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ISLAMABAD: The tax policy of introducing sales tax in three stages, starting from 5 percent on infant formula, baby food and fortified child nutrition milk powders, would avoid immediate impact of 18 percent sales tax on the general masses.

Sources told Business Recorder that amendments to the Finance Bill 2024 would consider this important aspect of heavy taxation on infant formula etc. The phase-wise taxation under the new tax policy would be considered by the budget makers during finalization of the recommendations under the Finance Bill 2024.

The Finance Bill 2024-25, recently introduced by the government, has withdrawn the zero-rating (Serial no.12(xvii) and 17 of the Fifth Schedule of the Sales Tax Act 1990) and imposed an 18% sales tax on locally produced infant formula, baby food, and fortified child nutrition milk powders.

Senate panel endorses phase-wise ST on local infant nutrition, milks

Finance Minister Muhammad Aurangzeb, in his budget speech, emphasized the importance of nutrition in the first 1,000 days of a child’s life and reiterated the need to address stunting. However, the imposition of 18% sales tax on locally produced infant formula, baby food, and child nutrition milk powders is seen by industry experts as counterproductive and contrary to the government’s stated priorities.

Sources said that the FBR and Senate Standing Committee on Finance has received recommendation introduction of sales tax in three stages: starting at 5% in the first year, increasing to 10% in the second year, and finally reaching the full 18% in the third year.

This proposed phased approach aims to allow businesses and consumers to adjust gradually, minimizing the immediate impact on affordability and ensuring a smoother transition.

The industry has warned that the government’s most recent decision of 18 percent sales tax on business and consumers across, will not just dent its long-term revenue plans, but also prove to be detrimental as businesses will shrink and eventually exit the country, withdrawing much needed foreign investment.

Amid the ongoing high inflationary climate and the inelastic buying power of consumers, industry experts have advised the government to implement a phased imposition of the General Sales Tax. Industry representatives argue before Senate Standing Committee on Finance that the strategy would balance the need for revenue generation with the imperative to safeguard the health and well-being of infants and children.

It would also protect future investments by providing businesses the necessary time to adapt to the new tax structure. Additionally, families would continue to provide their children with essential nutrients needed for optimal growth and development.

Given the high inflationary climate, it is essential to note that locally produced infant formula, baby food, and fortified child nutrition milk powders are priced at approximately 50% less than imported ones, making them more affordable for the masses. These products also drive the purchase of 300 million litres of milk from local farmers annually.

Experts warn that the heavy taxation could worsen malnutrition among infants and young children, as parents may be forced to shift to unsuitable, unhealthy, and inappropriate alternative feeding solutions. Pakistan is currently facing a malnutrition crisis, among the worst in the world. The under-five mortality rate, a key indicator of community health and nutritional status, stands at 137 per 1,000 births, which is alarmingly high by international standards. According to the National Nutrition Survey, 40% of children in Pakistan are underweight, and over half are affected by stunting.

Industry stakeholders in a recent meeting with the Senate Finance Committee urged the government and opposition Senators to recommend the phased imposition of GST to mitigate the adverse effects on child nutrition and health, ensuring a more balanced and sustainable approach to tax implementation.

Copyright Business Recorder, 2024

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