KARACHI: Nearly 250 direct suppliers to the country’s major tractor assemblers, Millat Tractors and Al-Ghazi Tractors, have stopped operations due to delayed payments for parts supplied, an office-bearer of the Pakistan Automotive Parts and Accessories Manufacturers (Paapam) said on Thursday.

Mumshad Ali, the Paapam’s senior vice chairman, said the tractor industry was on the brink of shutdown since the Federal Board of Revenue (FBR) has withheld refund of general sales tax (GST) and the new GST regime has made doing business difficult.

This situation has created a severe cash flow crisis across the entire supply chain, affecting everything from raw material suppliers to small and medium-sized enterprises (SMEs) in the engineering sector, he said. “Assemblers are unable to pay their suppliers, forcing vendors to shut down their operations. If this situation persists, tractor assemblers will be forced to cease operations within a week,” Mr Mumshad said.

The root of the problem lies in SRO 563, which governs GST refunds to tractor assemblers. Before 2022, refunds were issued under SRO 363, but SRO 563 has introduced complications by limiting refunds to farmer buyers only. There is currently no mechanism to distinguish between farmer and non-farmer buyers, leading to billions of rupees in refunds being withheld by FBR.

Moreover, older refunds under SRO 363 remain unpaid, along with penalties, pushing assemblers to seek legal recourse, he added. This unresolved issue has left the entire tractor industry in limbo. Without these refunds, assemblers are incurring losses on each tractor sold, forcing them to rely on bank borrowings.

As a result, they are no longer accepting fresh bookings or invoicing tractors, except those financed through banks. This cash crunch has caused months-long delays in payments to suppliers, a situation that the SME sector cannot sustain, Mumshad feared.

PM’s assistance

The issue has aggravated to a point where Paapam has decided to seek the prime minister’s assistance as previous attempts to resolve the matter with the finance and industries ministries were futile, Paapam chairman Abdur Rehman Aizaz said.

“It appears that the FBR has more powers than the government itself, holding the entire engineering base of the country hostage,” he said. “The situation is dire as GST refunds have been withheld from tractor assemblers for years and SRO 563 has further complicated matters.”

Mr Aizaz explained that the entire supply chain from steel suppliers to the vast engineering SME base is at a standstill. “The FBR’s actions threaten not only jobs but also tax revenue, import substitution, and the export of tractors and parts.”

Millat Tractors Limited (MTL) has in­­f­o­r­­med the Finance Ministry last month that the decision to impose 10 per cent sa­­les tax on the sale of tractors has resulted in closure of operations since July 1 as the mechanism for processing sales tax refunds has not been notified by the FBR.

As a result, MTL had not been able to take a single order or invoice a single tractor, causing significant financial losses to the company. As per the law, refund of excess unadjusted input tax relating to supplies may be claimed if the excess input tax is not adjusted. After imposition of 10pc sales tax, there will be a requirement to claim refunds to pass on the benefit fully to farmers.

As the mechanism to process refunds has not been announced by the FBR, the tractor industry suffered huge financial losses when such refunds were being processed. The MTL claimed that refunds amounting to more than Rs10 billion are pending since April 2020.

Published in Dawn, August 9th, 2024