FBR Issues Clarification

“Federal Board of Revenue (FBR) has issued a clarification on a news story titled “1 pc advance tax pushes up drug prices significantly” appearing in Daily Business Recorder on 3rd August, 2021. FBR has termed the information contained in the news story baseless and misleading.  The news item has given a false impression that prices of medicines have increased due to withholding tax and that scarcity of certain drugs is also a result of withholding tax.

FBR has clarified that no new tax has been imposed on medicines.  Major supply chain below manufacturers and distributors is out of tax net.  This chain consists of distributors, dealers, sub-dealers, wholesalers and retailers.  As a documentation measure, nominal withholding tax collection at the rates of 0.1% and 0.5% on sales to distributors and retailers respectively has been required to be collected by the sellers under the provisions of sections 236G and 236H of the Income Tax Ordinance, 2001.

This is not a tax on the medicines but on the income of traders involved in the supply chain.  This tax is adjustable against the final tax liability.  This rate of tax is much below than the tax liability of the traders involved in whole sale and retail of medicines. The supply chain of medicines below the manufacturers and importers carries profit margin of 25% to 40%. The major part of the supply chain is out of tax net, therefore, this documentation measure has been taken.

FBR has clarified that this documentation measure was applicable to electronics, sugar, cement, iron and steel products, fertilizers, motorcycles, cigarettes, pesticides, glass, textile, beverages, paint and foam sectors prior to Finance Act, 2021. The scope of these documentation measures have been extended to pharmaceuticals, poultry and animal feed, edible oil and ghee, auto-parts, tyres, varnishes, chemicals, cosmetics and IT equipment.  

FBR has clarified that the prices of medicines are controlled by DRAP Regulations. The withholding tax collection measures relating to the income of traders can in no way impact the prices of the medicines.”

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