-rated facility. Excluding revenues from sales of other products, Nestle is also booking losses in its milk operations.
Fauji Foods sustained a loss after tax of Rs5.8 billion last year. The trend continued in current fiscal year as well as FrieslandCampina and Fauji Foods booked losses in the first quarter.
Nestle Pakistan earned Rs1.93 billion but it was 53% less than the first quarter of fiscal year 2016-17.
PDA, the representative body of the dairy sector, has said the removal of zero-rated tax policy drastically increased the cost of milk processing industry, which eventually resulted in an increase in prices of packaged, hygienic milk and milk-based products.
PDA proposed on Thursday that a 1% increase in industry’s market share had significant benefits for the economy in the shape of additional 600 million litres of milk collection, pumping of Rs36 billion into the rural economy, creation of 2,500 direct jobs and Rs6 billion increase in taxes.
At present, 90% market is captured by loose milk and the share of packaged milk sector is only 10%. Despite having high milk consumption, malnutrition is a serious issue in Pakistan.
PDA claimed that in case the government decided to restore the zero-rated regime, the income tax contribution of the dairy sector would jump from Rs14.7 billion to Rs41.7 billion due to increase in sales over the next five years.
Overall, the dairy sector’s contribution will increase from Rs32.5 billion to Rs43 billion and the income tax contribution will be 96.5% of the total tax revenues.
Currently, half of the tax collection from the dairy sector is on account of unadjusted input tax, amounting to Rs16.9 billion. The industry claims its packaged milk sales will remain stagnant at half a billion litres per annum in case the government continues with the current taxation policies.
In case of restoration of the pre-2017 tax regime, the PDA has projected its sales will almost triple to 1.4 billion litres and government revenues will increase by an additional Rs10 billion.