The government is expected to introduce significant tax relief measures for Pakistan’s pharmaceutical sector in the upcoming FY2026–27 federal budget, according to official sources.
Sources told ProPakistani that authorities have decided to withdraw the 3 percent value-added tax (VAT) currently imposed on imported finished pharmaceutical and diagnostic products under the Twelfth Schedule. The levy had effectively raised the tax burden to around 4 percent in a price-controlled sector, conflicting with the intended 1 percent final tax framework under the Eighth Schedule.
However, officials confirmed that the existing sales tax exemption under Entry 166 of the Sixth Schedule will remain unchanged and will not be extended to additional government entities or general hospitals beyond charitable institutions.
Strong Pharma Sector Performance
The listed pharmaceutical industry recorded robust financial results in 2025, with profits increasing 78 percent year-on-year to Rs42.2 billion, supported by higher sales volumes, lower input costs, and reduced financial expenses.
Despite stronger profitability, the sector’s effective tax rate stayed nearly flat at 39.9 percent, compared to 40.3 percent last year, resulting in a total tax outflow of Rs27.9 billion. In the fourth quarter, the effective tax rate reached 40.9 percent, with tax expenses of Rs9.8 billion.
Proposed Tax Reforms for Growth and Exports
Industry experts say Pakistan’s pharmaceutical sector has strong potential for both domestic healthcare and exports but requires growth-oriented tax reforms to unlock expansion.
They argue that the current tax structure discourages investment, reinvestment, and export competitiveness, while companies face rising fiscal pressure.
Tax specialists have proposed introducing performance-based tax credits for export-oriented pharmaceutical firms, rewarding consistent year-on-year export growth to encourage reinvestment in research, compliance, and global expansion.
A tiered incentive model has also been suggested:
- 5–10% export growth → 5% tax relief
- 11–15% growth → 10% relief
- 16–20% growth → 15% relief
- Above 20% growth → 20% relief
Experts also recommend extending tax incentives beyond plant and machinery to include broader export-focused investments through accelerated depreciation and tax credits.
High Tax Burden and Policy Concerns
Analysts note that Pakistan’s corporate tax rate remains among the highest in the region, reducing competitiveness in a globally mobile investment environment.
They further suggest restoring a zero-rated sales tax regime for DRAP-registered pharmaceutical products, along with exemptions on packaging materials and diagnostic kits to reduce production costs and improve healthcare affordability.
Sector Importance
Experts emphasize that the pharmaceutical industry is not only a manufacturing base but also a key contributor to public health, employment, innovation, and foreign exchange earnings, and could play a stronger role in stabilizing the economy if supported through targeted reforms.
