he introduction of new tax measures by the federal government in the 2024-25 budget has brought some basic foods such as milk in the 18 percent sales tax regime. These foods were earlier exempt from taxes. The exemption was based on their nutritional value. The Federal Board of Revenue has been quick to absolve itself of the responsibility to collect tax from retailers, dealers and distributors. Instead, the producers and suppliers have been made withholding agents.

Pakistan is already facing a crisis of malnutrition. The under-five mortality rate—an important index of health and nutritional status of a community—stands at 137 for 1,000 live births. According to the National Nutrition Survey, 40 percent of children in Pakistan are underweight and over half of the children are affected by stunting.

The two measures have adversely impacted the supply chain of edible products. Prices of dairy milk and milk products have witnessed an immediate impact—a 25 percent raise from July 1. The impact of this measure will be seen in the coming months when the rates of other items will rise when new supplies hit the shelves.

Milk prices in Pakistan are now higher than in some developed countries such as France, the Netherlands and Australia. According to Bloomberg, ultra-high temperature treated milk price in Pakistan has now reached Rs 370 ($1.33) per litre as compared to $1.29 in Amsterdam, $1.23 in Paris and $1.08 in Melbourne. The per capita income in Pakistan is $6,260; in the Netherlands it is over $70,000, in France it is over $56,000, and in Australia it is over $60,000.

The new taxes have brought milk, tea whitener, milk powder for children, formula milk for infants, into tax categories. These were earlier exempted.

The Finance Act 2024-25 has also imposed a 2.5 percent advance income tax on retailers, assigning the fast-moving consumer goods sector as withholding agents. This has opened a Pandora’s box. Retailers say it is not the duty of manufacturers to collect such taxes from them as withholding agents. Manufacturers, too, are not interested in doing the FBR’s job. However, the FBR has long relied on indirect taxes to meet the revenue targets.

The imposition of 18 percent GST has invoked a 4 percent sales tax on non-registered retailers. Almost 95 percent of retailers are unregistered in Pakistan. Furthermore, under the withholding agent regime, the producers are bound to deduct 2.5 percent advance income tax (withheld income tax on behalf of the FBR) on registered retailers. This will impact retailers’ margins. Hence, there is resentment in every sector, from producers to retailers.

The FBR has launched a Tajir Dost scheme to get retailers and shops registered. However, so far, the response from the traders’ community has been lukewarm.

Flour prices have risen similarly. Khalique Arshad, a progressive flour mill owner, says that withholding income tax on behalf of the FBR has become a serious concern for the industry. This has raised the price of a 20 kg flour bag by Rs 45. Meanwhile, non-registered dealers and retailers have refused to procure flour from the mills if they deduct taxes and register them as non-filers. The Punjab government has fixed the retail price of flour bags at Rs 20 per 20 kg bag differential from the ex-mill rate. This retail price includes transportation costs and dealer and retailer margins. The mandatory withholding tax reduces the retailer’s profit. Dealers and retailers continue to refuse to get registered to procure flour from the mills. This has resulted in a shortage of flour.

Khalique says that the government should collect taxes directly from dealers and retailers rather than making flour millers withholding agents.

Some FMCG sector tax officials say that the government’s decision of shifting tax collection responsibility to consumer goods manufacturers instead of implementing structural reforms to bring retailers into the tax system will adversely affect the overall taxation regime.

Many retailers in Lahore, Karachi and Islamabad have refused to secure supplies of the FMCG products over withholding of the 2.5 percent advance income tax on supplies.

Retailers say the government should engage with ‘stakeholders’ before implementing such tax measures and discuss the rationale behind this policy to gain their support. They say the government will not get the desired results with a huge (95 percent) unregistered retailer base in the country.

The new taxes have also resulted in reduced sales and decreased demand. Perishable goods, particularly in the dairy sector, have witnessed a significant disruption of supply chains.

Imran Saleemi, secretary general of the Lahore Supermarket Association, says that sales were already declining as a result of rising prices as the purchasing power of the people was eroding. The new taxes, he says, will bring the sales further down. “If a family was earlier purchasing two litres of milk per day, they may now buy one or one and a half litres per day. This trend is already visible at most stores,” he says.

The writer is a staff reporter at The News. He tweets @jawwadrizvi