ISLAMABAD: The Federal Board of Revenue (FBR) has calculated a revenue loss of over Rs101 billion on account of sales tax exemption granted to the pharmaceutical industry during 2020-21.
According to the Tax Expenditure Report 2022 issued by the FBR, sales tax exemption has caused a revenue loss of Rs25,050 million during 2020-21 on the import of raw materials used for the basic manufacture of pharmaceutical active ingredients and for manufacture of pharmaceutical products.
On the local supplies, the FBR suffered a revenue loss of Rs64,429 million on the supplies of substances registered as drugs under the Drugs Act, 1976 and medicaments as are classifiable under chapter 30 of the First Schedule to the Customs Act, 1969. The FBR has suffered a revenue loss of Rs12,007 million due to sales tax exemption on the local supplies of the raw materials for the basic manufacture of pharmaceutical active ingredients and for manufacture of pharmaceutical products.
According to the Finance Act, 2022, the manufacturing or imports of substances registered as drugs under the Drugs Act, 1976 would be subjected to only one per cent sales tax. This is subject to the conditions that the sales tax charged and deposited by the manufacturer or importer shall be a final discharge of tax in the supply chain. No input tax shall be adjusted by the manufacturer or importer.
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The one per cent sales tax would also be applicable on the import of the active pharmaceutical ingredients, excluding excipients, for the manufacture of drugs registered under the Drugs Act, 1976 or raw materials for the basic manufacture of pharmaceutical active ingredients.
Under the Fifth Schedule (Customs Duty), the customs duty exemption under 18(1A) of the Customs Act, 1969 on the import of Active Pharmaceutical Ingredients by pharma sector caused a revenue loss of Rs1,892 million. The duty exemption on the import of excipients/chemicals by pharmaceutical sector has a revenue impact of Rs525 million during 2020-21, the Tax Expenditure Report 2022 said.
Under the Fifth Schedule (Customs Duty)- Part II Table-C, the duty exemption on the import of drugs (mostly Life Saving) by imported by the pharmaceutical sector caused a revenue loss of Rs10,179 million. The packing materials/raw materials used for packing by pharmaceutical sector has revenue implications of Rs1,159 million.
The duty exemption on the import of the diagnostic kits/equipment by the pharmaceutical sector caused a revenue loss of Rs3,591 million.
The FBR has revenue impact of Rs85 million on the import of pharmaceutical raw materials if imported for manufacture of contraceptives. The reduced rate of duty is applicable on the import of pharmaceutical raw materials if imported for manufacture of contraceptives in accordance with the input output ratios determined by the Directorate of Input Output Co-efficient Organization.
The report said that the tax expenditure in sales tax is 49.9% of the total expenditure in 2021-22. The larger share of exemptions is granted at the import stage which is nearly 44% of the total sales tax expenditure. The tax expenditure in sales tax increased by 27.9% compared to that in preceding year. Several factors played role in the surge of sales tax expenditure. The sales tax revenue increased by 20% in the same fiscal year contributing towards an increase in tax expenditure as well. Due to COVID-19, the exemptions in pharmaceutical sector were increased and new exemptions were introduced for energy technology, health, and pharmaceutical sectors during 2020-21.
Copyright Business Recorder, 2022
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