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News reports say that the government has finalized the mini-budget to raise about 360 billion rupees by levying 17% General Sales Tax – GST on 140 items or so. The items include milk, cereals, bakery items, meat, chicken, gold, bicycles, cars including electric cars, mobile phones, phone calls, pharmaceutical raw materials and so on.
It is yet a draft which will have to be approved by the parliament so that it could be implemented. Considering that most members of our parliament either do not understand such technical matters (the rest understand too well and try to manipulate things to their advantage), the bill is likely to be passed easily.
The list also includes raw materials for manufacturing of medicines, cereals, fish feed, animal feed etc. Our focus is on Pharmaceutical Products.
Pharmaceutical products in Pakistan are categorized as ‘Prescription Only’ drugs. Vitamins, minerals, nutritional supplements etc. were also included in the same list previously, but since promulgation of Health and OTC SRO in 2012, these are now in a separate OTC – Over the Counter list. Prices of Prescription drugs are regulated by Drug Regulatory Authority Pakistan – DRAP, while OTC drugs and supplements are de-controlled and may be sold at any price fixed by the manufacturer/marketer.
Pharmaceutical products had always been exempted from GST in the past. Several input materials, such as packaging components, are subject to GST for quite some time, but the pharmaceutical manufacturer absorbs this cost and does not charge the same to consumer. In the consumer products case, the GST is charged to consumer by the merchant who deposits this revenue in government treasury. Twice in the past, GST was levied on finished pharmaceutical products and would have been charged to consumers, but it was almost instantly withdrawn even before it could be implemented.
Most Pharmaceutical raw materials are imported; few materials are manufactured in Pakistan although they are sold at the same price or even higher. Raw materials were always exempted from GST for pharmaceutical manufacturers having license to manufacture from DRAP. Several years ago, we applied to FBR – then CBR to remove GST from gelatin capsule shells and sugar which were part of materials that went inside the patient with medicine, hence raw materials. CBR agreed and removed GST on these two items.
We understand that the representatives of pharmaceutical sector have met the advisor on finance, Shaukat Tarin, in a bid to convince him to reconsider and not impose GST on raw materials.
The FBR sources somehow claim that a major part of pharmaceutical sector was undocumented, and they would like to document it through this exercise. This is a bizarre claim and should be investigated. The facts are that:
- The pharmaceutical manufacturers must get registered before they could start manufacturing. The license is issued for a period of five years after thorough inspection by a panel who submits report to the Central Licensing Board.
- Import of all pharmaceutical raw materials is subject to approval of each invoice from DRAP local office. No Pharmaceutical raw material is cleared by Customs without approved invoice.
- Sale of raw materials in the market or from one manufacturer to the other is legally prohibited. True, that some materials get to the market somehow which is due to unscrupulous elements on all sides. This is an exception, not a norm, and policies are made on norms, not exceptions. Other issues, if any, may be handled differently.
- FBR also claims that pharmaceutical market is nearly 700 billion rupees, out of which 530 billion is the undocumented supply chain. This claim is also not well-placed. True, that some local suppliers of packaging issue invoices without GST and both parties get benefitted, but the volume estimate is not correct.
- FBR has also indicated that the entire population of pharmaceutical manufacturers is not registered with FBR. It is due to the recommended process. Pharma manufacturers pay tax at the import stage or in local purchase, but they don’t charge it to consumer. They do not need to register with FBR.
- Raw materials are the basic part of any drug. If these are subjected to 17% GST, it will be a huge burden on manufacturers under the current system.
- If pharma manufacturers are allowed to charge GST to consumers, it will increase the prices of all drugs significantly and overburden the already crying consumers.
All in all, the situation is not yet clear. We shall have to wait and receive more information to understand this situation.
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