Milking the Numbers: Analyzing the Impact of GST on the Dairy Industry

The recent imposition of an 18% Goods and Services Tax (GST) on packaged milk in Pakistan is set to cause substantial disruptions within the dairy industry. This tax increase, part of the Federal Budget 2024-25, has multifaceted repercussions that extend beyond immediate fiscal impacts, threatening the industry’s stability and long-term growth.

Economic Impact

The dairy industry in Pakistan is a critical component of the nation’s economy. It not only provides employment to millions but also contributes significantly to the country’s GDP. The rise in GST on packaged milk, increasing the price from PKR 300 to PKR 370 per liter, is expected to cause a sharp decline in consumer demand. This anticipated drop in sales will adversely affect the profitability of dairy companies, leading to potential downsizing and layoffs. With the already high unemployment rates in Pakistan, this development could further strain the job market, leading to increased economic instability.

With decreased demand for dairy products, dairy farms may be forced to scale back operations or even shut down, leading to job losses for farm workers and related support staff.

 

The decline in sales is estimated to be as high as 40 percent due to high retail price of milk, which will likely force dairy companies to reduce production. This reduction in production capacity will have a ripple effect throughout the supply chain, affecting not just dairy farmers but also businesses involved in packaging, distribution, and retail. Smaller dairy farms and companies may find it particularly challenging to survive, potentially leading to market consolidation where only larger, more financially resilient companies can endure.

Read also: The Impact of GST on Packaged Milk for Consumers

If the dairy industry experiences a 40% drop in sales and subsequently reduces its purchase of milk from farmers, the impact on employment in the dairy sector and related industries could be significant. With decreased demand for dairy products, dairy farms may be forced to scale back operations or even shut down, leading to job losses for farm workers and related support staff.

Additionally, reduced milk purchases from farmers would result in a surplus of milk, driving down milk prices and further straining the financial viability of dairy operations. This downward spiral could also affect jobs in transportation, processing, retail, and other sectors within the dairy industry’s supply chain, ultimately contributing to a rise in unemployment rates within the broader agricultural and food sectors.

Impact on Foreign Exchange

Pakistan’s dairy industry plays a significant role in the country’s foreign exchange earnings. The sector not only caters to domestic demand but also contributes to export revenues. With the increase in GST, the competitiveness of Pakistani dairy products in international markets is jeopardized. Higher prices may reduce the demand for Pakistani dairy exports, negatively impacting foreign exchange earnings. This potential decline in exports could exacerbate the trade deficit, leading to further depreciation of the Pakistani rupee.

A weaker rupee increases the cost of imports, which can have a broad impact on the economy, leading to higher prices for goods and services across various sectors. This situation can create a detrimental cycle of inflation, reducing the purchasing power of consumers and further dampening economic growth.

Strategic Considerations

The imposition of GST on packaged milk also brings to light strategic considerations for the government and industry stakeholders. There is a need to balance revenue generation with the economic health of critical industries. The dairy industry, being a significant contributor to both employment and nutrition, requires careful policy planning. Pakistan has the lowest per capita income yet has the highest sales tax on dairy as compared to the entire world.

To mitigate the adverse effects of this tax policy, the government could explore alternative revenue generation measures that do not disproportionately burden essential commodities. Additionally, investments in improving dairy productivity, such as enhancing feed quality, disease control, and market access, could offset some of the negative impacts by increasing overall industry efficiency.

Conclusion

The imposition of an 18% GST on packaged milk threatens the economic health of Pakistan’s dairy industry, with anticipated declines in sales, increased unemployment, and adverse effects on foreign exchange earnings. It is crucial for the government to reassess this tax policy to protect the industry and ensure its continued contribution to the economy. Strategic investments and policy adjustments can help balance fiscal needs with the sustainable growth of this vital sector.