Pharmaceuticals companies engaged in contractual manufacturing will have to pay tax at source at the rate of 10 per cent on their total receipts that they get as service charge for manufacturing products for others, officials of the National Board said.
They said that producing products for other pharmaceutical companies would be considered as rendering services and would require paying the tax on service charge.
Service receiving companies will deduct the tax while making payment to contract manufacturers, the officials said.
The taxpayers, however, will be able to adjust the advance tax with the total income tax payable for a year, they said.
Income tax wing of the NBR on Sunday issued a letter in this connection after income tax zone-8 sought clarification regarding the tax rate for the sector.
The officials said many pharmaceuticals companies using its machinery and manpower in the country produced products for other local and foreign companies under toll manufacturing agreement.
Many local and multinational companies having additional demand for medicine appoint second company for producing products for them, they said.
Under the system the main company provides the contracting company with all the raw materials.
In exchange of producing products for other companies, the contracting factories get manufacturing charges which are also known as toll charge or service charge.
The officials said the taxmen in the field office were in confused on the rate of advance tax from toll manufacturing sector and they usually used to
deduct the tax at 5 per cent.
There was also ambiguity on whether the advance tax will be considered as final settlement, they said.
Now the field office will ask the pharmaceutical companies for deducting the tax while making payment of the service charge to contract manufacturers, they said.
-With New Age input
