Challenges facing the tractor industry

The agriculture practices all over the world are increasing farm mechanization, adopting modern technologies resultantly, boosting their quality and volumes, which not only ensure their national food security but have also become a vital source of economic growth increasing their total share in exports providing financial stability to these countries.

Farm mechanization plays the most important role in the farming process, whereas the key source of power is the tractor which makes it possible to operate various agricultural implements/machines and perform all the farming tasks.

The Tractor Industry of Pakistan has evolved with the country in the last 07 decades, attaining over 90% indigenisation, developing a local vendor base of over 200 parts manufacturers, providing livelihood to over 500,000 families, earning over 50 million USD in tractor exports annually with the most affordable international quality tractor in the world, saving valuable foreign exchange for the country, and substantially contributing in millions of rupees annually to the National Exchequer.

On the other hand, the agriculture sector of Pakistan is facing following policy and administrative disruptions inhibiting its natural growth and progress in a globally thriving sector. The crop output rates in Pakistan have drastically declined vis-a-vis last year. Simultaneously, due to unpredictable high inflation the cost of production has also skyrocketed, which has reduced the farmer’s profitability to negative figures.

Since the country’s inception, it is a widespread acclaimed reality that the mainstay of Pakistan’s economy is the agriculture sector which provides food security, employment opportunities and raw material to the Industrial Sector for further processing of consumer products.

If the above grave situation faced by the agriculture sector of Pakistan is not timely addressed by the concerned authorities then the above-mentioned problems will further aggravate, which may result in the overall collapse of the national economy. The present Government has thankfully realized this severe situation and has started taking immediate steps for recovery and support of the farmers.

Firstly, to increase the capability of the farmers for vastly acquiring the tractors, the Government of Punjab has recently announced “The Green Tractor Scheme”, which will provide 20,000 tractors with a subsidy of approximately Rs.1500,000/- each to the selected lucky farmers after they have been issued the “Kissan Card” by the Government of Punjab.

Secondly, in the latest federal budget the government has appreciatively imposed a reduced rate of sales tax which will only benefit the farmers if the tractors are provided free from the condition of every farmer being a land owner, since many of the farmers do not own land and are working on leased lands as workers for landlords.

The rural youth works as service providing farming labourers on lands owned by other parties. Until or unless this policy is not revised as all-inclusive of the farming community its benefits cannot be disseminated to the agriculture sector of Pakistan.

In light of the government’s decision to impose 10% sales tax on the sale of tractors, the farmers may appreciate the government for approving a reduced rate of sales tax on tractors despite the pressure to increase it to the full rate of 18%. This is a very good decision by the government to support the agriculture sector and the farmers who are under a great deal of financial distress due to reduced crop rates and increasing input costs.

As per the law, refund of excess unadjusted input tax relating to supplies may be claimed if the excess input tax is not adjusted. Following the imposition of 10% sales tax, there will be a requirement to claim refunds to pass on the full benefit to the farmers.

Although the mechanism to process refunds has not been announced by FBR, the Tractor Industry has suffered from great financial losses previously when such refunds were being processed. Refunds amounting to more than Rs 10 billion are still pending for payments and processing by FBR since April 2020. Unless there is a swift and efficient refund process in place, the intended benefit of reduced tax cannot be passed on fully to the customers.

Previously until April 2022 the refunds of the tractors were processed under SRO 363(I)/2012 dated 13 April 2012 under which tractor manufacturers were entitled to refund of excess input tax within 3 days of filing of refund application. However, on 29th April 2022, another SRO No. 563(1)/2022 was issued by FBR, which stipulated many conditions for claiming refunds.

The conditions within the SRO were not practical. As per the SRO, the benefit of the reduced rate of tax could only be given to farmers owning land and holding documents to prove ownership of land and therefore excluding farmers with-out-of-date ownership documents and any other farmer cultivating land on contract with no land ownership.

Following this SRO despite the industry ensuring the stipulated conditions were met, FBR has till date refused to pay any refunds to any tractor company. Furthermore, FBR has refused to accept the land registry documents submitted for refunds and has accused Tractor Industry of being involved in tax fraud. FBR has not only rejected their claim for refund but has claimed that not even a single tractor has been sold to a farmer as per the conditions in the SRO and therefore full sales tax of 18% should be imposed.

As per the Tractor Industry source, since the budget announcement, the mechanism for processing sales tax refunds has not been notified by FBR till date. Resultantly, the sales operations have been closed since July 1st and not been able to take a single order or invoice a single tractor, causing significant financial losses. The industry has requested that the SRO 363(I) 2012 be modified and issued for this purpose.

However there is a fear that SRO563 (I) 2022 may be issued by FBR. Clearly, based on the actions taken by FBR as explained above, it will not be possible for the industry to apply 10% sales tax on tractors as intended by the government if SRO563(I)2022 is issued.

If SRO563(I)2022 is notified by FBR, the industry will have to revise the prices of tractors and apply 18% sales tax. This is undesirable and the Tractor Industry understands that it is contrary to what the government intended when the rate of sales tax was fixed at 10%. However, as per the SRO only certain customers meeting the conditions stipulated would qualify for 10%. As the tractor companies previously have been unable to verify required documents to the satisfaction of FBR, they would only be able to apply the reduced rate if the documents are pre-approved by FBR.

Furthermore, if the discriminatory nature of the SRO.563 (I)/2022 DATED 29.04.2022 is enforced, it will only cause devastating after-shocks by alienating those farmers who are working on rented/hired lands and majority of Rural Youth of Pakistan who are service providers to the landowners in terms of almost all farming tasks, renting their own tractors and performing paid services.

In most of the rural areas, in joint family systems, lands are generally not transferred in the name of children/grand children who otherwise engage in agriculture. Such buyers will be unwittingly forced to pay sales tax @ 18%. In remote areas where land records are not regularly updated, buyers in such situations will also be deprived of the facility.

Subsequently, this will reduce farming in the country, sinking tractor demand, production and sales, and threatening the livelihood of over 500,000 families working for the associated industries into unemployment and poverty.

It is about time the Ministry of Finance, Government of Pakistan, took note of the alarming situation and advised FBR that there should not be any conditionality on tractor purchase, and ensured an efficient process to claim refunds so that the agriculture sector and tractor industry may avail the benefit of reduced sales tax rates and play their due role in the national economy.

Copyright Business Recorder, 2024