Pharma supplies: KTBA urges FBR to revisit clarification about ‘further tax’

KARACHI: Karachi Tax Bar Association (KTBA) has urged the Federal Board of Revenue (FBR) to revisit its earlier clarification regarding the levy of further tax on pharmaceutical supplies to avoid unnecessary litigation.

In a letter sent to the chairman FBR, KTBA said that substances registered as drugs under the Drugs Act, 1976 (ie, pharma products) were earlier exempt from the levy of sales tax under the Sales Tax Act, 1990 (“Act”), the Finance (Supplementary) Act, 2022, withdrawn, and the pharma products were made zero-rated in terms of Serial No.19 to the Fifth Schedule of the Act. Later, through the Finance Act 2022, Serial No.19 of the Fifth Schedule was omitted and a new Serial No.81 was introduced in Table 1 of the Eighth Schedule to the Act.

It said that Serial No.81 created the sales tax charge at the rate of 1% on manufacturer/importer of drugs and that the tax so charged and deposited by a manufacturer would be treated as a final discharge of sales tax liability for the entire supply chain. Therefore, once the manufacturer/importer has charged and deposited the sales tax @ 1%, the rest of the entire supply chain would be ousted from the levy of sales tax.

It said that a clarification C.No. 3(16)ST&FE-Policy/2022/230285-R issued by the Federal Board of Revenue (FBR) on 23 November 2022, which has asked to pay further tax @ 3% on the sale of drugs to unregistered persons.

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The KTBA said that the above clarification and its directions are contradictory to the legal position. It is being re-iterated that Serial No.81 in Table-1 of the Eighth Schedule to the Act categorically states that tax collected and discharged by the manufacturer of drugs under the Drugs Act, 1976 is a final discharge of tax for the entire supply chain. Therefore, if further tax is asked to be levied on sale by the manufacturer/importer, it stands exactly opposite to the substantive law for declaring collection and discharge of tax by manufacturer/importer as final tax.

The term ‘final tax’ implies that no further collection of the tax would be made under the Act irrespective of a person’s nature/class/category /registration status.

Even otherwise, it needs to be given due cognizance that once it is clear that the supply is not subject to tax under section 3(1) of the Act, it cannot be subject to any additional tax by virtue of section 3(1A) of the Act. The above legal position has also been fortified by the Sindh High Court (SHC) in the case of Digicom Trading (Pvt.) Ltd reported as 2016 PTD 648.

In view of the above, KTBA requested that the above clarification may be re-clarified in the light of decisions given by the SHC and appellate tribunal as the position taken by the FBR yet for the second time and too knowingly, on the same issue, does not signify anything and is uncalled for on the part of the regulator and apprehended that the matter will yet again land in the court and will not yield anything but unnecessary and avoidable litigation.

Copyright Business Recorder, 2022