PAKISTAN’S dairy sector is seeking continuation of zero-rating regime for what it calls the sector’s healthy growth and opposes being put in the tax exemption category.

This is one of the five key budget proposals made by a spokesman of Pakistan Dairy Association (PDA) before the National Assembly Standing Committee on Finance on April 19. Other proposals include re-transposition of dairy products form 8th Schedule to 5th Schedule of the Sales Tax Act 1990, payment of Rs20bn pending sales tax refunds and implementation of minimum pasteurisation laws.

Most of the MNAs including those from the opposition parties supported the dairy industry’s demand which, they said, was necessary for its smooth growth. The association builds up pressure against the sector’s likely removal from the zero-rating regime every year as the budget date draws nearer. And its fears arise as the FBR tries to convert the sector’s zero-rating regime to exemption mode but the finance ministry has not yet accepted its recommendation. The FBR chairman told the standing committee that this year, too, the board will make the same recommendation because the dairy sector is enjoying too many concessions.

Although Pakistan is the fourth-largest milk-producing nation, it is still dominated by the informal sector and remains undocumented, disorganised and entrenched in age-old production and marketing practices

Why the dairy producers insist on the zero-rating is that under this regime they pay no taxes and can also claim refunds on input taxes. If their products are placed in the category of exemption from GST, they will lose this facility. As a result, their cost of production will escalate which they will pass on to the consumers. What may follow is the decrease in the sale of packaged milk and reversion of many consumers to unprocessed milk.

The PDA spokesman also sought abolition of sales tax on by-products such as cheese, butter, flavoured milk and cream sold in packing as these were essential part of a healthy diet. Taxing them can discourage their consumption in middle-class families who prefer to buy unprocessed milk which may not often be of good quality.

Despite being every household’s essential item, the production of milk and its marketing is one of the least commercialised enterprise. Although Pakistan is the fourth-largest milk-producing nation, it is still dominated by informal sector and remains undocumented, disorganised and entrenched in age-old production and marketing practices. Only 5-7pc of the country’s total milk production is marketed through formal channels.

Meanwhile, a leading Swiss multinational in dairy sector and a Norwegian mobile phone company’s banking facility have joined hands in a unique experiment to provide financial access to thousands of dairy farmers and to make disbursement of milk collection payments swift, easy, and transparent. The phone firm ensures delivery of the payment to the farmer’s mobile account that they can withdraw from the nearest retailer. Apart from speedy payment, it opens the doors for mobile financial services to them.

Earlier, most of the dairy workers received their payments in cash from the supply agent. Every year, the milk multinational pays over Rs22bn for obtaining milk from various sources in Pakistan.

The cellphone company has, at present, 36m customers and its banking facility, being the country’s first and largest branchless banking solution, has 20m customers. While more than a 100m people still do not have a bank account and banks do little for their financial inclusion, this facility, in a way, fills the vacuum.

The dairy sector is at present facing a myriad of critical problems, a major reason being the governments’ apathy towards this sector. A recent study shows that the policymakers have always been ‘more concerned about the development of the crop sector than the dairy sector’.

This is despite the fact that livestock’s contribution to GDP ‑11.8pc in 2014-15 ‑ remains higher than the contribution made by the entire crops sector. In fact, the study says, the policy-makers ‘never had faith in the development of the dairy sector’.

Published in Dawn, Business & Finance weekly, May 2nd, 2016