As Finance Minister Ishaq Dar finalizes his third budget speech, a sense of uneasiness is brewing in Pakistan’s formal dairy sector as the federal government is planning to withdraw dairy products from the zero-rated regime in the budget FY16.
If passed into law, the sales tax would be slapped on dairy items making packed milk costlier. If that is not enough, the government is also planning to increase the duty on powdered milk import. These developments are very disconcerting for the industry.
Recall that in FY14 the government had taken away the zero-rating facility from the dairy sector. However, the zero-rated GST status was later restored. Similarly, in FY15, Pakistan Dairy Association (PDA) feared the withdrawal of zero-rating but that never happened thanks to effective lobbying.
Again, according to PDA if this exemption is removed and the new regime implemented, the cost for milk and dairy processing industry will be increased by 7 percent and the net price of packaged milk will be raised by at least Rs 6 per liter.
The consumption of milk and milk-related products is a major part of Pakistani diet. According to Euro monitor International, Pakistan is the fifth largest producer of milk in the world, and the milk production capability of Pakistan is growing fast. However, in terms of total tradable milk, Pakistan stands at third position globally.
It is rather unfortunate that when it comes to consumption patterns, Pakistan lacks proper data on packaged milk use. However, one can safely say that loose milk still dominates the Pakistani market and remains the most consumed form of milk.
Also, the large part of the target market for packaged milk is upper class and growing middle-class Pakistanis who are willing to spend a bit more on packaged milk. With growing middle class and urbanization, more and more people are increasingly concerned about the health and safety which has helped to increase the penetration and consumption of packaged milk in the market.
Unless there is credible evidence to suggest that the bulk of packaged milk is being consumed by the price-sensitive class, one is inclined to believe that the withdrawal of zero-rating should not be a big issue for packed milk producers as those in the higher SEC class would still prefer to buy packed milk. The demand for milk is relatively inelastic. The middle to higher end target market is unlikely to switch to lose milk.
However, for Efoods, in particular, that also has brands like Omung and Tarang, brands that are cheaper and compete with GST free loose milk, higher taxes can also come to haunt its growth.
This article originally appeared on June 5, 2015 in Business Recorder (BR) research.
