Islamabad: The Government of Pakistan has raised the sales tax rate on tractors to 14% from the previous 10%, a move that applies to both locally produced and imported tractors with engine capacities between 25kW and 75kW. This tax adjustment is aimed at addressing the growing backlog of sales tax refunds and improving cash flows for manufacturers.

According to AKD Securities Limited, the increased Goods and Services Tax (GST) is expected to prevent further accumulation of sales tax refunds owed by the government, potentially easing cash flow issues for leading manufacturers such as Millat Tractors Ltd. (MTL) and Al-Ghazi Tractors Ltd. (AGTL). Specifically, the change is projected to improve cash flows for MTL by PKR 3.5 billion and for AGTL by PKR 1.1 billion.

The policy adjustment comes after the removal of the zero-rated status for tractors in the Federal Budget FY25, which initially set the sales tax at 10%. Prior to this increase, tractor companies faced challenges in offsetting the lower output GST rate of 10% against an input GST rate of 18%, leading to significant sales tax receivables. MTL and AGTL reported outstanding sales tax receivables of PKR 6.3 billion and PKR 1.2 billion, respectively.

While the increased sales tax may result in higher prices for consumers, potentially affecting demand in what is already seen as a sluggish market, the Punjab government’s ‘Green Tractor Scheme,’ which subsidizes the purchase of 9,500 tractors, is expected to support market demand despite these changes.