Restoration of ST zero-rating facility on tractors: FBR opposes ministry''s proposal

The Federal Board of Revenue has strongly opposed proposals of the Ministry of Industries to restore sales tax zero-rating facility on the agricultural tractors or impose a lower rate of 4 percent sales tax on it in view of government policy that exemptions and zero-ratings are major distortions in the Value Added Tax (VAT) regime.
Sources told Business Recorder here on Thursday that the meeting of the Economic Co-ordination Committee (ECC) of the Cabinet to be held here on Friday (December 9) would take the decision on the removal of levy of 16 percent sales tax on agricultural tractors. Ministry of Industries has submitted three proposals for withdrawal of 16 percent sales tax on agricultural tractors. The first option is that the sales tax zero-rating on agricultural tractors may be restored.
The second option is that the deemed price (say 25-30 percent of the actual price) may be fixed for sales tax purposes, as has been done in the case of sugar and fertilisers. The third option is that the sales tax may be phased scattered on three to four years instead of imposition in one go ie @4 percent per year. Responding to these proposals, the FBR has opposed all these proposals on the argument that it is not the government policy to give exemptions and zero-rating facility, which would create distortions in the supply chain.
In its summary to the ECC of the Cabinet, Ministry of Industries and Production observed that the Association of tractors manufacturers and Pakistan Association of Automotive Parts & Accessories Manufacturers (PAAPAM) approached the Ministry of Industries and submitted a representation on the subject matter. The manufacturers protested against the imposition of 16 percent GST on tractors as it has affected the industry adversely, besides additional burden of price on the farmers, sources said.
In accordance with the policy laid down vide SRO 549(1)/2008, dated June 11, 2008, zero-rating of sales tax on agricultural tractors was provided with the intent to ensure availability of tractors to the farmers at affordable prices. The same has however, been withdrawn in March, 2011, resulting into increase of prices of agricultural tractors by around Rs 90,000 to Rs 200,000. Increase in prices of tractors has made it difficult for the farmers to purchase new tractors and convert traditional farming into mechanical farming for higher yield, especially when cost of other agriculture inputs has gone up substantially. Furthermore, Zarai Taraqiati Bank Limited (ZTBL) has also not been extending loans for purchase of tractors since April 2010, creating another impediment for the farmers, sources said.
Sources said that the production data maintained by Engineering Development Board (EDB) indicates that production of tractors since March, 2011 has declined drastically from over 72000 units to around 20000 units per annum. Economic Survey of Pakistan also emphasises that accelerated farm mechanisation is the only tool to speed-up the growth rate in the agriculture sector.
It further highlights that available farm power is inadequate with only 464,000 tractors in operation, which means that per hectare horse power (hp) availability is 0.9hp only, as opposed to required 1.4hp per hectare, as per Food and Agriculture Organisation (FAO) recommendations, sources said.
It is believed that the primary aim of levying sales tax on agricultural tractor is to enhance revenues. It is submitted that last year over Rs 5 billion were paid by the industry in the form of taxes while around Rs 7-8 billion is estimated by government in lieu of sales tax on expected production of 80000 units during the current financial year. However due to decline in production, the tax collection will not exceed Rs 3.7 billion, which means less revenue as compared to last year. Further, due to the declining trend in the production and sate of agricultural tractors from 80000 units per annum to around 20,000 to 25,000units, the economy will suffer an additional loss of over Rs 35 billion by reduced sales, sources said.
Accordingly, for the revival of tractor industry and to provide an impetus to the agriculture sector, which is the backbone of the economy with 24 percent share of the National GoP, Ministry of Industries has proposed that the sales tax zero-rating on agricultural tractors may be restored or deemed price (say 25-30 percent of the actual price) may be fixed for sales tax purposes, as has been done in the case of sugar and fertilisers. Another option is that the sales tax may be phased in three to four years instead of imposition in one go ie @4 percent per year.
The summary of the Ministry of Industries was circulated to Federal Board Revenue (FBR) for their views/comments. The FBR regretted the request for exemption of sales tax on tractors for being a conscious policy decision of the government. The Ministry of Industries has requested the ECC of the Cabinet to approve any of the above-mentioned proposals for withdrawal of sales tax on the agricultural tractors, sources added.