It is post-budget appeals season. Last week witnessed a media blitzkrieg, with various industry associations calling out for reversal of tax anomalies proposed in the budget. The dairy industry looked particularly betrayed. It claimed that instead of rationalizing existing taxes, the budget proposes fresh ones that could put the industry out of business.
Excessive taxation is of course a scrouge. Historically, Pakistan’s fiscal apparatus has been particularly inclined towards milking the documented sector of the economy. Taxes on consumption are especially undesirable as they suppress demand by raising prices. To borrow from Friedman, in an ideal world, “taxes should be cut under any circumstance; for any excuse; and whenever it’s possible.”
Unfortunately, a fiscally motheaten state does not operate in an ideal world. Instead, the best-case scenario for businesses is a fair application of tax code across categories and firms, that allows level playing field for competition, and ensures optimal allocation of resources across productive sectors of economy. But what is fair?
Before 2016, dairy sector was zero-rated. Not only dairy products were sales tax exempt, but producers could also reclaim GST paid on input stages such as on packaging. The favourable tax regime not only supported exponential growth in industry’s milk volumes, but also allowed dairy processors to launch innovations across a diverse set of value-add product categories such as dairy drinks, tea-whiteners, flavoured drinks, and fat-based indulgences. Naturally, the abolition of zero-rating was a shock that dairy players still claim to be reeling from.
Fast forward to 2018, and the industry found common cause with a Prime Minister who promised eradication of stunting and wasting from Pakistan’s malnourished millions. Although the administration was unable to deliver on its promise during the early years of IMF-led stabilization, industry’s advocacy campaign made 2021 look like the year dairy would become the comeback kid. Instead, federal budget proposed raising GST from 10 to 17 percent on value-added products, and all hell broke loose.
Like all things Pakistan, the discourse surrounding the proposed imposition has come to be dominated by two sharply diverging extremes. On one hand is the dairy industry, which predictably argues that the “a slice of cheese and a glass of milk has equal amounts of nutrition”. If the claim is accurate, then a slice of domestically produced cheddar cheese is a more superior and affordable source of nutrition, as it is currently cheaper than a glass of 250mL UHT milk. On the other is the principle-based argument, which insists that all value-add products should be uniformly taxed, while exempting essential food commodities, particularly for those at the bottom of the socioeconomic pyramid. Of course, emphatic arguments can be presented by either side, such as whether mozzarella cheese is ever a consumer essential to deserve a reduce sales tax bracket of 10 percent. Similarly, the other side might argue why butter and cream – considered breakfast staples - must belong in the maximum tax bracket of 17 percent, same as branded scents and colognes. And in a country where fashion footwear and garments enjoy reduced GST of 12 percent, why must tea-whiteners and yogurt be deprived of the same?
The nexus of nutrition and affordability may be a subject outside the scope of a newspaper column. However, one element crucial to all taxation discussion is its appeal to common sense, missing from taxation on dairy both in the past and the present. If the food and health authorities in a country have taken the evidence-based position that processed milk is safer than loose milk, then removing zero-rating was a flawed decision that compromised national health at the expense of tax collection.
In fact, if the state’s foremost objective is to eradicate stunting and wasting, product categories such as infant formula and fortified powdered milk - aimed at encouraging nutrition among children - should be top-of-the-list items for zero-rating agenda, even ahead of UHT milk that targets several other uses in addition to drinking.
Instead, news reports suggest that faced with aggressive campaigns by the dairy industry, the government has quickly yielded under pressure. And what a spectacular capitulation has it been! Rather than initiating a debate over which product categories manufactured by dairy industry may fall under ‘essentials for healthy nutrition’, government may have conceded even more ground than it was supposed to.
The fiscal implication of administration’s knee-jerk response is that coffee-flavoured drinks and butter now belong in the same category of “partly essentials” (partly because they have not achieved the coveted zero-rating status). That is the price citizenry must pay for fiscal measures that are devoid of both common sense and technical research.
Never mind that neither the dairy industry nor the food and health authorities of the country have bothered to ask whether veg-fat based margarine, and dairy-based butter should be classified together? Or whether dairy drinks and filled milk powder that target lower income segments should face lower tax to encourage safe milk consumption? Or for that matter, if dairy processors were to start manufacturing condensed milk or Greek yogurts tomorrow, will it be sensible to classify them along with such mass products as tea-whiteners.
For its part, the dairy industry can be sure that the win, however substantial, may prove fleeting. It won’t be long before a future fiscally constrained government in Islamabad may see rot in uneven sales tax application. Low taxed “cheese” may once again become a symbol of excess and subsidized consumption for the rich. Before that day comes, let’s hope dairy processors take the distant goal of category conversion seriously. If higher share of future investment by dairy sector is aimed at improving price competitiveness of processed milk rather than at gearing up high margin value-added dairy products portfolio, it will be a win for both the country and the industry.
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