Mohsin Siddiqui (Chief Reporter)
The government’s new tax policy proposes a phased approach to introducing sales tax on infant nutrition products, including infant formula, baby food, and fortified child nutrition milk powders. This strategy, starting with a 5% sales tax, aims to prevent the immediate impact of an 18% sales tax on the general public, ensuring a smoother transition for both businesses and consumers.
The Finance Bill 2024 highlights the government’s awareness of the heavy taxation burden on essential nutrition products for infants and children. As part of the new tax policy, the budget makers will consider a phased taxation approach during the finalization of recommendations under the Finance Bill 2024.
Under the Finance Bill 2024-25, the government has repealed the zero-rating status (Serial no.12(xvii) and 17 of the Fifth Schedule of the Sales Tax Act 1990) and imposed an 18% sales tax on locally produced infant formula, baby food, and fortified child nutrition milk powders. However, to mitigate the immediate impact, sources reveal that the Federal Board of Revenue (FBR) and the Senate Standing Committee on Finance have recommended introducing this tax in three stages. This approach includes:
- A 5% sales tax in the first year.
- A 10% sales tax in the second year.
- The full 18% sales tax in the third year.
Finance Minister Muhammad Aurangzeb, in his budget speech, emphasized the critical importance of nutrition in the first 1,000 days of a child’s life. Addressing stunting and malnutrition remains a top priority. However, the imposition of an immediate 18% sales tax on essential nutrition products is viewed by industry experts as counterproductive to these goals.
Industry representatives have warned that such heavy taxation could not only disrupt the market and reduce business viability but also severely impact the nutritional intake of infants and young children. Locally produced infant nutrition products are currently priced about 50% lower than imported alternatives, making them more accessible to a larger segment of the population. These products also support local farmers by driving the purchase of approximately 300 million liters of milk annually.
The abrupt implementation of an 18% sales tax could exacerbate the already severe malnutrition crisis in Pakistan. With the under-five mortality rate at 137 per 1,000 births and 40% of children underweight, heavy taxation could force families to turn to less nutritious alternatives. This shift could have dire consequences for child health and development, further straining the country’s healthcare system.
Industry experts argue that a phased introduction of the sales tax would provide businesses with the necessary time to adapt, maintaining their operations and encouraging continued investment. This approach would also ensure that families can continue to afford essential nutrition products for their children, safeguarding public health.
In recent meetings with the Senate Finance Committee, industry stakeholders have urged both government officials and opposition senators to endorse the phased tax strategy. They argue that this method balances the need for revenue generation with the critical imperative of protecting child health and nutrition.
Experts emphasize that without a phased approach, the heavy taxation could lead to businesses shrinking or exiting the market, withdrawing much-needed foreign investment, and ultimately denting the government’s long-term revenue plans. Amid the current high inflationary climate and the inelastic purchasing power of consumers, a sudden tax hike could have widespread negative repercussions.
