The tractor industry in Pakistan, a vital component of the country’s agricultural machinery sector, is facing an unprecedented crisis. The imposition of a 10% sales tax has pushed the industry to the brink of collapse, endangering the livelihoods of approximately 500,000 families and putting 200,000 jobs at risk.
For over seven decades, this industry has been a cornerstone of Pakistan’s economy, supporting a network of more than 200 local parts manufacturers and contributing significantly to national exports and the economy, according to a statement issued by the tractor manufacturers.
The crisis began in June 2024 with the introduction of a 10% sales tax on previously exempt tractors. This change has forced the industry into a refund regime fraught with delays and complications.
The Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) has sounded the alarm, highlighting the severe impact of the Federal Board of Revenue’s (FBR) delayed General Sales Tax (GST) refunds and the complications introduced by Statutory Regulatory Order (SRO) 563.
This new regulation limits GST refunds to farmer buyers only, without a clear mechanism to distinguish between farmer and non-farmer buyers, resulting in billions of rupees in withheld refunds.
The industry is further burdened by legacy refunds under SRO 363, which have remained unpaid since April 2020, amounting to more than Rs. 10 billion. The unresolved issue has left the entire industry in limbo, with assemblers incurring losses on each tractor sold and relying on bank borrowings to stay afloat.
This financial strain has rippled across the supply chain, affecting raw material suppliers and small and medium-sized enterprises (SMEs) in the engineering sector.
According to PAAPAM, nearly 250 direct suppliers to the country’s major tractor assemblers, have already ceased operations due to delayed payments for parts supplied. Primary the issue is Statutory Regulatory Order (SRO) 563, which governs GST refunds to tractor assemblers. This new regulation, replacing the previous SRO 363, has introduced complications by limiting refunds to farmer buyers only.
To stabilize the industry and prevent a complete shutdown, urgent measures are needed. The industry is calling for a streamlined and efficient refund process to ensure that the benefits of reduced tax can be fully passed on to farmers.
This would involve revising the current GST refund mechanism to address the complications introduced by SRO 563 and ensuring timely payment of legacy refunds. Additionally, there is a need for government intervention to provide financial relief to assemblers and suppliers, allowing them to continue operations without incurring losses.
If these proposed measures are implemented successfully, the tractor industry could stabilize, preserving jobs and supporting the livelihoods of half a million families. This would also ensure the continued growth of Pakistan’s agricultural sector, which is crucial for the national economy, contributing around 23% to the GDP and employing 37.4% of the labor force.
By addressing the current challenges, the government can help secure the industry’s future, ensuring that it continues to contribute to the country’s economic growth and food security. The swift resolution of these issues would not only prevent a potential shutdown but also reinforce confidence in Pakistan’s ability to support its key industries and maintain economic stability.
