The government is contemplating bring the sales tax on locally manufactured tractors down from 5% to zero which has been an industry ask for a while now. If fulfilled, tractors sales will likely see a sharp incline. Already, tractors have had a solid run—sales of local tractors went up by 35 percent in 9MFY18 year on year. While overall growth in the agri sector may have been the main determinant, the lower sales tax on tractors (5% from 10%) has undoubtedly bolstered the demand.

Tractor sales and GST on tractors have had a close negative relationship over the year. Since farmers have limited purchasing power, any incremental changes in prices can affect their ability to buy agriculture machinery and vehicles. In FY11, sales tax was 17 percent which was brought down to 5 percent in FY12 but back up again to 10 percent in FY13 and to 17 percent in 2014.

In FY15 once again, the GST was reduced to 10 percent, further down to 5 percent in FY17. These frequent shifts in policy caused fluctuations in sales as well. Sales dropped by 34 percent between FY13-15 when GST was raised, grew by 39 percent between FY14 and FY15 when GST was reduced to 10 percent and by 59 percent between FY16-17 when it was further reduced to 5 percent.

With still such low level of mechanization, demand for tractors is there. Some estimates suggest, at least one million more tractors are needed to maintain a ratio of one tractor-to-fifty acres. Globally, a share of one tractor-to-twenty five acres and even lower is maintained. Meanwhile, the agriculture sector has been doing better. The latest State of Economy report by SBP attributes growth to improvement in major kharif crops “…such as sugarcane and rice, surpassed their targets for FY18, while cotton crop managed to exceed last year’s production level. Higher yields, attractive output prices, and supportive government policies, largely explain the healthy output of kharif crops”.

Growth in exports of wheat, rice (22%) and cotton (38%) in the July-Feb period according to Pakistan Bureau of Statistics (PBS) are positive indicators. In Dec-17, the Economic Coordination Committee had approved the proposal of Ministry of National Food Security and Research of exporting wheat products from Punjab and Sindh noting that the country was seeing a bumper crop so carry-over stocks could be exported. As a result, wheat exports rose by 13 times this year against last year. Meanwhile, rice carry competitive prices abroad compared to other countries which will boost exports. The REAP team is now vying to get greater market access to Iran for their rice.

Credit to the agriculture sector also improved by 43 percent in the first half of FY18 brought forward by supply side improvements where commercial banks and microfinance banks/institutions are now open to cater to small-scale farmer needs, according to the SBP report.

With healthier cash crops, and easier financing, the zero GST will definitely push tractor demand up. If Sindh government tractor scheme of Rs2 billion kicks off, the surge in tractor sales will continue well into FY19.