Karachi, May 22, 2024 – The Overseas Investors Chamber of Commerce and Industry (OICCI) has called for the restoration of the zero-rated regime for the pharmaceutical industry in its proposals for the upcoming budget 2024-25.
The OICCI’s recommendations focus on reinstating the zero-rated status for pharmaceutical products registered with the Drug Regulatory Authority of Pakistan (DRAP) under serial 81 & 82 of the Eighth Schedule.
Currently, pharmaceutical products are subjected to a 1% sales tax without allowing input tax adjustment, making the final tax liability apply to the entire supply chain. This setup means that distributors cannot claim the input tax of 1%, ultimately shifting the tax burden onto manufacturers through higher distributor margins, effectively resulting in a 2% financial hit to manufacturers.
The OICCI emphasized that the pharmaceutical industry is tightly regulated, making price increases rare. Consequently, this additional cost severely impacts the already limited margins and commercial viability of the sector. The OICCI proposes that the pharmaceutical industry should revert to the zero-rated regime, restoring the conditions that existed prior to the Finance Act of 2022.
In its detailed proposal, the OICCI highlighted that the Federal Government, through the Finance (Supplementary) Act, 2022, initially introduced a zero-rated regime for the pharma sector. This change allowed the pharmaceutical industry to claim refunds on input tax paid for purchases related to pharmaceuticals and medicaments. However, despite the regime’s shift to a 1% final sales tax liability, these refunds remain stuck. The refunds were supposed to be processed within 72 hours according to rule 391 of Chapter V-B of the sales tax rules, 2006. The OICCI has urged the government to expedite these refunds, as delays have severely impacted the industry’s working capital requirements.
Additionally, the OICCI has proposed abolishing the value-added tax (VAT) on the import of finished pharmaceutical products under the Twelfth Schedule of the Sales Tax Act, 1990. Currently, a 3% VAT is levied on imported finished pharmaceutical products. This tax becomes a part of the cost for an industry where prices are regulated by DRAP and cannot be passed on to consumers due to the final tax for the entire supply chain. Consequently, with the 3% VAT and the 1% sales tax, the total sales tax liability increases to 4%. The OICCI argues that this tax burden is untenable and should be removed to ease the financial strain on the pharmaceutical industry.
Furthermore, the OICCI has recommended that the scope of tax exemptions provided under Serial No. 166 of the Sixth Schedule be extended beyond charitable hospitals to include government institutions, departments, and hospitals. This expansion would alleviate financial pressures on these entities and improve their ability to provide essential healthcare services.
The OICCI’s proposals aim to create a more favorable fiscal environment for the pharmaceutical industry, which is crucial for ensuring the sector’s sustainability and growth. By addressing these tax concerns, the OICCI believes that the government can support the pharmaceutical industry in maintaining its viability and continuing to provide affordable medications to the public.
