Taxation of Healthcare Services in Pakistan

Healthcare is a vital sector in Pakistan, encompassing hospitals, clinics, diagnostic laboratories, pharmacies, and medical consultants. While healthcare services are generally seen as public welfare, they are also subject to taxation under various federal and provincial laws. The tax treatment of healthcare services in Pakistan has evolved significantly over the years, particularly with the introduction of sales tax on services by provincial revenue authorities.

Understanding the taxation framework applicable to healthcare providers is essential for hospitals, diagnostic centers, pharmaceutical retailers, and consultants to ensure compliance and avoid penalties. This article offers a comprehensive guide to the taxation of healthcare services in Pakistan, including applicable taxes, exemptions, registration requirements, and compliance procedures.

Overview of Healthcare Services in Pakistan

Healthcare services in Pakistan may be provided by:

• Public hospitals and government-funded facilities

• Private hospitals and clinics

• Diagnostic labs and imaging centers

• Doctors and medical consultants

• Pharmaceutical distributors and pharmacies

• Ambulance and paramedic services

The tax treatment varies based on the nature of service, location, and legal structure of the healthcare provider.

Key Tax Authorities and Applicable Laws

Healthcare businesses are governed by both federal and provincial tax laws, including:

• Federal Board of Revenue (FBR): Income tax and import duties

• Provincial Revenue Authorities:

  • Punjab Revenue Authority (PRA)

  • Sindh Revenue Board (SRB)

  • Khyber Pakhtunkhwa Revenue Authority (KPRA)

  • Balochistan Revenue Authority (BRA)

• Sales Tax Act, 1990

• Provincial Sales Tax on Services Acts (2011 onwards)

While most core medical services are exempt from sales tax, ancillary services may be taxable.

Income Tax on Healthcare Providers

1. Applicability

Under the Income Tax Ordinance, 2001, all healthcare businesses and professionals earning income in Pakistan are subject to income tax.

Taxpayers include:

• Private hospitals and clinics (companies, AOPs, sole proprietors)

• Doctors and consultants in private practice

• Diagnostic laboratories

• Pharmacies and distributors

2. Tax Rates

3. Advance Tax and Withholding

Healthcare providers may also be required to:

• Pay advance tax under Section 147 (quarterly)

• Deduct withholding tax under various sections (e.g., on salaries, rent, supplies)

• File monthly withholding statements

Sales Tax on Healthcare Services

Sales tax on services is levied by provincial authorities, and the taxability of healthcare services varies across provinces.

1. Punjab Revenue Authority (PRA)

Under PRA’s Second Schedule, the following healthcare services are exempt:

• General medical consultation and treatment

• Surgical procedures

• Emergency and inpatient care

• Diagnostic services (pathology, radiology)

However, aesthetic and cosmetic procedures, medical spa services, and high-end wellness treatments may be taxable under service codes 9819.9000 and 9819.1100.

2. Sindh Revenue Board (SRB)

Similar exemptions apply in Sindh. Medical services are exempt under SRB Notification No. 3-4/3/2013:

• Hospitalization

• Surgery

• Diagnosis

• Treatment of diseases

But non-essential wellness services and private room charges may attract 13% Sindh sales tax if not exempted.

3. KPRA and BRA

• Both authorities follow a similar structure

• Medical services are largely exempt

• Ancillary services such as laundry, cafeteria, and diagnostics offered separately may be taxable

4. Sales Tax on Pharmaceuticals

Pharmaceutical sales are taxed under Federal Sales Tax (FBR):

• 0% sales tax on essential medicines listed in Fifth Schedule

• 17% sales tax on cosmetics, supplements, and unregistered medical products

Pharmacies must register for STRN and file monthly sales tax returns.

Registration Requirements for Healthcare Businesses

1. With SECP (If Incorporated)

• Register with the Securities and Exchange Commission of Pakistan (SECP) as:

  • Private Limited Company

  • Public Limited Company

  • Non-Profit (Section 42)

Required for hospitals, diagnostic centers, and large clinics.

2. With FBR

• National Tax Number (NTN) is mandatory for all healthcare entities

• File income tax returns annually

• File withholding statements monthly (if applicable)

3. With Provincial Revenue Authority

• STRN (Sales Tax Registration Number) required if:

  • Providing taxable ancillary services

  • Operating diagnostic labs separately

• File monthly sales tax returns

4. With DRAP (for Pharmacies)

Pharmacies and drug sellers must be licensed with the Drug Regulatory Authority of Pakistan (DRAP).

Withholding Tax on Healthcare Sector

Hospitals and clinics, if acting as withholding agents, must deduct tax under:

• Section 149: Salaries to staff

• Section 153: Payments to suppliers, service providers

• Section 155: Rent

• Section 152: Foreign remittances to consultants

Failure to comply results in penalties and disallowance of expenses.

Tax Exemptions and Concessions

1. Non-Profit Healthcare Organizations

Entities registered under Section 42 of Companies Act and approved as non-profit by FBR may be exempt from income tax, subject to:

• 75% of income spent on core objectives

• Proper maintenance of audited financials

• Filing of annual income tax returns

2. Hospitals in Rural Areas

Newly established hospitals in underserved rural areas may qualify for:

• Income tax holidays under Clause 133, Part I of Second Schedule

• Reduced import duties on medical equipment

• Exemptions from minimum tax

3. Donations and Zakat

Healthcare institutions registered as approved donees can:

• Receive tax-exempt donations

• Claim Zakat contributions under Section 61

These must be declared in tax returns and utilized for healthcare provision.

Recordkeeping Requirements

Healthcare providers must maintain the following:

• Patient billing records

• Diagnostic and lab fee logs

• Payroll registers

• Supplier invoices

• Sales tax invoices (if registered)

• Monthly revenue and expense summaries

Records should be preserved for six years under tax law.

Tax Challenges in the Healthcare Sector

1. Unregistered Practitioners

Many independent consultants and small clinics remain unregistered, leading to tax evasion and compliance gaps.

2. Mixed Revenue Streams

Hospitals offering both exempt and taxable services must:

• Segregate income and expenses clearly

• Ensure input tax is claimed only on taxable activities

3. Input Tax Disallowance

Provincial authorities may disallow input tax on general expenses if:

• Services are exempt

• No separate STRN obtained

4. Import Taxes on Equipment

Medical equipment often attracts high import duties, unless:

• The importer is a recognized hospital

• Exemption certificates under SROs are obtained

Proper documentation and DRAP registration are essential.

Audit and Compliance for Healthcare Entities

Healthcare businesses are subject to tax audits by FBR or PRA:

• Under Section 177 of the Income Tax Ordinance

• Under Section 25 of Sales Tax Act

Auditors may request:

• Bank statements

• Service logs

• Utility bills and rent agreements

• Payment proofs for taxes withheld

Compliance with IRIS, PRA/SRB online portals, and e-filing systems is mandatory.

International Tax Considerations

Medical institutions receiving foreign grants, donations, or making remittances to overseas consultants must:

• Report under Section 152 and FATCA/CRS guidelines

• Ensure compliance with SBP and AML regulations

• Declare all foreign income and receipts in tax filings

Use of Technology for Tax Compliance

Many hospitals and healthcare groups use:

• Hospital Management Systems (HMS)

• Accounting Software (e.g., QuickBooks, Xero)

• Sales Tax POS Integration (for pharmacies)

• Online payment logs for service fee collection

Digital records help with audit readiness, tax reporting, and filing accuracy.

Penalties for Non-Compliance

Best Practices for Tax Compliance

• Register with FBR and PRA/SRB (if applicable)

• Separate taxable vs exempt revenue

• File monthly and annual returns on time

• Maintain digital financial records

• Reconcile sales with bank deposits

• Seek professional tax advice

How Sterling.pk Supports Healthcare Tax Compliance

At Sterling.pk, we specialize in helping:

• Private hospitals and clinics

• Diagnostic labs

• Medical consultants

• Pharmacies and distributors

We offer:

• Tax registration and return filing

• Input tax reconciliation

• Withholding tax compliance

• DRAP, SECP, FBR and PRA liaison services

• Audit handling and tax appeals

Our healthcare clients trust us to keep their operations compliant while they focus on saving lives.

Conclusion

Taxation of healthcare services in Pakistan is nuanced, with exemptions for core medical services and taxes applicable on ancillary or commercial offerings. As the government increases oversight of service sectors, healthcare providers must stay vigilant in managing their tax responsibilities.

By understanding the tax structure and keeping documentation in order, healthcare entities can minimize risk and benefit from available exemptions. Sterling.pk is your partner in navigating this complexity and ensuring full compliance.