Zero-rate tax required for imports of pharmaceutical APIs

KARACHI: The Federal Board of Revenue (FBR) has been asked to apply zero-rate sales tax on the import of pharmaceutical APIs and simplify sales tax refunds.

The Chamber of Commerce and Industry of Foreign Investors (OICCI), in its proposals for the 2022/2023 budget, has informed the tax authorities that the above amendment on sales tax applied through the bill Finance (Supplementary) 2022 in January 2022 will result in huge sales tax refunds which will impact the cash flow of pharmaceutical players due to delays in processing refunds by government authorities.

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The OICCI recommended:

I. Pharmaceutical API imports should also be ‘zero-rated’, to avoid generating huge sales tax refunds

ii. Adjustment of sales tax refund should also be allowed against income tax payable – section 10 is read with rules 26 and 28.

iii. Submitting Schedule H as part of the sales tax return should be discontinued as these details are redundant and are being used as a tool to delay refund processing – Rule 28. Tax authorities should simplify the requirement of documentation for the verification of the payment of the sales tax on the inputs by limiting to the Declaration of Goods, the Invoice and the Bank Statement as adequate supports.

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The chamber highlighted the input sales tax on opening inventory of pharmaceuticals and recommended that pharmaceuticals be zero-rated effective January 16, 2022. In accordance with the FBR publication, refunds of sales tax on inputs will be allowed on a consumption basis. However, no rule has been enacted to date to reclaim the upstream sales tax on opening inventory of pharmaceutical products.

OICCI pointed to Section 148 of the Income Tax Order 2001 – Withdrawal of Income Tax Withholding on the Importation of Medicines Relating to Rare and Chronic Diseases, Including Multiple Sclerosis plaques, oncology, hematology, eye blindness, diabetes, hypertension and heart failure.

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He said oncology drugs worth more than tens of millions are donated annually to deserving patients by selected pharmaceutical companies through Patient Assistance Programs (PAPs). A withholding tax on income of 5.5% is currently levied on the importation of these drugs, although no income is generated by this free supply.

The OICCI recommended:

I. To provide an exemption from the application of Article 148 of the ITO 2001 on the importation of pharmaceutical drugs for the above disease areas, by adding a new clause in the second schedule of the ITO 2001.

ii. Allow tax exemptions/credits when companies provide free benefits to society through patient access programs.

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He further pointed to sections 236G and 236H of the Income Tax Order 2001 – Collection of advance income tax on the sale of pharmaceuticals to distributors, resellers, wholesalers and retailers.

The chamber stated that it was unclear whether the advance tax should be levied on the gross value of sales or on the value of sales net of discount. Some details issued by the regional tax authorities impose the collection of an advance tax on sales to doctors and hospital pharmacies. On the other hand, doctors are applying for an exemption as end consumers and public hospitals are applying for an exemption under Section 236O of the ITO 2001.

Therefore, he recommended that the FBR issue clarifications in terms of assessed value and specific exemptions from the operation of Sections 236G and 236H to the above extent.

OICCI also requested clarification of the definition in Section 21(O) of the Income Tax Order 2001. She said the current law restricts the eligibility of sales promotion expenses incurred by pharmaceutical companies to up to 10% of their turnover. However, tax authorities tend to treat all marketing expenses as advertising, sales promotion and publicity expenses. Likewise, it’s also unclear whether revenue means “gross sales” or “net sales”.

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Therefore, he recommended that a new circular explaining the definition of advertising, sales promotion and advertising as well as turnover be issued.

It declared reduced advance tax rate on import of pharmaceuticals not manufactured in Pakistan. The possibility of benefiting from a reduced rate of advance tax on imports is subject to obtaining a certificate from the DRAP, which complicates the process.

The OICCI recommended that the single list of registered drugs not manufactured in Pakistan be obtained directly by the FBR from the DRAP and that the requirement for companies to obtain a certificate from the DRAP be waived by the FBR.

The chamber requested the exemption of imported and supplied medical equipment and declared that the said exemption was removed by the complementary finance law 2022, should be reinserted.