CHANGES in taxation proposals, withdrawal of subsidies and absence of measures to boost farm productivity in the short-run are set to hit the food sector.

However, some incentives announced in the FY16 budget are meant to raise the mechanisation bar in the agricultural sector and to hopefully strengthen supply chains. But only time will tell to what extent these would mitigate the negative impact of the new budget proposals on the growth of food business.

The 1pc additional tax on companies making more than Rs500m annual profit will hit large food processing companies. They, in turn, are likely to pass it on to consumers if there is room for it without taking a hit on their sales revenue. The omission from the zero-rating regime of flavoured milk, yogurt, cheese, butter, cream, desi ghee, whey, milk and cream and concentrated sugar etc would also affect the business of food companies.

Tax experts say that suppliers shall no longer be able to claim input tax on the items omitted from zero rating. But the impact of this on their cost of sales would be compensated somewhat in case of local sales of these items under brand names because in that case the applicable sales tax would be 10pc, instead of 17pc. Competition for small dairy processors in the undocumented sector with the registered companies would thus intensify.

Under FY16 budget, sales tax exemption has been withdrawn from poultry feed and cattle feed including their all ingredients except soyabean meal and cotton seed oil-cakes. This will affect poultry business and raise the cost of cattle raising. But, here again, the negative impact of this move would remain limited because these items have been subjected to a lower than normal sales tax. This is apparently aimed at encouraging documentation of poultry and livestock business.

The faster inflow of agricultural credit towards poultry, livestock and fishing seen in FY15 is expected to be sustained in FY16 and would help poultry and meat processors and fish exporters alike

How this would impact on local sales and exports of poultry meat and processed beef and mutton would depend on how people engaged in this business see it in the overall change that the new budget has brought about in their business environment. But Pakistan Poultry Association has voiced its concerns regarding tax changes and tax imposed on poultry feed.

The budget envisages a four-year income tax holiday for companies that set up Halal meat production plants and obtain obtain Halal certification by December 31, 1016. This is a huge incentive for the future of efficient meat processing, market watchers say.

Similarly, the new budget allows supply of agriculture produce including fresh milk, live chicken birds and eggs to remain exempted from withholding tax subject to certain conditions. That can help poultry and dairy sector absorb some new tax amendments comfortably. The supply of fish has also been exempted from withholding tax. This, together with the proposals announced in annual development plan for fish sector support, should give more confidence to seafood processing and exporting companies.

The faster inflow of agricultural credit towards poultry, livestock and fishing seen in FY15 is expected to be sustained in FY16 that would help poultry and meat processors and fish exporters alike.

An important area where food business is going to be affected by the new budget proposals is of higher sales tax (10pc instead of 5pc) on import of soyabean meal and oilseeds meant for sowing. In the short-term, this may cause difficulties for poultry and livestock business as well as for cooking oil industry. But in the long run, it would support development of local poultry and animal feed industry and encourage fuller utilisation of the potential of domestic oilseed cultivation and usage, industry sources say. Domestic production of oilseeds has remained low for years and a chief reason behind it was low-cost imports of foreign oilseeds.

Slashing by nine percentage points of the cumulative sales tax and withholding tax on import of agricultural machinery and reduction in sales tax on local supply of certain categories of such machinery from 17pc to 7pc are sure to help stimulate investments in farming. Further assistance will come via interest-free loans for solar tube wells.

But the withdrawal of subsidies on power sector would more than offset the positives, industry sources fear. Since the new budget is inflationary in nature due to the overall taxation, the cost of growing food crops, vegetables and fruits would remain high and offset, at food processing and export stage, the relief for the supply chain and cold storage management.

Published in Dawn, Economic & Business, June 15th, 2015

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