Investing in health sector: tax incentives to modernize pharmaceutical sector

The pharmaceutical sector is a strategic nation al asset: it safeguards public health, generates export earnings and provides skilled employment. Yet today’s tax architecture imposes cascading, non-adjustable levies that inflate medicine costs without delivering proportional fiscal benefit.

The industry now carries one of the country’s heaviest cumulative tax burdens; roughly 47 percent - comprising 29 percent corporate tax, 10 percent super tax, 5 percent Workers’ Profit Participation Fund (WPPF), 2 percent Workers’ Welfare Fund (WWF), 1 percent Central Research Fund (CRF) and 3 to 4 percent average sales tax.

Recent retroactive levies such as the 2022 super tax have increased uncertainty and raised operating costs, making planning and cash flow management harder for firms producing essential medicines.

In addition, a 1 percent sales tax is treated as full and final across the supply chain with no input adjustment, while a 3 percent minimum value addition tax on finished goods and an effective ~18 percent burden on imported packing materials all feed into a regulated cost base.

In a market of price controls and inelastic demand, those costs are ultimately borne by patients.

Concerns around cascading and non-adjustable taxes have also been highlighted in broader policy discussions within the business community, including recommendations by the Overseas Investors Chamber of Commerce and Industry (OICCI), which has consistently advocated a more streamlined and predictable tax framework to support investment and sectoral competitiveness.

The Central Research Fund, set at 1 percent of profit before tax under the Drugs (Licensing, Registering and Advertising) Rules, 1976, was intended to strengthen research and regulatory capacity.

In practice it has compressed retained earnings across the sector without clear, traceable research outputs or robust industry oversight. Using a conservative illustrative turnover of PKR 1 trillion, CRF collections would have been substantial over time, roughly PKR 140–150 billion, resources that, if retained in the sector, could have been invested in manufacturing capacity, regulatory compliance and supply resilience.

Given the CRF’s opaque stewardship and the pressing capital needs of the sector, abolition is the most pragmatic step.

Any funds already collected should be reallocated only through a formal, mutually agreed mechanism between government and industry that guarantees transparency, measurable impact and public accountability.

Sales tax is a particularly acute problem. Charging 1 percent as “full and final” without allowable input credits effectively taxes tax: manufacturers charge this to distributors who cannot claim it back, prompting distributors to recover costs through higher commissions and margins. That creates a double cost burden for manufacturers and a hidden markup that filters through to patient prices. Overlapping levies on finished goods, packaging imports and minimum value additions compound the effect.

The policy response should be simple and predictable: return the pharmaceutical sector to an exempt regime (no output sales tax), zero rate or guarantee timely refunds for exports and inputs used in export production; and remove sales taxes on packing materials so essential medicines are not taxed twice.

Similar rationalization of cascading indirect taxes has also been part of recent reform proposals put forward by the OICCI and other business stakeholders seeking to reduce cost distortions across key industries.

Super tax has likewise been applied in ways that increase unpredictability and cash flow pressure. A sector producing essential medicines cannot absorb frequent, retroactive surcharges without consequences for prices and operations.

Super tax, if retained as a policy tool, should be time bound, non-retroactive and clearly communicated well in advance. It should be targeted and progressive, with safeguards to avoid double taxation; for example, excluding income already subject to industry levies or permitting credits and exemptions or relief for essential medicine lines and export income to protect supply and competitiveness.

These tax adjustments should sit within a fiscally responsible reform package. Removing overlapping sales taxpayers will reduce avoidable cost distortions that patients pay for today.

Time bound, performance linked export incentives and accelerated depreciation for plant and machinery would stimulate modernization, bolster foreign exchange earnings and expand the taxable base over time.

Reassessing statutory levies such as WPPF and WWF and committing to transparent reporting on any retained funds will improve accountability and public trust.

This is not a plea for unchecked relief but a call for calibrated rebalancing: lower avoidable costs, protect medicine availability and quality and preserve fiscal sustainability. Abolishing the CRF, addressing cascading sales taxes and redesigning super tax rules can help Pakistan’s pharmaceutical sector modernize, expand exports and strengthen medicine security.

The industry stands ready to work constructively with government and regulators to implement pragmatic, accountable reforms that protect patients and advance national health and economic priorities.

Copyright Business Recorder, 2026