The pharmaceutical industry is one of the most essential and regulated sectors in Pakistan, playing a critical role in public health and the national economy. With over 700 manufacturing units and thousands of registered brands, pharmaceutical companies contribute significantly to employment, research and development, healthcare access, and exports. While the government offers some fiscal incentives and exemptions to this sector due to its public welfare importance, pharmaceutical companies in Pakistan are still subject to various federal and provincial taxes. This comprehensive 2025 guide covers the key taxation aspects affecting pharmaceutical companies, including income tax, sales tax, withholding tax, custom duties, regulatory fees, and compliance requirements.
Overview of the Pharmaceutical Sector in Pakistan
Pharmaceutical companies in Pakistan operate in areas such as manufacturing, import, marketing, and distribution of human and veterinary medicines. The industry includes both multinational corporations and domestic manufacturers, with the Drug Regulatory Authority of Pakistan (DRAP) overseeing drug registration, pricing, and quality standards. Pharmaceutical companies often operate under private limited or public limited company structures and are primarily registered with the Federal Board of Revenue (FBR) for taxation purposes. Despite being exempt from sales tax on most of their finished goods, pharmaceutical companies are subject to income tax, minimum turnover tax, and customs duties on raw material imports.
Income Tax Obligations
Corporate Tax Rate
Pharmaceutical companies are subject to corporate income tax under the Income Tax Ordinance, 2001. As of tax year 2025, the standard tax rate for resident companies is 29% on net taxable income. This rate applies to all pharmaceutical manufacturers and marketers registered as companies in Pakistan.
Minimum Tax on Turnover
If a pharmaceutical company declares a loss or shows very low profit, it may still be liable to minimum tax on turnover under Section 113 of the Income Tax Ordinance. The minimum tax is calculated as 1.25% of turnover, unless the company qualifies for a specific exemption or reduced rate.
Advance Tax Payments
Companies are required to pay advance tax on a quarterly basis under Section 147. The advance tax is based on the company’s latest assessed income or projected income for the current year. Any shortfall may result in penalties and default surcharge.
Final Tax Regime (FTR) Exemptions
Pharmaceutical companies are generally assessed under the Normal Tax Regime (NTR) and are not subject to the Final Tax Regime (FTR) that applies to exporters and certain other businesses.
Allowable Deductions and Tax Credits
Pharmaceutical companies can claim deductions for:
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Salaries and wages
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R&D expenses
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Depreciation on plant and equipment
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Marketing and promotion (subject to limitations by DRAP)
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Interest on loans
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Repairs and maintenance
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Charitable donations under Section 61
Additionally, they may claim tax credits for:
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Investment in machinery and equipment (Section 65B)
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Employment generation (Section 64B)
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Enlistment on a stock exchange (Section 65C)
Sales Tax on Pharmaceuticals
Exemptions under the Sales Tax Act, 1990
Under the Sixth Schedule (Table I) of the Sales Tax Act, 1990, most finished pharmaceutical products—such as tablets, capsules, syrups, injectables, and vaccines—are exempt from sales tax. This means that manufacturers and importers of registered drugs do not charge 18% general sales tax (GST) on the sale of such products.
However, not all pharmaceutical-related items are exempt. The following may be taxable:
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Over-the-counter (OTC) non-medicinal items like energy drinks or food supplements
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Unregistered drugs
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Hospital equipment and accessories
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Raw materials and packing materials (subject to input tax credit or exemptions)
Zero-Rating vs. Exemption
Pharmaceuticals fall under exempt and not zero-rated categories. This distinction is important:
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Exempt supplies: No sales tax is charged, but input tax cannot be claimed
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Zero-rated supplies: No sales tax is charged, but input tax is claimable and refundable
Since most pharmaceutical goods are exempt rather than zero-rated, companies often face input tax accumulation on purchases of raw materials, utilities, and packaging, leading to increased cost of production.
Sales Tax on Services
Services availed by pharmaceutical companies—such as advertising, distribution, warehousing, security, and lab testing—are often subject to provincial sales tax on services. Provincial authorities and their rates are:
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Punjab Revenue Authority (PRA) – 16%
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Sindh Revenue Board (SRB) – 13%
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Khyber Pakhtunkhwa Revenue Authority (KPRA) – 15%
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Balochistan Revenue Authority (BRA) – 15%
Companies must ensure their service providers are registered and compliant with relevant provincial tax laws.
Withholding Tax Obligations
Under Section 153 – Payments to Suppliers
Pharmaceutical companies making payments to suppliers, distributors, and contractors must deduct withholding tax under Section 153:
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On supply of goods: 4% for companies (adjustable)
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On services: 8% for companies (adjustable)
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On contracts: 7% for companies (adjustable)
These rates apply to Active Taxpayer List (ATL) suppliers. Rates may be increased by 100% for non-ATL vendors.
Under Section 149 – Salaries to Employees
Companies must also deduct withholding tax on salaries under Section 149, based on prescribed tax slabs. Employers must issue salary certificates (Form 16) and submit monthly and annual statements.
Section 156 – Prize or Bonus Schemes
If a company offers prize schemes or promotional gifts to retailers or healthcare professionals (in compliance with DRAP rules), withholding tax at 20% may apply under Section 156.
Import Duties and Taxes
Raw Material Imports
Pharmaceutical companies import raw materials, APIs (active pharmaceutical ingredients), chemicals, and packaging materials. These are subject to:
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Customs Duty: 0% to 20%, depending on the HS Code
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Additional Customs Duty (ACD): 1% to 4%
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Sales Tax on Imports: 18% (may not be refundable if end product is exempt)
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Income Tax on Imports (Section 148): 5.5% (adjustable)
Many raw materials and APIs are listed under Fifth Schedule or Customs Tariff Concessions, making them eligible for duty-free or concessional rates.
Exemptions via SROs
Certain imports by pharmaceutical companies are exempt from sales tax or customs duty under specific Statutory Regulatory Orders (SROs), such as:
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SRO 1007(I)/2005 – Concessions on APIs
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SRO 567(I)/2006 – Exemptions on plant and machinery
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SRO 38(I)/2022 – Raw materials exemption list
Companies must ensure their HS Codes match SRO eligibility and submit appropriate documentation to claim exemptions.
Drug Regulatory Authority (DRAP) Fees and Levies
Non-Tax Regulatory Charges
In addition to federal taxes, pharmaceutical companies are required to pay fees and charges under DRAP Act, 2012, including:
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Drug registration fee
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Product renewal and variation fee
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Laboratory testing fee
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Good Manufacturing Practice (GMP) inspection charges
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Annual licensing fee
These are not taxes per se, but must be factored into the total cost of compliance.
Export of Pharmaceutical Products
Export Incentives
Pharmaceutical companies that export medicines are eligible for several benefits:
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1% final income tax on export proceeds under Section 154
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No sales tax on exported medicines
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Zero customs duty on imported raw materials used in exportable drugs
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Duty drawback on local input materials
To avail these incentives, exporters must ensure:
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Documentation through WEBOC or other customs system
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Receipt of export proceeds through banking channels
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Registration with Trade Development Authority of Pakistan (TDAP)
Filing and Compliance Requirements
Annual Return Filing
Pharmaceutical companies must file:
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Income Tax Return: Due by December 31 for companies with June year-end
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Sales Tax Return: Monthly, by 18th of every month
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Withholding Statements: Monthly and annually via IRIS
Record-Keeping Obligations
Companies must maintain:
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Purchase and sales ledgers
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Import and customs clearance documents
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Tax challans and bank payment proofs
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Audit reports and financial statements
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Salary and HR records
Failure to maintain records can lead to disallowance of expenses, input tax rejection, and audit penalties.
Penalties for Non-Compliance
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Late return filing: Rs. 2,500 per day (up to Rs. 50,000)
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Failure to deduct or deposit WHT: Tax + default surcharge + penalty
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Input tax claim without proper invoice: Disallowed + penalty under Section 21
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Customs misdeclaration: Heavy fines, penalties, and seizure
Tax Planning for Pharmaceutical Companies
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Maintain ATL status to avoid higher withholding
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Use ERP systems to track taxable and exempt purchases
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Claim investment and R&D tax credits where eligible
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Use bonded warehousing for import-export efficiency
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Seek advance rulings for classification disputes from FBR
Conclusion
Pharmaceutical companies in Pakistan operate within a complex but favorable tax framework. While their finished goods enjoy sales tax exemption, they remain subject to corporate income tax, customs duties, and various withholding obligations. Efficient tax planning, proper documentation, and timely filings are essential to avoid penalties and ensure continued eligibility for tax incentives. As the government continues to reform and digitize tax administration, pharmaceutical companies must stay updated on regulatory changes and engage tax professionals to manage compliance. With the right approach, pharmaceutical firms can optimize their tax position and contribute to the growth of both the industry and public health in Pakistan.
