‘Ill-planned tax regime’ for tractor industry fuels circular debt of refunds

LAHORE: The poorly designed tax policies affecting the tractor industry have led to a growing circular debt related to refunds.

Newly introduced taxes on tractors have created conflicts between buyers and manufacturers, leading to reduced sales and difficulties in tax collection. Since many tractor buyers are undocumented, manufacturers are bearing the brunt, which is taking a toll on the industry, according to a leading manufacturer.

The industry is currently facing severe challenges, threatening a sector crucial to the national economy. Dubbing it as a crisis hitting both the country’s tractor manufacturers and vendors alike, the sector calls for immediate government intervention to stabilize and promote growth in the sector.

The tractor industry faces what it calls compounding challenges, primarily due to the introduction of a 10 per cent sales tax on tractors in the June 2024 budget announcement; the sector was previously exempt from sales tax. The new policy has disrupted operations and financial stability for manufacturers, forcing them back into a complex refund process. Unfortunately, outstanding legacy refunds are creating a circular debt situation.

In 2022, the introduction of SRO 563(1) further complicated matters by imposing strict, retrospective conditions on tractor buyers. Refund benefits were restricted to farmers with valid land documentation, excluding many who could not meet these requirements. Despite compliance with these conditions, the industry has not received the expected refunds, resulting in significant financial strain.

Regarding refund backlogs, the Federal Board of Revenue (FBR) has the final authority to approve or deny refund claims submitted by original equipment manufacturers (OEMs). Currently, around Rs11 billion in refunds is pending for tractor manufacturers, placing a heavy burden on the industry.

While the industry acknowledges the need for proper documentation and complies with it, the increased documentation requirements for buyers are straining manufacturers. Proving that buyers are actual farmers is challenging due to family ownership and inadequate documentation practices, and many farmers lease rather than own land. Thus, the focus should be on those actively cultivating the land, regardless of ownership.

The documentation requirements are further complicated by the lack of comprehensive government guidelines this year. Past requirements have been applied retrospectively, leading to uncertainty.

Currently, there is no clear list of required documents or a mechanism for OEMs to verify their authenticity. Moreover, the tax guidelines fail to differentiate between commercial and agricultural uses of tractors.

The industry views the new sales tax measures as counterproductive, placing additional financial burdens on consumers. With rising inflation and reduced profitability for growers, the increased taxes on tractors are likely to deter new purchases.

To address these issues, the industry is calling for a clear tax policy for manufacturers. The government needs to provide specific documentation requirements and streamline the refund process with clear criteria and timelines for verification and disbursement. There should be a reevaluation of the increased documentation and tax requirements to understand their impact on the OEM agri-tech sector.

It is important to note that the tractor manufacturing and parts industry is a vital component of the agriculture sector, with an export value of $20 million, over 250 suppliers, and employment for 200,000 people (either directly or indirectly). The industry boasts an impressive 92 per cent localization rate.