Dr M Ali Hamza
Taxation is the foundation of a strong economy. It funds essential services like infrastructure, education, healthcare, and security, supporting the well-being and growth of society. Paying taxes isn’t just a legal duty; it’s a shared investment in our nation’s future.The core purposes of taxation arei) creating an environment where businesses can thrive and public welfare can be supported through government revenue, ii) promoting fair wealth distribution by ensuring equal opportunities for all; a level playing field, iii) aligning with global tax standards to stay competitive in international trade, and iv) driving national development and progress.Ultimately, it is the responsibility of government decision-makers, those who design and approve the budget, to ensure the said goals are achieved through sound tax policies.
Fairness is a fundamental principle of taxation. The idea isn’t new. In The Wealth of Nations, Adam Smith introduced the Four Canons of Taxation: Equity – taxes should be fair,Certainty- taxpayers should know what to expect,Convenience- taxes should be easy to pay, andEfficiency- tax collection should not be wasteful.Modern economists like Joseph Stiglitz and Arthur Laffer have built on these ideas, focusing on how to raise government revenue while still encouraging growth and supporting public welfare.
Arthur Laffer, known for the “Laffer Curve,” presents another view. He suggests that lower tax rates can sometimes lead to higher revenue by stimulating economic activity and broadening the tax base. According to Laffer, high taxes discourage investment, work, and entrepreneurship. For countries under IMF programs like Pakistan, adopting a more growth-friendly tax policy might increase revenues without stifling the economy and compromising public welfare.
While taxation is meant to support public welfare in all economic models, the real issue lies in how policies are designed and applied. For a country like Pakistan; facing fiscal pressure and operating under IMF programs, it’s crucial to adopt smarter, fairer, and more equitable tax systems.Even the IMF emphasizes the need to protect public welfare. Do our policymakers follow this vision? Maybe, but some recent decisions suggest otherwise.
Let’s look at an example from the 2024–25 budget.The government imposed an 18% GST on packaged, safe milk, shifting it from zero-rated to fully taxed. Why was this decision made?There seem to be two main reasons. First, policymakers likely assumed that packaged milk is mainly consumed by the wealthy, making the tax progressive. However, a study by Mackenzie disproved this. It founds that 60% of packaged milk in Pakistan is consumed by households earning around PKR 50,000 per month; clearly not part of the rich class. This makes the tax regressive. Second, the government may have expected higher revenues by taxing the formal dairy sector. But the result was the opposite: sales dropped by 20%, and revenue targets weren’t met.Beyond these two misjudgements, the decision also led to other negative impactson public health, consumer trust, and the formal dairy industry, which already struggles to compete with the huge unregulated sector.
As an agriculture-based country, farmers are the economy warmers.However, the recent imposition of 18% GST on packaged milk has severely impacted them.According to a report by the Pakistan Dairy Association (PDA), over 500 milk collection centres have shut down. Instead of adding 10–15% new farmers each year, 35% of existing formal dairy farmers were forced to shift back to the unsafe and unregulated loose milk market. Meanwhile, the price of loose milk increased by PKR 30–40 per litre, but farmers had no benefit from this rise, rather the sellers (gawalas).
This tax decision also caused dairy companies to halt major investments. Around PKR 1.3 billion per year meant for farm productivity and farmer development was withdrawn. Additionally, companies had to lay off 20% of their workforce, run their plants at less than 50% capacity, and cancel PKR 400 million per year in investments aimed at converting consumers from raw to safepackaged milk.
A 2024 report by the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) highlights another serious impact of the 18% tax on the formal dairy sector. After the tax was imposed, the unregulated loose milk market, controlled by milk sellers (gawalas), not farmers, gained an extra PKR 1,319 billion through unfair price hikes. Yet, the government didn’t earn a single extra rupee in tax revenue from this shift.The result? More unsafe milk flooded the market, putting public health at risk. Gawalas and shopkeepers made huge profits, while farmers suffered.
Who lost? The farmers, the consumers, the regulated dairy sector, and ultimately, the government itself.This policy undermined progress in food safety, rural livelihoods, and long-term economic development.In a country like Pakistan, with a population of 242 million and over 40% of children suffering from stunted growth due to malnutrition, taxing safe packaged milk goes against public health goals and it is also not even in line with global practices. Safe milk be either zero taxed or should not exceed 5%.
Dairy example raises concern about, how taxes been dealt in preparation of budget. If pressure of revenue collection is superseding public welfare, we need to re-evaluate our approach. Pakistan needs to expand its tax base, improve administration, and generate sustainable revenue without harming economic growth, compromising on public health and blocking investment into regulated sector.
