World prices have plummeted by over 50 percent from a November 2007 high of 4,550 dollars a metric ton of milk powder.
"The treasury is reviewing prices now and will come to a decision when the forward contracts signed by the milk importers expire by mid-February this year," said a senior government official.
"The government wants to maintain the domestic price of a 400 gramme pack of milk powder around 225-230 rupees to protect the local dairy farmers.
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However, the exact tax increases still has not been finalized, he said.
Earlier this week consumer affairs minister Bandula Gunawardane said further reductions in milk powder prices would be balanced with a need to protect domestic dairy farmers.
This week the government declared a 16 billion rupee 'stimulus' package to boost economic growth to an optimistic 6.
0 - 6.5 percent in 2009.
Sources say the government plans to hike taxes in a falling market to maintain domestic prices at current levels for revenue purpose