FAT PROBLEM IN MILK

Prices of milk across country has gone up.
The current price inflation in milk has mainly to do with a shortage of fat.
It has led dairies to increase full-cream milk prices more or to cut down fat content through rebranding of existing products.

Production statistics:

The share of buffaloes to total output was about 46.4% in 2021-22.
In 2000-01, it stood at 56.9%, even as the share of crossbred/exotic cows has risen (18.5% to 32.8%) and that of indigenous/non-descript cattle declined (24.6% to 20.8%) over this period.

Export-induced inflation

A more immediate reason for rising fat prices is exports.
During 2021-22, India exported over 33,000 tonnes of ghee, butter, and anhydrous milk fat valued at Rs 1,281 crore
The supply-side pressures built up just when demand was returning with the lifting of lockdown restrictions and resumption of economic activity.
Exports added fuel to the fire, exacerbating domestic shortages.

Solutions:

October-March is normally the ‘flush’ season in milk, when supply exceeds demand.
Dairies convert the surplus that they procure into skim milk powder (SMP) and butter fat.
The same SMP and fat is reconstituted into whole milk during the ‘lean’ summer-monsoon months.
Milk doesn’t attract any goods and services tax.
But SMP is taxed at 5% and milk fat at 12%.
While dairies pay no tax on milk procured from farmers, they have to shell out GST on solids.
And input tax credit cannot be claimed, as there’s no GST on milk itself.
The tax incidence goes up as the fat in the reconstituted milk increases.
The GST component is ultimately passed on to the consumer.
One way to avoid this is by doing away with GST on milk solids used for reconstitution purposes.
Alternatively, the GST on milk fats can be reduced to 5%.
Differential rates on SMP and fat probably make no sense, when both are derived directly from milk.
A 12% GST on milk fat is also an anomaly when vegetable fat (edible oils) is taxed at 5%.