The Pakistan Dairy Association fears that the sector may be removed from the zero-rating tax regime in fiscal year 2015-16.

But this threat looms over the dairy sector every year on the budget eve and the association carries out a campaign against any change. It says if the proposal is implemented, the price of packaged milk will increase by at least Rs6 per litre as the cost of production for dairy processing industry will rise by 7pc. Besides, the sale of packaged milk may decrease by over 20pc as many consumers will revert to unprocessed milk.

The FBR chief told the Senate Standing Committee on Finance last year that the government has given maximum tax concessions to the dairy sector including the zero-rating sales tax status. The industry, he said, is paying no taxes but entitled to sales tax refunds on inputs. In 2013, the FBR had recommended a change in the sector’s status from zero-rating to exemption from sales tax, but the proposal was dropped in the final text of the Finance Bill (2013-14). This year too, the FBR is raising the issue again.

To many, exemption of dairy products, such as milk, from GST and taxing them at zero rating particularly for inputs may look the same thing but actually they are not. Under the zero rating, the dairy producers can claim refunds on input taxes but this facility will not be available to them if the dairy products are exempted from GST.

The diary sector argues that only the continuation of the zero rating regime can enable it achieve a higher growth rate and in case of the exemption regime the growth will slow down. The FBR charges a minimum rate of 5pc customs duty on the import of machinery by the dairy sector.

About 90pc of those engaged in the diary farming and the consumers reside in villages, small towns and backward areas. Only 8-10pc of them belong to corporate sector residing in urban areas.

However, this sector’s true rival and a major deterrent to its growth has been milk powder whose import has during the last ten years recorded a big rise although the country boasts of being one of the leading milk producers in the world. India and Turkey have imposed 68pc and 180pc duty respectively on the import of milk powder. But Pakistan’s duty rate is only 20pc for members of the Saarc and 25pc for the rest of the world.

In February, NA Standing Committee on Food Security had unanimously recommended 100pc duty on import of milk powder. In 2012 and 2013, whey powder imports were 19.5m kg valuing $13.4m and 18.3m kg valuing $15m respectively.

The problem is that the farm gate price of fresh milk is higher than powdered milk and many prefer to consume the latter. Secondly, since the supply of fresh milk is not enough to satisfy the growing demand, it is difficult to discourage import of skim milk powder (SMP).

There are reports that farmers are losing interest in the country’s once-profitable dairy sector because of rising costs and diminishing income.

Many of the country’s small-to-medium sized dairy farms, having 50-200 animals, have shut down in recent years. The number of dairy farms has reduced to 8m from 11.5m in 1996.

Turkey has been a great success in the last decade in diary sector and there is a move to follow its example. In particular, Punjab is adopting a similar model under which the government will provide necessary support and assistance in the form of subsidies and enabling taxation regime to the dairy sector and its sub-sectors such as breeding, feeding, quality testing and processing.

Published in Dawn, Economic & Business, May 18th, 2015

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