Cut in sales tax on milk in budget: Food security minister proposes Tax Policy Unit of MoF, FBR

ISLAMABAD: Federal Minister for National Food Security and Research Rana Tanveer Hussain has strongly proposed Tax Policy Unit of the Ministry of Finance and Federal Board of Revenue (FBR) to reduce sales tax on milk in budget (2026-27) keeping in view alternate taxation measures and projects for pasteurisation for establishment of “safe milk cities”.

He was speaking at a pre-budget consultation jointly organised by Sustainable Development Policy Institute (SDPI) and Pakistan Dairy Association.

Federal Minister for National Food Security and Research Rana Tanveer Hussain has underscored the need for rationalizing taxes and bringing about structural reforms in the dairy sector to improve affordability, ensure safe nutrition, and support farmers in the country.

The minister said livestock accounts for nearly 60 per cent of the agriculture sector and holds significant potential for both domestic nutrition and exports. He acknowledged that taxation policies, particularly sales tax on dairy products, have affected production and growth. “Softening of tax regime can help increase both production and revenue,” he suggested.

Rana Tanveer noted that reducing General Sales Tax (GST) on milk was not difficult, thus proposals like pilot projects for pasteurization and the establishment of “safe milk cities” are under consideration. He said improving milk quality and formalizing the sector would be key priorities going forward.

In his welcome remarks, SDPI Executive Director Dr Abid Qaiyum Suleri suggested multiple taxation scenarios and called for placing processed milk in a third schedule. He warned that rural milk collection centres were shutting down, since pricing of processed milk directly hits loose milk markets.

Experts informed that while reducing sales tax is suggested to support the dairy processing industry, alternative approaches are also recommended when government fiscal space is limited under the IMF regime.

Tax experts argued for a structural fix rather than adding more penalties. Expanding the Third Schedule is the solution. This would ensure sales tax on key grocery items and everyday consumer goods is paid at the factory gate, clearly visible on every pack and difficult to manipulate across a supply chain that the taxman can barely monitor. There’s strong support exists at the Federal Board of Revenue and the Tax Policy team, especially after successfully transitioning coffee into the Third Schedule in the budget 2025.

Pakistan’s sales tax system had been designed in a value-added model to collect revenue at every stage in an effort to document the economy. However, despite being in place for over a quarter of a century, the regime still suffers from gaps and revenue leakages at value chain stages, SDPI was informed.

In addition, the government has introduced additional taxes on unregistered and non-filing retailers to encourage them to register and start filing income tax returns. However, this approach hasn’t been successful and has instead led to increased complexity and other negative consequences. A 4 percent additional tax and a 2.5 percent advance income tax on unregistered retailers, in addition to the existing 18 percent sales tax, may seem punitive. Manufacturers often absorb both charges rather than risk losing shelf space, as over 80 percent of retailers are unregistered nationwide and operate outside the tax net. Interestingly, the third schedule of sales tax doesn’t differentiate between registered and non-registered retailers.

Currently, a wide range of consumer goods, including bottled water, biscuits, coffee, ice cream, chocolates, juices, syrups and squashes, beverages, packaged tea and spices, as well as personal care items like soaps and shampoos, are already covered under this regime. Expanding the Third Schedule to include cooking oil, ketchup, milk and dairy products, infant formula, frozen foods, flour and noodles could strengthen revenue visibility for the government while providing consumers with greater price transparency and stability.

Considering, the Third Schedule offers an opportunity for tax collection at the manufacturing stage, significantly reducing procedural complexity for both businesses and tax authorities, and ends discrimination and bring uniformity in the collection process, experts added.

Usman Zaheer Ahmad, the Chairman of Pakistan Dairy Association, highlighted that 40 per cent children in Pakistan suffer from stunting due to malnutrition, despite milk being the most widely consumed animal protein. He said the sector remains 98 per cent informal, with limited quality controls. He warned that 18 per cent GST in 2024 caused 27 per cent decline in formal dairy sector. He proposed reducing GST to 10 per cent and bringing part of the informal economy into the tax net, which could generate up to Rs250 billion in revenue.

Earlier, SDPI Head of Ecological Sustainability and Circular Economy Unit, Zainab Naeem, said the consultation aimed to bring together government, private sector, and civil society to address food insecurity and link the dairy sector with nutrition. She emphasized that milk should be treated as a basic nutritional necessity rather than a luxury item. She called for strategies to enhance affordability and accessibility for low- and middle-income households.

Farrah Naz, the Country Director of Global Alliance for Improved Nutrition (GAIN), said malnutrition costs Pakistan around 03 per cent of GDP annually, with over 40 per cent of children under five stunted. She stressed that safe milk is essential for child development and advocated reducing GST on milk from 18 per cent to 05 per cent. She also stressed the need for strengthening formal dairy systems, expand processing capacity, and utilize by-products such as whey.

Naeem Hassan, the Director of Business Taxation Office, Ministry of Finance, said the recommendations shared by SDPI and the Pakistan Dairy Association are prudent and workable.

Sajid Mehmood Qazi, the Additional Secretary, Special Investment Facilitation Council (SIFC), pointing out structural weaknesses in the tax system, said that over-reliance on documented sectors is discouraging formal businesses and contributing to declining tax revenues in the dairy industry.

Eman Fatima from the Prime Minister’s Office Board of Investment, highlighting regulatory complexities that hinder new entrants in dairy farming, reiterated that 18 per cent GST had slowed sectoral growth.

Dr Ihtesham Khan of the Food and Agriculture Organization (FAO) raised concerns over public health, stating that loose milk often contains harmful micro-toxins due to poor feed quality and lack of testing, increasing the health burden.

Dr Sajid Amin Javed, Deputy Executive Director (Research), SDPI, emphasized a long-term, integrated policy framework combining fiscal, health, and rural development strategies. He called for incentivising private sector investment and developing cooperative models to connect small farmers with markets.

Copyright Business Recorder, 2026