Advance Tax on Sale to Pharmaceutical Products

Introduction

The pharmaceutical industry in Pakistan is one of the largest and most essential sectors of the economy, supplying medicines, vaccines, and healthcare products to millions of patients across the country. Given the scale of transactions involved — from manufacturers and importers to distributors and ultimately to pharmacies and hospitals — the Federal Board of Revenue has established a specific advance tax mechanism for the distribution of pharmaceutical products.

Under Section 153 read with Clause 24(A) of Part II of the Second Schedule to the Income Tax Ordinance, 2001, every prescribed person (pharmaceutical manufacturer or importer) is required to collect advance tax at the time of sale of pharmaceutical products to distributors. The rate of tax depends on the filing status of the distributor — with filers and non-filers subject to different rates.

Critically, like the similar provision for cigarette products, the advance tax collected on pharmaceutical product sales is designated as minimum tax — meaning it is non-adjustable against the distributor's annual tax liability and non-refundable under any circumstances.

Legal Basis — Section 153 and Clause 24(A), Second Schedule, Part II

Section 153 of the Income Tax Ordinance, 2001 governs withholding tax on payments for goods, services, and contracts. It requires prescribed persons to collect advance tax at the time of making payments for taxable transactions.

Clause 24(A) of Part II of the Second Schedule to the Income Tax Ordinance, 2001 establishes a specific reduced rate advance tax regime for pharmaceutical products sold to distributors. Part II of the Second Schedule generally provides for reductions in tax rates for certain specified categories. Clause 24(A) places pharmaceutical product distribution within this reduced rate framework while simultaneously designating the tax collected as minimum tax.

The rates under Clause 24(A) for pharmaceutical products are significantly lower than the general Section 153 rates applicable to other goods — reflecting the essential nature of medicines and the government's policy of keeping the tax burden on the pharmaceutical supply chain relatively light while still ensuring a guaranteed minimum tax collection at source.

Who Is Required to Collect This Tax?

The obligation to collect advance tax under Clause 24(A) for pharmaceutical products falls on every prescribed person at the time of sale. In the pharmaceutical sector, prescribed persons include:

• Pharmaceutical manufacturers — companies holding manufacturing licences under the Drug Regulatory Authority of Pakistan (DRAP) and producing medicines, tablets, capsules, syrups, injections, vaccines, and other pharmaceutical products
• Pharmaceutical importers — persons or companies that import pharmaceutical products into Pakistan for domestic distribution

The collection obligation arises at the time of the sale — the moment the manufacturer or importer sells pharmaceutical products to a distributor. The manufacturer collects the tax, deducts it from the payment received (or adds it to the invoice), and deposits it with FBR.

From Whom Is the Tax Collected?

The advance tax under Clause 24(A) is collected from distributors of pharmaceutical products — persons or entities that purchase pharmaceutical products directly from manufacturers or importers for onward distribution to pharmacies, hospitals, clinics, and other end-buyers.

The distributor's Active Taxpayer List (ATL) status determines the rate of advance tax applicable to them:

• Distributors who appear on FBR's ATL are classified as filers and pay at the lower rate
• Distributors who do not appear on the ATL are classified as non-filers and pay at the higher rate

Rates of Advance Tax Under Clause 24(A) — Pharmaceutical Products

Both rates result in minimum tax — the distinction between filer and non-filer status affects only the rate, not the nature of the tax. A filer pays 1% while a non-filer pays 2% — exactly double — on every purchase from a pharmaceutical manufacturer. Since the tax is non-refundable, this rate difference directly and permanently impacts the distributor's profit margin on every purchase.

Comparison with Other Sector Advance Tax Rates

The pharmaceutical rate of 1%/2% is the lowest sector-specific advance tax rate in Pakistan's income tax withholding framework — reflecting the government's recognition of the essential public health role of the pharmaceutical industry and the need to keep medicines accessible by not excessively burdening the supply chain with tax costs.

Practical Examples

Example 1 — Sale to a Filer Distributor

A pharmaceutical company sells medicines worth PKR 1,000,000 to a distributor. The distributor appears on FBR's Active Taxpayer List as a registered income tax filer.

Example 2 — Sale to a Non-Filer Distributor

The same pharmaceutical company sells medicines worth PKR 1,000,000 to another distributor who is not on FBR's Active Taxpayer List.

Annual Impact — High-Volume Pharmaceutical Distributor

A pharmaceutical distributor purchasing PKR 50,000,000 worth of medicines annually saves PKR 500,000 per year simply by being a tax filer. Since the minimum tax is non-refundable, this saving is permanent and recurring — making filer status extremely valuable for pharmaceutical distributors operating at scale.

What Does Minimum Tax Mean for Pharmaceutical Distributors?

The minimum tax designation under Clause 24(A) has specific and permanent consequences:

Cannot Be Adjusted Against Annual Tax Liability

The 1% or 2% advance tax collected at the time of purchase cannot be used to reduce the distributor's annual income tax liability. Even if the distributor's computed income tax for the year is PKR 0 due to business losses or deductions, the minimum tax already paid on pharmaceutical purchases cannot be applied as a credit against any other liability.

Cannot Be Refunded

Unlike standard adjustable advance tax — where excess deductions are recoverable through the annual return — the minimum tax on pharmaceutical product sales is permanently retained by FBR. There is no mechanism to claim it back regardless of the circumstances.

It Is a Permanent Cost of Distribution

Every pharmaceutical distributor must treat the Clause 24(A) minimum tax as a fixed cost of doing business — similar to rent, salaries, or transport. It reduces the distributor's net margin on every purchase from the manufacturer and must be factored into pricing strategies for onward sales to pharmacies and hospitals.

Responsibilities of the Pharmaceutical Manufacturer

The pharmaceutical manufacturer (or importer) as the prescribed person has the following obligations:

1. Verify distributor ATL status before each sale
   Check whether the distributor appears on FBR's Active Taxpayer List to determine whether the 1% (filer) or 2% (non-filer) rate applies. Verification can be done through FBR IRIS or by sending the distributor's CNIC as an SMS to 9966.
2. Collect the correct advance tax at the time of sale
   Deduct the applicable percentage from the payment received or add it to the invoice amount at the time of each transaction.
3. Deposit with FBR within prescribed timeframe
   Deposit the collected advance tax with FBR through the designated payment channels within the prescribed period (generally by the 15th of the following month for monthly withholding).
4. Issue withholding certificate to distributor
   Provide the distributor with a withholding tax certificate (CPR — Computerised Payment Receipt) confirming the advance tax deducted, the rate applied, and the period of deduction.
5. Include in monthly and annual withholding statements
   Report all Clause 24(A) deductions in the monthly and annual withholding tax statements filed with FBR on IRIS.

Are All Pharmaceutical Products Covered?

Clause 24(A) applies broadly to pharmaceutical products — a category that encompasses:

• Prescription medicines — tablets, capsules, syrups, injections, drops
• Over-the-counter (OTC) medicines and health products
• Vaccines and biologics
• Medical devices classified as pharmaceutical products under DRAP regulations
• Imported pharmaceutical products distributed domestically

Difference Between Pharmaceutical and General Goods Withholding

It is important for pharmaceutical businesses to understand how Clause 24(A) differs from the general Section 153 withholding applicable to other goods:

Frequently Asked Questions (FAQs)

Q1: Does Clause 24(A) apply when a pharmaceutical distributor sells to a pharmacy or hospital?
No. Clause 24(A) applies specifically to the sale from manufacturer or importer to distributor. When the distributor sells to pharmacies, hospitals, or clinics, different withholding provisions may apply (or may not apply at all, depending on the nature of the buyer). Clause 24(A) does not apply at the retail or end-user stage of the chain.

Q2: My company imports medicines directly for use in our hospital. Is Clause 24(A) applicable?
Clause 24(A) applies to sales to distributors — persons who purchase for onward commercial distribution. If a hospital imports directly for its own use (not for resale), the Clause 24(A) distributor-level minimum tax may not apply. The applicable withholding provision depends on the specific nature of the import and use. Consult a tax advisor for your specific situation.

Q3: The pharmaceutical company applied 2% (non-filer rate) on my purchases but I am actually on the ATL. What can I do?
Inform the manufacturer immediately and provide proof of your ATL status (CNIC verification or IRIS printout). The manufacturer should apply the correct 1% rate going forward. For the excess 1% already deducted, since the tax is minimum and non-refundable, recovery through the annual return is not possible — this underscores the importance of verifying ATL status proactively before each purchase.

Q4: Can a pharmaceutical distributor claim any deductions in their annual return?
Yes. The distributor still files an annual income tax return and can claim all allowable business deductions — cost of goods, salaries, rent, transport, depreciation, and other expenses. However, the Clause 24(A) minimum tax cannot be used as a credit against the computed annual tax liability. It is permanently separate from the annual return calculations.

Q5: Does this provision also cover veterinary pharmaceutical products?
Whether veterinary pharmaceutical products fall within the definition of "pharmaceutical products" under Clause 24(A) depends on their regulatory classification under applicable laws. If the products are registered with DRAP or the relevant authority as pharmaceutical products, they likely fall within the provision. Confirm with a qualified tax professional for specific product categories.

Q6: Does Clause 24(A) apply to free samples given by pharmaceutical companies to doctors?
Free samples are not a commercial sale and no consideration is received. The Clause 24(A) advance tax is collected on the sale of pharmaceutical products — a transaction involving a price. Free samples distributed for promotional purposes do not constitute a taxable sale under this provision, so no advance tax collection arises.

Conclusion

Clause 24(A) of Part II of the Second Schedule to the Income Tax Ordinance, 2001, read with Section 153, establishes a dedicated advance tax regime for pharmaceutical product sales to distributors. The rates are 1% for filer distributors and 2% for non-filer distributors — with both amounts designated as minimum tax that is non-adjustable and non-refundable.

The pharmaceutical sector benefits from significantly lower rates compared to both the cigarette sector (2.5%/5%) and general goods (4%/8%) — reflecting the essential public health role of medicines in Pakistan. However, the minimum tax nature of the deduction means every rupee deducted is a permanent cost to the pharmaceutical distribution chain.

For pharmaceutical distributors operating at any meaningful scale, maintaining filer status is not just a compliance obligation — it is a direct and compounding financial saving. At PKR 50,000,000 in annual purchases, filer status saves half a million rupees per year in irrecoverable minimum tax costs.