THE Centre for Applied Policy Research in Livestock working under the University of Veterinary and Animal Sciences, Lahore, has recently come up with a policy paper listing key challenges to the sector.

The paper, entitled ‘Revival of Dairy Sector for Economic Development’, provides eight elaborate recommendations for reviving the sector, which it says contributes about one-fifth to the country’s gross domestic product (GDP) and employs more than 40 per cent of the rural workforce.

Livestock is the largest shareholder in agriculture, with a contribution of 58.3pc in the sector’s GDP. More than 7.5 million farming families, mostly smallholders and landless peasants, are directly involved in livestock farming.

Pakistan is the third-largest milk producer in the world, with annual production of over 50 billion litres. Therefore, milk is by far the only product of the livestock sector that alone exceeds the combined value of all major cash crops in the country.

As a result of various dairy development initiatives since 2005, commercial and corporate farming emerged after tremendous improvement was witnessed in the sector. However, almost a decade of investment started losing steam in 2013 and has now brought the sector at the verge of devastation, putting the livelihoods of millions of farmers at risk.

The import of milk and whey powder at low customs duty has adversely affected the growth of the local dairy sector in recent years, a policy paper says

The policy paper lists seven key challenges to the sector: import of milk and whey powder, exemption of sales tax instead of zero rating, livestock farming not being treated as agriculture, high cost of production, price capping of milk and meat, lack of awareness among consumers, and missing support for local processing and value addition.

The paper says that the import of milk and whey powder in the country at low customs duty has played a vital role in sabotaging the growth of the local dairy sector in recent years. Low prices of milk powder in the international market, in the absence of high tariffs, enabled local dairy processors and milk traders to import powder and replace fresh milk purchase from farmers. The increasing trend of selling tea-whiteners and dairy liquid products instead of milk also contributed to the trend.

Between 2011 and 2016, the imports of skimmed milk powder increased from 27,706 tonnes to 43,068 tonnes in quantity and from $89m to $147m in value, the report says, citing United Nations Comtrade data.

Similarly, whey powder import increased from 26,784 tonnes to 30,841 tonnes in quantity and from $17m to $24m in value. It reflects that from 2013 to 2016, the import of powders almost doubled and the country spent over $175m in importing these powders in 2016 alone. This is despite the fact that the country has one of the largest animal populations and is among the biggest milk producers.

As for the negative tax regime, the paper says that supply of fresh milk and its products has been zero-rated for sales tax since 2006. However, the government has abolished the zero rating status (Pakistan Customs Tariff Code: 04.01) through Finance Act of 2015-16 and 2016-17 and categorised it as “exempt” under Sales Tax Act of 1990.

With the zero-rated sales tax status, the sector was able to claim refund for sales tax paid on the inputs. However, with abolishing of zero-rating, dairy farmers and processors are no longer able to claim the refund and are forced to book additional expense in their costs.

Pointing out sectoral discrimination, it says that unlike other agriculture sub-sectors, livestock is not being provided with various benefits, including subsidies, reduced electricity tariffs, reduced duties, income tax exemption, reduced and exempt duties on agricultural machinery, etc.

The paper also sees price capping as discrimination against the sector. It questions the logic of controlling the prices of milk and meat by the local governments in cities when there is no price control mechanism for the inputs being supplied to livestock farmers.

In order to address the challenges, the paper suggests that:

• Customs and regulatory duties on the import of milk and whey powder should be raised from 45pc to 100pc and imports be regulated through strict veterinary health and food safety standards.

• The zero-rating status shall be re-transposed for raw milk and its products by moving these products to the fifth schedule of Sales Tax Act of 1990.

• Benefits available for the agriculture sector should also be applicable to the livestock farming, including reduced electricity tariffs, exemption of income tax, waved-off and/or reduced duties and taxes on machinery and raw material.

• Duties and taxes on the import of raw material such as feed items, dairy machinery and consumables for the livestock and dairy farming should be reduced or abolished.

• Prices of milk and meat shall be de-capped and be determined on demand and supply to allow more investments and improve quality with rationalisation of the prices in the medium to long term.

• Focus should be shifted to quality control and awareness to help consumers purchase quality food items. Local dairy processing and value addition needs to be supported instead of importing value-added products. The imposition of 10pc sales tax on locally manufactured pure milk powders or infant formulas for children using local milk should be abolished.

• Long-term national dairy development policy needs to be prepared and implemented under which all stakeholders, including government, academia, researchers, private sector and farmers, shall adhere to the national policy.

Published in Dawn, The Business and Finance Weekly, April 9th, 2018