Drug makers engaged in contract manufacturing will have to pay 10 percent advance taxes on the service or toll charge, the National Board of Revenue said.
The revenue authority said making medicine for others firms under contract manufacturing (CM) will be treated as a service and advance taxes would have to be paid on the service charge.
Pharmaceutical companies, for whom the CM operators will make drugs, will have to deduct the tax during bill payment, said NBR in a letter sent to a field office early this week.
About 30 companies are engaged in contract manufacturing and will be able to adjust the advance tax with the total income tax payable for a year.
The NBR issued the letter after one of its field offices, Tax Zone-8, sought clarification on the rate of tax for CM in the pharma sector. The field office also wanted to know whether the tax paid on services for CM would be treated as final settlement or not.
The rate of tax for CM is ambiguous, which gives a scope for tax evasion, said a senior official of NBR, seeking anonymity.
Taxmen said field offices usually collected 5 percent source tax for a lack of clarity on CM.