THE Pakistan Pharmaceutical Manufacturers Association, which represents around 300 national drug makers, has threatened to shut down production in less than a week unless the government reverses its decision to reimpose a 17pc sales tax on raw material used to manufacture medicines. Chances are that its threat will fizzle out. But that does not mean that the demand is unjustified. The government imposed the refundable value-added levy on pharmaceutical raw material, or active pharmaceutical ingredients used to produce medicines after a lapse of some years as part of its deal with the IMF. At the time of the passage of the supplementary finance bill, or ‘mini budget’, through which tax exemptions amounting to Rs350bn for various sectors were revoked in late January, the government had promised the manufacturers to quickly and seamlessly refund the taxes paid on raw material. The purpose of withdrawal of the exemption was to document the industry rather than collect more revenue from it. However, the government hasn’t kept its promise to the industry, in spite of several meetings between the finance minister and PPMA representatives to resolve the issue.

The drug producers are right in complaining about the imposition of sales tax at a time when the cost of doing business is constantly rising due to the surging prices of energy and packaging material. Still, shutting down production is not going to help them resolve the problem. They must understand that the cash-strapped government can’t afford to take back the decision if it wants to avoid further complications with the IMF, which has already delayed the conclusion of the ongoing seventh review of its funding programme and the transfer of much-needed dollars because of the energy price relief as well as growing political instability in the country. Both sides will have to find a way out through negotiations, and agree to a mechanism that would ensure the early processing of the industry’s sales tax refund claims. Willingness on the part of the FBR — which uses the industry’s unpaid tax claims for inflating its revenue collection numbers — to settle the matter is going to be a crucial factor. The government must realise that if the manufacturers are forced to close their factories and create a shortage of medicines in the market, or raise the prices of their products to improve cash flows, it would place a major burden on inflation-stricken, middle class households, further eroding the political capital of the ruling party.

Published in Dawn, March 19th, 2022