The federal government is expected to announce major tax relief measures for the pharmaceutical sector in the upcoming federal budget for FY2026–27.
Highly placed government sources told ProPakistani that authorities have decided to abolish the 3 percent value-added tax (VAT) on imported finished pharmaceutical and diagnostic products under the Twelfth Schedule.
This levy had effectively raised the tax burden to around 4 percent in a price-regulated sector, deviating from the intended 1 percent final tax structure under the Eighth Schedule.
However, the existing sales tax exemption under Entry No. 166 of the Sixth Schedule will not be expanded to include additional government institutions, departments, or general hospitals, and will remain limited to charitable hospitals.
The listed pharmaceutical sector recorded a strong financial performance in 2025, with profits rising 78 percent year-on-year to Rs. 42.2 billion, supported by higher sales, easing input costs, and lower financial charges.
Despite improved earnings, the sector’s effective tax rate remained nearly unchanged at 39.9 percent in 2025, compared to 40.3 percent a year earlier, resulting in a total tax burden of Rs. 27.9 billion. In the fourth quarter, the effective tax rate stood at 40.9 percent, with tax expenses reaching Rs. 9.8 billion.
Sources said Pakistan’s pharmaceutical sector has strong potential not only in healthcare provision but also as a high-value export industry, provided it is supported through targeted and growth-oriented tax reforms.
However, the current tax regime continues to discourage investment, reinvestment, and expansion, while pharmaceutical exporters face increasing fiscal pressure.
Tax experts have recommended introducing tax credits for export-oriented pharmaceutical companies that demonstrate consistent year-on-year growth. Such a mechanism would ease financial pressure and support reinvestment in research, development, compliance, and global market expansion.
They also proposed a tiered tax credit system linked to export growth, where:
Additionally, they suggested extending accelerated depreciation beyond plant and machinery to include broader investment in export-oriented upgrades, along with targeted tax credits to support long-term industrial modernization.
They further argued that Pakistan’s corporate tax rate remains among the highest in the region, making it harder to attract and retain investment in a globally competitive environment.
Recommendations also include restoring a zero-rated sales tax regime for DRAP-registered pharmaceutical products and exempting packaging materials and diagnostic kits to reduce production costs and improve healthcare affordability.
They added that the pharmaceutical industry is not only a manufacturing sector but also a critical pillar for public health, employment generation, innovation, and foreign exchange earnings, and could play a key role in stabilizing Pakistan’s economy if properly incentivized.
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