Hoping against hope

LAHORE: The manner in which businesses have reacted to the budget announcement shows that they still hope to force the government to roll back most of its taxation measures already passed by parliament.

These demands are being made at a time when the government is considering taking more such measures. State planners have already expressed their inability to reduce income tax rates because revenues are badly needed.

The issue of the withdrawal of exemptions has been in the air for over a decade. Some exemptions were withdrawn during this period, but those where the beneficiaries enjoyed lucrative benefits remained intact because of influential vested interests. The principle of imposing sales tax was applied selectively, and many sectors or individuals were exempt. It was only after the IMF put its foot down that the federal government was forced to withdraw some exemptions to prepare its case for an IMF programme.

Previously, the exemptions were lopsided. Exempted sectors, except medicine, were not properly regulated and continued to increase retail rates on a regular basis. Most of the increases were unjustified. The principle of economies of scale was not applicable on producers that commanded the market. In fact, market leaders also command the highest retail price. Small, on-field producers sell at lower prices than those set by market leaders. The regulation of the retail prices of their products is also essential.

Take, for instance, the case of the dairy sector. Most milk processors procure milk from open markets (rural areas, small dairy farms). Some processors have large dairy farms from where they collect part of the required milk for processing. The milk procured by top processors is first tested for quality, and if there is dilution through water, a discounted price is paid.

The processor pays for raw milk at the rate of Rs120-130 per litre to suppliers (some milk is bought on-site, and in other cases, it is accepted after testing at a dairy processing facility). Most of the milk procured from rural buffalo (and cow) contains 9.0 per cent fat. The milk after processing is toned down to 4.5 per cent fat.

The remaining fat is a byproduct that fetches five times more price. Skimmed milk, called a value added product, contains only traces of fat and the fat thus saved is also marketed.The milk bought at Rs120 per litre used to retail at Rs250-270 per litre (at least twice the procured price) before the budget. The current retail price of one litre of packed milk is Rs340-360. It should be determined why the price of milk doubled.

Another point is, when the processors sell milk at double the procured price are they not fleecing consumers? Would the sales tax be a larger burden on processed milk than the profits of processors?

Another unreasonable objection by businesses on SRO 350(I)/2024, dated 7th March 2024, is regarding the fact that it has linked the buyers’ ability to file sales tax returns to the compliance of their suppliers. Documentation will not be possible if suppliers remain outside the tax net. If the buyers procure from an unregistered supplier, they will be forced to bear their tax. This way the suppliers will be forced to comply if buyers ask them to register.