Sources told Business Recorder here on Tuesday that the Ministry of Finance, the Federal Board of Revenue (FBR) and Pakistan Dairy Association (PDA) held meetings on the tax recommendations pertaining to dairy sector to be considered in coming budget (2017-18). A set of proposals of dairy sector is expected to be incorporated in Finance Bill 2017.
Industry recommended that the government was of the policy to grant zero rate sales tax status to milk & milk based products including raw milk produced by commercial farms, to keep the packaged products under the buying reach of the general public. Through finance acts 2015-16 and 2016-17, sale tax zero rating status has been abolished and imposed reduced rate tax (10%) on goods such as; concentrated (powder) milk, cream, yoghurt, cheese, butter, whey whilst UHT and fat filled milk has been categorised as "exempt" under the Sales Tax Act 1990. Removing of zero rate tax policy had drastically increased the cost of the milk processing industry which eventually is resulting into the increasing trend of prices of packaged/hygienic milk & milk based products. Removal of zero rating policy is also hampering the growth and development of documented industry resultantly the undocumented segment (fresh milk market) of the economy is flourishing.
The government should re-transpose the aforementioned goods to the 5th Schedule of the Sales Tax Act 1990 & continue the zero rating facility for the dairy sector.
Reduction of sales tax rate on laminates (packaging material), fresh milk and fruit pulps should be referred as "Wealth of Country" which in majority of the cases perished because of expensive packaging material. In case of reduction of duty or local taxes, cost of production of the food manufacturers will be reduced which will not only result into safeguarding the milk and fruit pulps but will also help the government increase the tax revenues.
The government should introduce reduced sales tax rates or rate of duties should be reduced on packaging material (such as laminate) to boost packaged food industry and reduce waste of milk and fruit pulps. Such schemes will also help in increasing the exports which currently are not competitive because of high cost of production.
The federal government imposed 25% regulatory duty on import of milk powder which negatively impacted the dairy industry in general and 'infant formulae' in particular. Import of milk powder is intricate to cater the requirements of manufacturing of infant formulae for which only locally produced milk (fresh milk) cannot be consumed due to high sensitivity of the product. Import of milk powder is also imperative for production of various other dairy products in the times of milk inadequacy; especially in summers known as lean period.
It is recommended to abolish regulatory duty on import of 'Whey (PCT0404.1010) & Milk (PCT0402.1000)' powders and also to reduce the custom duty from 20% to 10%. Withholding of income tax on purchase of fresh milk from direct growers is exempted from income tax withholding under the provisions of clause 12(a), part IV of 2nd schedule of Income Tax Ordinance 2001.Whilst if a milk is purchased through commission agent, it attracts the provisions of section 233 where commission is subject to withholding of tax at the rate of 15%. This is clearly a case of hardship as milk commission agents are small entrepreneurs and tax rate is far higher than the income they earned by the means of collection and selling of milk.
It is also recommended to "exempt milk" from withholding tax in cases either it is purchased through direct farmer or through commission agent. The Fifth Schedule of the Sales Tax Act, 1990 allows for the zero rating of raw materials, packing materials, subcomponents, components, sub-assemblies and assemblies required for the manufacture of goods specified for zero rating subject to conditions defined in Chapter XIV of the Sales Tax Special Procedure Rules. It is recommended that such zero rating of inputs be extended to other direct and indirect material, including capital goods, required in the manufacturing process and furtherance of supply, including cattle feed and dairy farm machinery, for which an input tax is claimed, such as on energy and utilities, etc. This will stop the accumulation of refunds at source, improve the cash flow position of dairy companies and avoid the cumbersome procedure for obtaining zero rating certificates.
The federal government in Finance Act 2015 has reduced the sales tax on import of agricultural machinery from 17% to non-adjustable sales tax at 7% under the Eighth Schedule of the Sales Tax Act, 1990 whereas previously the sale tax at the rate of 17% was adjustable.
The FBR is also examining a proposal that the reduced rate of 7% should also be adjustable. Moreover, it should also cover all agricultural machinery like mowers and cutters under PCT Code 8433.2000, dairy farm related machinery such as milking equipment under PCT Code 8434.1000, 8434.2000, 8434.9000 which is still being charged at the rate of 17%. Regulatory duty on skimmed milk powder was increased drastically to 25% from 5% in Finance bill 2016. This has resulted in increased cost of finished products of various dairy, sweets and confectionery companies. It is recommended to bring duty level down to 5% which was maintained for many years to reduce price of finished goods of various dairy, sweets and confectionery companies.
Withholding tax on all imports is applicable at the rate of 5.5% for raw material used for manufacturing. Most of the time, exemption certificate is not issued by tax authorities because of which companies have to pay income tax at import stage in addition to advance tax paid in each quarter. These payments result in generating income tax refunds at the end of the year impacting cash flow of the companies.
It is recommended that companies registered with large taxpayers units or listed on stock exchange should be exempted from collection of income tax under section 148 of the Income Tax Ordinance, 2001. Turnover tax applicable on the turnover of fast moving consumer goods (FMCG) distributors is 0.2% of their total turnover. However, withholding agents are required to deduct income tax @ 3%/ 3.5% on payments to them. Deduction of income tax on the higher rate as compared to their ultimate income tax liability results in creation of detrimental environment for their business, creation of refunds and cash flow issues for the distributors ultimately impacting the dairy industry.
Industry has recommended that withholding tax rate be reduced from currently 3%/ 3.5% to 1.0% for FMCG distributors in line with the withholding taxes applicable on the distributors of cigarette and pharmaceutical products (clause 24(A), Part II, 2nd Schedule of Income Tax Ordinance 2001).
Agriculture sector is being provided with subsidised electricity tariff, while dairy farms continue to be charged high electricity costs despite the dairy being one of the leading sub-sectors of the agriculture sector. Nearly 58% of the agricultural GDP comes from livestock. It is recommended that subsidised electricity tariff shall be introduced for dairy farms and for chilling of milk, in accordance with agricultural tariff.
Thousands of exotic cattle have been imported from Australia, Europe and USA and are being managed by large-scale dairy farms to produce high quality milk locally. These animals require to be vaccinated for prevention of diseases and majority of such vaccines are not available in Pakistan; thus required to be imported. Currently, there is no provision of importing these vaccines legally. It is recommended that an easy procedure may be devised with Drug Regulatory Authority of Pakistan to allow import of necessary vaccines by corporate dairy farms with an undertaking for using at their own dairy farms.
Bovine semen is imported from North America and Europe to fulfill breeding requirements at the dairy farms and make genetic progress. Recently, some restrictions have been introduced on import of semen such as only proven and A2A2 bulls can be imported. It is recommended that such restriction shall be waived off for corporate dairy farms when they will import for using at their own farms. Or at least permission shall be accorded for import of genomic A2A2 bulls' semen.
The current tariff on the raw materials imported for use by domestic liquid food packaging industry is anomalous as basic raw materials are being charged to duty at the highest duty rate. This tariff is not only discriminatory but is also goes against GOP's concessionary fiscal policy for the agriculture sector. Hence, there is need to provide a level-playing filed to the domestic liquid food packaging industry.
The duty concessions will not only help in developing the domestic liquid food packaging but will also prevent colossal waste of milk and fruits, provoke potential investment of almost 1 billion euros in packaging for liquid food packaging alone over the next 2-5 years, increase employment all over the country especially in the downstream industries of the packaging industry and increase rural employment and farmers' incomes. This will prove to be a great engine of socio-economic growth and development of the country.
It is, therefore, proposed that all categories of raw materials namely polymers, coated paper/paper board and aluminium foil (respective PCT headings) may kindly be exempted from levy of customs duty or impose lowest possible duty under the FIFTH Schedule to the Customs Act, 1969 when imported by the Liquid Food Packaging Industry for dairy and fruit juices and Flexible Packaging Laminates Industries (excluding cigarettes industries), industry recommendations added.
Copyright Business Recorder, 2017