The federal government is expected to introduce significant tax relief measures for Pakistan’s pharmaceutical sector in the upcoming FY2026–27 budget.
According to senior government sources cited by ProPakistani, authorities are planning to abolish the 3% value-added tax (VAT) currently applied to imported finished pharmaceutical and diagnostic products under the Twelfth Schedule. This levy has effectively increased the sector’s tax burden to around 4%, despite the intended 1% final tax structure under the Eighth Schedule.
However, officials clarified that the existing sales tax exemption under Entry No. 166 of the Sixth Schedule will remain unchanged and will continue to apply only to charitable hospitals, without any expansion to other public institutions, government departments, or general hospitals.
Despite the challenging tax environment, Pakistan’s listed pharmaceutical companies posted strong financial results in 2025, with profits rising by 78% year-on-year to Rs. 42.2 billion. The growth was driven by improved sales, lower input costs, and reduced financial charges.
Even with higher profitability, the sector’s effective tax rate remained almost stable at 39.9%, compared to 40.3% in the previous year. Total tax payments reached Rs. 27.9 billion, while in the fourth quarter the effective tax rate stood at 40.9%, with tax expenses of Rs. 9.8 billion.
Sources further noted that Pakistan’s pharmaceutical industry has strong long-term potential not only in healthcare delivery but also as a high-value export sector, provided it receives targeted fiscal support and policy stability.
However, stakeholders argue that the current tax structure continues to discourage investment, expansion, and reinvestment, while exporters face increasing financial pressure.
Tax experts have proposed introducing export-linked tax credits for pharmaceutical companies that achieve consistent annual growth. Under their suggested framework, tax relief would be structured as follows:
- 5–10% export growth: 5% tax reduction
- 11–15% growth: 10% tax relief
- 16–20% growth: 15% tax relief
- Above 20% growth: 20% tax relief
They also recommended extending accelerated depreciation incentives beyond plant and machinery to include broader export-oriented upgrades, along with targeted credits to support industrial modernization and research investment.
Additionally, experts have called for restoring a zero-rated sales tax regime for DRAP-registered pharmaceutical products and exempting packaging materials and diagnostic kits to help reduce production costs and improve healthcare affordability.
Overall, they emphasized that the pharmaceutical sector is not only a key manufacturing industry but also a critical contributor to public health, employment, innovation, and foreign exchange earnings, and could play a major role in strengthening Pakistan’s economy if supported through growth-oriented reforms.
