KARACHI: The Federal Board of Revenue (FBR) has been urged to zero rate sales tax on import of pharmaceutical API and simplification of sales tax refunds.
The Overseas Investors Chamber of Commerce and Industry (OICCI) in proposals for budget 2022/2023, informed the tax authorities that the above sales tax amendment enforced through the Finance (Supplementary) Bill, 2022 in January 2022 will result in huge sales tax refunds which will impact cashflows of pharmaceutical players due to delays in refunds processing by the government authorities.
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The OICCI recommended:
i. Pharma API imports should also be ‘zero rated’, to avoid generation of huge Sales tax refunds
ii. Sales Tax refund adjustment should also be allowed against Income Tax liability – Section 10 read with Rule 26 & 28.
iii. The submission of Annexure H as part of the Sales Tax Return should be discontinued since these details are redundant and are utilized as a tool to delay refund processing – Rule 28. Tax Authorities should simplify the documentation requirement for verification of Input Sales Tax payment by limiting it to Goods Declaration, Invoice and Bank Statement as adequate supports.
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The chamber highlighted input sales tax on opening stock of pharmaceutical products and recommended that pharmaceutical products have been zero rated since January 16, 2022. As per FBR release, refunds against input sales tax will be allowed on consumption basis. However, there are no rules promulgated till to date for claiming the input sales tax on opening stock of pharmaceutical goods.
The OICCI pointed out Section 148 of Income Tax Ordinance, 2001 – Withdrawal of withholding income tax for import of drugs pertaining to Rare & Chronic diseases including Multiple Sclerosis, Oncology, Hematology, Eye Blindness, Diabetes, Hypertension and Heart Failure.
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It said oncology medicines worth more than tens of millions are being given to deserving patients every year by selected pharmaceutical companies under Patient Assistance Programs (PAP). Advance income tax at 5.5 per cent is currently being charged on import of such medicines whereas no revenue is generated from such free of cost issuance.
The OICCI recommended:
i. Provide exemption from the operation of section 148 to the ITO 2001 on import of pharmaceutical medicines for above mentioned disease areas, through addition of a new clause in the Second Schedule to the ITO 2001.
ii. Allow tax exemptions/ tax credits where companies are offering free benefits to the society through Patient Access programs.
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It further highlighted Section 236G and 236H of Income Tax Ordinance 2001 – Collection of Advance Income Tax on sale of pharmaceutical products to distributors, dealers, wholesalers and retailers.
The chamber said it is not clear whether advance tax should be collected on gross sales value or sales value net of discount. A few clarifications issued by regional tax offices require collection of advance tax on sale to doctors and hospital pharmacies. On the other hand, doctors claim exemption being final consumers and state-owned hospitals claim exemption under section 236O of ITO 2001.
Therefore it recommended the FBR should issue clarification in terms of taxable value and specific exemptions from operation of section 236G & 236H to the above extent.
The OICCI also sought clarification in definition under Section 21(O) of Income Tax Ordinance, 2001. It said the current law restricts the admissibility of sales promotion expenditure incurred by pharmaceutical companies up to 10 per cent of their turnover. However, the tax authorities tend to treat the entire marketing expenditure as advertisement, sales promotion and publicity expenditure. Similarly, it is also not clear whether the turnover means “gross sales” or “net sales”.
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Therefore, it recommended a new circular explaining the definition of advertisement, sales promotion & publicity as well as turnover should be issued.
It said reduced rate of advance tax on import of pharmaceutical products not manufactured in Pakistan. The facility of reduced rate of advance tax on import is conditional on obtaining certificate from DRAP which adds complexity to the process.
The OICCI recommended one time list of registered drugs not manufactured in Pakistan should be obtained by FBR from DRAP directly and the requirement for companies to obtain certificate from DRAP be waived off by FBR.
The chamber sought exemption of medical equipment imported and supplied and said the said exemption has been deleted vide Finance Supplementary Act 2022, should be re-inserted.
