â€œVAT Process on Goods Sale of Manufacturing Industryâ€? (A case study on Incepta pharmaceutical ltd.)
Part 1 Chapter 1 Profile of the Organization (Incepta pharmaceuticals ltd.) Incepta Pharmaceuticals Ltd. is a leading pharmaceutical company in Bangladesh established in the year 1999. The company has a very big manufacturing facility located at Savar, 35 kilometer away from the center of the capital city Dhaka. The company produces various types of dosage forms which include tablets, capsules, oral liquids, ampoules, dry powder vials; powder for suspension, nasal sprays etc. Since its inception, Incepta has been launching new and innovative products in order to fulfill unmet demand of the medical community. The focus was to bring more new technologically advanced molecules to this country. The company specializes in value added high technology dosage form like sustained release tablets, quick mouth dissolving tablets, barrier coated delayed release tablets etc. It has established a modern research and development laboratory for the development of new advanced dosage forms for various drugs and devices like poorly soluble drugs, dry powder inhalers, coated pellets, modified release products, taste masked preparation etc. Incepta quickly developed a very competent sales team, which promotes the specialties throughout the country. The company virtually covers every single corner of the rural as well as urban area of Bangladesh. It has its own large distribution network having 13 depots all over the country. The company has a clear vision to become a leading research based dosage form manufacturing company with global presence within a short period of time. The Research and Development department for various dosage forms has been very well developed. Incepta intends to bring newer products of advanced technology through research hitherto unknown in this country. Such activities will not only benefit the company but also the total pharmaceutical sector of the country. In the post 2005 era, the company also intends to embark into the production of Active Pharmaceutical Ingredient (API).
Plans are underway to get into reverse engineering and analogue research in order to produce new API. The company is now expanding its activities beyond the geographical boundary of Bangladesh. The products are of high standard and therefore these will be exported to both developed and developing countries. The company is open to collaborate with interested parties in various countries. The future is wide open and the opportunities are bountiful. Incepta will continue to strive to provide high quality medicine at affordable prices to the people here in Bangladesh and other parts of the globe. Incepta at glance Name of the company
: Incepta pharmaceuticals limited
: Head office 40. Shahid Tajuddin Sharani, Tejgoan Industrial Area, Dhaka-1208, Bangladesh : Factory Bara Rangamatia, Zirabo, Savar, Dhaka
: +880-28837811-26 +880-2-8837946-49
+880-2-8837952 : firstname.lastname@example.org email@example.com
Year of establishment
Form of company
: private limited
Total number of employees
Capital Value of Authorized capital Paid up capital/ reserves
: 16.00 million USD 7.50 million USD /4.16 million USD
Total sales turnover Year
(thousand USD) Domestic sale (million USD) Growth Rate Year Turnover(%)
General Product Tablets
Liquid injection ampoules
Liquid injection vials
Dry vial for injection
Powder for oral suspensions
Sachet of oral powder
3.80 Million/Year :
Export Existing Market(Countries): Afghanistan, Belize, Bhutan, Congo, Costa Rica, Cambodia, Dominican republic, EI Salvatore, Ethiopia, Guyana, Georgia, honk Kong, Honduras, Kenya, Myanmar, Mongolia, Mauritania, Srilanka, Somalia, Togo, Tajikistan, turkey, Ukraine, Vietnam. Future Market (Countries): Algeria, Angola, Argentina, brazil, Bolivia, Belarus, Canada, Gabon, Kazakhstan, Mexico, morocco, Peru, Qatar, Singapore, Senegal, Syria, Trinidad& Tobago, Turkmenistan, USA, Zimbabwe. Position in the industry According to IMS health survey, Incepta is currently 2 nd position in 2008 with highest growth rate among the top 10 companies here in Bangladesh.
Chapter 2 National Board of Revenue, Bangladesh (NBR)
The National Board of Revenue (NBR) is the central authority for tax administration in Bangladesh. Administratively, it is under the Internal Resources Division (IRD) of the Ministry of Finance (MoF). MoF has 3 Divisions, namely, the Finance Division the Internal Resources Division (IRD) and the Economic Relations Division (ERD). Each division is headed by a Secretary to the Government. Secretary, IRD is the ex-office Chairman of NBR. NBR is responsible for formulation and continuous re-appraisal of tax-policies and tax-laws in Bangladesh.
Negotiating tax treaties with foreign governments and participating in inter-ministerial deliberations on economic issues having a bearing on fiscal policies and tax administration are also NBR's responsibilities. The main responsibility of NBR is to mobilize domestic resources through collection of import duties and taxes, VAT and income tax for the government. Side by side with collection of taxes, facilitation of international trade through quick clearance of import and export cargoes has also emerged as a key role of NBR. Other responsibilities include administration of matters related to taxes, duties and other revenue related fees/charges and prevention of smuggling. Under the overall control of IRD, NBR administers the excise, VAT, customs and income-tax services consisting of 3434 officers of various grades and 10195 supporting staff positions. National board of Revenue (NBR) has three wings like- Income Tax, Value Added Tax and Customs duty.
National Board of Revenue (NBR)
Value added tax (VAT)
Large Taxpayer Unit (LTU)
Value Added Tax (VAT): Value Added Tax (VAT) was introduced in Bangladesh in 1991 by passing the Value Added Tax Act, 1991 in the parliament. After seventeen years of its introduction, thousands of changes have been done in the VAT system including its management. Bangladesh VAT has shifted far away from the international practices in some cases. VAT a percentage tax on the value added of a commodity or service as each constituent stage of its production and distribution is completed. VAT may be classified in three ways: (I) On the basis of coverage of stages - throughout the production and distribution stages, or confined to limited stages - manufacturing plus wholesale, or wholesale plus retail; (ii) On the basis of the method of calculation - tax credit method, subtraction method, and addition method; and (iii) On the basis of tax treatment of final-product capital goods such as machinery, equipment, and supplies - the consumption form, the income form, and the product variety. Thus the three broad types of VAT are the gross national product (GNP) type, income type and consumption type. A consumption type VAT is an indirect tax. An income type or a GNP type VAT might be considered as a direct tax but a commodity tax cannot be considered so. Consumption type VAT is also considered as an alternative form of 'sales tax'. In April 1979, the Taxation Enquiry Commission (TEC) officially took up the issue of introducing VAT in Bangladesh as an alternate to sales tax. Until 1982, sales tax was being collected under the Sales Tax Act 1951, which was replaced by the Sales Tax Ordinance 1982 with effect from 1 July 1982. The World Bank played the pioneering role in introduction of VAT in Bangladesh. A World Bank Mission visited Bangladesh for preparing an agenda for tax reform in Bangladesh in December 1986. The mission submitted its final report on 15 October 1989. The report recommended the introduction of a manufacturing-cum-import stage VAT at a single standard rate within three years. Thereafter, a Bangladesh Tax Mission visited India, Indonesia, the Philippines and Thailand during 13 November - 04 December 1989. The Mission submitted its report in January 1990. The government discussed the issues relating to introduction of VAT with all related private and public agencies including the various leading Chambers of Commerce and Industry from time to time. The government prepared the Value Added Tax Act 1990 (Draft) in June 1990.
Final version of the Value Added Tax Act was promulgated 31 May 1991 as a Presidential Ordinance with eight sections (relating to registration under VAT system and the appointment and powers of VAT authorities). It was made effective from 2 June 1991. The Value Added Tax Bill 1991 was introduced in the Parliament on 1 July 1991 and the Parliament passed it on 9 July 1991. With the Presidential assent to the bill on the next day it came into effect as The Value Added Tax Act 1991. The VAT Act 1991 replaced the Business Turnover Tax Ordinance 1982 and the Sales Tax Ordinance 1982 with effect from 1 July 1991. It imposed VAT @ 15% on importer or supplier (producer) of taxable goods and provider of taxable services having annual turnover of Tk 1.5 million or more. It imposed Turnover Tax (TT) @ 2% (currently 4%) on supplier of taxable goods and provider of taxable services having annual turnover of less than Tk 1.5 million (Tk 2 million at present). The new law imposed VAT at zero-rate on export sales of any goods and services, brought excise duties on most goods under the VAT net, and imposed Supplementary Duty (SD) @ 10% to 85% on goods and services which are luxurious and non-essential and are socially undesirable. The standard tax rate for VAT has been fixed all along at 15% (for taxable goods and services). The adoption of truncated value-bases caused multiplicity of practical tax rates, but VAT rate is a single, flat or uniform one. The rate of turnover tax (TT) is also uniform at 4% (2% up to 11 June 1997). But the rates of supplementary duty (SD) are multiple. At the beginning (FY 1991-92), there were five different rates which ranged from 10% to 85%. Next rates were eleven in number and ranged from 5% to 350%. For FY 2000-01, there are 31 different rates that ranged from 2.5% as on coffee to 350% as on cigarettes. Highlights of VAT: (I) VAT is imposed on goods and services at import stage, manufacturing, wholesale and retails levels; (ii) A uniform VAT rate of 15 percent is applicable for both goods and services; (iii) 15 percent VAT is applicable for all business or industrial units with an annual turnover of Taka 2 million and above; (Iv)Turnover tax at the rate of 4 percent is leviable where annual turnover is less than Taka 2 million; (v) VAT is applicable to all domestic products and services with some exemptions; (vi) VAT is payable at the time of supply of goods and services; (vii) Tax paid on inputs is creditable/ adjustable against output tax;
(viii) Export is exempt; (ix) Cottage industries (defined as a unit with an annual turnover of less than Taka 2 million and with capital machinery valued up to Taka 3, 00,000) are exempt from VAT; (x) Tax returns are to be submitted on monthly or quarterly or half yearly basis as notified by the Government. Tax Base for VAT Import Stage: Customs Assessable Value + Customs duty + Supplementary Duty a) Goods (manufacturing): [Production cost + Profit and Domestic/Local Stage:
Commission (if any) + Supplementary duty (if any)] b) Services: [total receipts excluding VAT but including supplementary duty (if any)]
Truncated Base / Fixed Value Addition: In some of the cases of goods and services producers and sellers face difficulties in availing VAT credit/adjustment facilities due to non availability of invoices from the sellers of input. In order to remove this operational difficulty fixed bases such as 10%, 25%, 30%, and 60% value addition is taken into account for calculation of VAT for a number of goods and services. In such circumstances net VAT rate for different rates of value addition comes to 1.5%, 2.25%, 4.5% and 9%. VAT at the wholesale and retail stage: In case of wholesalers and retailers, there is a special provision for a 1.5% percent VAT known as Trade VAT on the total sale, provided that the wholesaler/retailer do not avail the facility of input credit/adjustment. Such tax is also collected at the import stage from importers of finished goods as an advance trade VAT. Tariff Value for imposition of VAT: Under the VAT Law, the government is empowered to fix Tariff Value for some items for the collection of VAT. Example: tariff value for mild-steel products produced from imported/locally procured re-rollable scraps is TK 4000.00 per MT. Normal VAT input credit is also not available under this system.
Deduction of VAT at source: As deduction at source is also practiced in case of VAT on certain services, Government, Semi-Government, Autonomous Bodies, NGOs, Banks, Insurance Companies and Limited Companies are authorized by the government to deduct applicable VAT on the services at source.
Chapter 4 Large Taxpayer Unit (LTU) Aiming modern tax administration LTU starts functioning since November, 2003. The government of Bangladesh with support from Department for International Development (DFID) took the task of reforms in direct tax & VAT wing of the National Board of Revenue. The government has designated the Large Taxpayers Unit as the pilot zone for the implementation of the reform in direct tax. Focal point of LTU Reorganization of tax administration & formation of LTU with following functional wings-
Taxpayer service wing
Revenue account wing
Tax collection enforcement appeal wing
Others objective of LTU: • Introduce modern techniques of tax administration. • Improvement in the management of data and information systems (MIS). • Better services for the tax payers. • Increase income tax revenue. • Increase Voluntary Compliance of the taxpayers. • Increase Professionalism in tax administration
The success of LTU •
Taxpayer friendly environment has been established
Facilitation of taxpayer service has been performed
Mutual trust & confidence has been established
Tax compliance cost has been minimized
A modern IT-based automation system has been developed in taxpayer service wing, collection wing & other wings.
Revenue collection target has been increased tremendously. In 2004-2005 FY,revenue collection was only 1475 crore , In 2007-2008 FY, collection has reached to 4042 crore with same jurisdiction.
Less cost Revenue earning
Declaration of Taxpayers Charter
Other Financial Institute (Investment & leasing companies)
Mobile Telephone Companies
Director of the above Companies
Part 2 Chapter 1 Introduction to the Report Statement of the Problems •
How pharmaceutical company deals with VAT authority for goods sale purpose.
The study on Pharmaceuticals Company (Incepta pharma) is taken to understand the VAT process during goods sale. Objectives of the Study: Broad/General Objective: •
To know VAT process of pharmaceutical company during goods sale
To know VAT processing system of manufacturing company.
How pharmaceutical company deals their price declaration in the NBR.
Know about the import VAT and export VAT process.
Dealing about, price declaration on tender in NBR.
Methodology of the Study: Primary data: Primary data is collected by interviewing the managers from the internship activities on Incepta. For this purpose, people who are involved on the vat process of incepta and LTU are selected. So sample will be selected on the random basis. In addition, some statistical application like- percentage, mean, graphs and table might be on final report. Secondary data: Secondary data will be collected from: •
Incepta Pharmaceutical ltd.(Websites)
National board of revenue(NBR)
Other pharmaceuticals company
And previous report (if any)
VAT flows of pharmaceutical company (Incepta) Pharmaceutical company produces pharmaceutical goods and their vat process goes on as their production process going on. At the very beginning company have to purchase their raw material and have to pay vat expenses. After write it down on their purchase register they can get the rebate. At the time of work in Process Company need to accumulate on treasury. Then company can sell their product and have to pay the vat payable amount. Finally companies have to submit the Vat return, which include all the summary of vat process. Pharmaceutical companies particularly deal with pharmaceutical goods, so goods sale is the most important stage of these industry. And during the goods sale stage they have to maintain a standard process dealing their VAT with the VAT authority. Companies also have to follow some formalities before goods sale and after goods sale. However companies can sale their goods in different forms and subsequently process will be a little bit different.
Illustration of VAT process during goods sale: Incepta Pharmaceuticals Ltd wants to produce and sell some pharmaceutical goods. During the production stage Incepta needs to follow the rules of NBR. When the product is finally ready for sale, Incepta also needs to comply with NBR rules and regulation for their VAT process. For instance: Incepta wants to sell their final product worth taka 100,000 but before sale the product Incepta should follow some rules with NBR. They have to declare price and ingredients of single product and total worth of 100,000 taka. After examine price declaration, if LTU (Large Taxpayer Unit) permit Incepta only then Incepta can sell their product. Incepta can sell their product in different form. They can sell their product in locally, can export, can sell on tender and also sell on contractual basis. Incepta need to pay VAT in every form of sale except the export. However to get VAT exception Incepta will need to submit an application showing they are exporting the product. If the sale is on contractual basis, Incepta need to submit all document regarding the contract. Incepta need to submit the challan to the LTU showing the sell of taka 100,000 after sale product. If some product return to Incepta, should write on credit note and it should need to submit on LTU. So, these are formulation for Incepta before the goods sale, during the goods sale and after the goods sale. A flow chart showing the VAT process of Pharmaceutical companies during the goods sale is adopted:
Goods Sale Stage
Before goods sale
Price declaration on LTU Price declaration of tender on
After goods Sale
Sale on tender Contractual Sale
Before Goods Sale: After completed all the process to reach the final product goods are ready for sale. However before sale the product company have to do some formal procedure with the vat authority i.e. LTU. Price declaration: Before sale the product to customer and if the product is new then company need to disclose individual product price on LTU. At the price declaration time company need to enclose Mushok-1 and Annexure copy of each product.
Chapter 3 Goods Sale Different forms of sale: After all the formalities have done company can sell its product to customer. Product can sale in different form like: Locally: If the product is sale on local market then company have to pay Vat and adjust it with the treasury. Export: If the product is exported than company will get vat exemption and get rid of paying vat. For the export purpose company need to follow some formalities with the LTU.
Sale on tender: Product also can sale on the tender base. At this time company have to show all documents related the tender on LTU. Contractual sale: Contractual sale is sale of product to the other pharmaceutical company. For example- if Incepta sale some product to the Beximco pharma, general pharma.
So company can sale their product on different way and they have to pay vat accordingly. However companies get benefit if they export their product.
Chapter 4 Formalities after sale: After sale the product companies also need to comply with different formalities with LTU. Some of the formalities they have to face are:
Challan: At the time of product Sale Company write it down on Challan book. And this Challan copy should give to the LTU and pay the amount of vat payable. So vat payable is accounted on the base of the Challan and this Challan is recorded on Mushok-11.
Mushok-11 Credit Note: After sale the product, if some product returns for any reason then this is recorded on Credit note. Credit note is send along with products to the seller. Seller need to show it to the LTU and get rebate from vat paying. Company need to write credit note on Mushok-12.
Mushok-12 Current Account: Current account is the summary of current situation of all vat direction. Mushok18 is used for the current account purpose. In Mushok-18, transaction description, purchase and sales register, tax rebate, tax payable, accumulate on treasury and finally closing balance are disclosed.
Mushok-18 Sales register: After sell the product, company need to write down it on sales register. Mushok-17 is used for the sales register purpose.
Mushok-17 VAT Return: Vat return is the final form of the vat direction. For this return purpose, Mushok-19 is used. In this Mushok, company need to disclose vat expenses, vat rebate, accumulate on treasury, vat payable and finally summary of all vat procedure. Vat return is similar like current account because of its information disclose. However current account has major differences with the vat return. Current account is done on the daily activity basis but Vat return is done on periodically basis and Vat return is the main form of Vat direction.
Chapter 5 Suggestions VAT system is one of the most important and complex part for pharmaceuticals company. The current procedure follows by pharmaceutical company has some unstructured problems. Also Large Taxpayer Unit (LTU) has some unsystematic procedure. So some recommendation goes for both LTU and pharmaceutical companies: Large Taxpayer Unit (LTU) Large Taxpayer Unit (LTU) is currently done almost every work by manually. They check different Mushok form like-challan, credit note, current account, VAT return by manually. Also price declaration, price declaration on tender and export allowances are done on similar ways. So this procedure has unsystematic flows and time consuming and need to be computerized LTU is currently faces shortage of manpower. Now there are only 15 officers in LTU. It is not sufficient enough for proving better performance of different wings of LTU to achieve 40% of National Target. Also currently enrolled employees have lack of computer skill. So computer skilled manpower should be added in the LTU procedure. In addition shortage of office space is another problem for LTU to work smoothly and need to be addressed. So overall LTU and according on procedure has some problems and need to overcome for the better performance of VAT system of this body. Pharmaceutical company VAT process is very important part for pharmaceutical company. Incepta, leading pharmaceutical company does their VAT procedure on two stages. One is their factory stage and another is commercial stage. But most of the works on these two stages for VAT purpose are done by manually. For example they do the purchase register, sales register and VAT return on their similar books and khata. So this is lengthening process and time consuming. Also itâ€™s very difficult to find out related information during the VAT audit from this procedure. So pharmaceutical company need to be more computerized for the VAT related process. In addition, VAT procedure during the goods sale stage like; price declaration, export allowances, submitting challan, credit note are done unsystematically. So this procedure should need to be more realistic. Conclusion
VAT is the prime source of Government revenue. Pharmaceutical companies are major component of this VAT. So VAT process and procedure are very important part for any pharmaceuticals company. From starting the business till end up, companies have to follow VAT rules. Also to produce goods till sell the goods companies have to maintain different VAT procedure. Though pharmaceuticals companies are manufacturing company, they have to update VAT process at the very stage of their production process. In addition, the most important stage of pharmaceutical companies is to sale the pharmaceuticals goods. At this stage they have to maintain a VAT direction to the VAT authority. So pharmaceuticals companies need to keep in touch with the VAT procedure during their goods sale stage and this stage is one of the crucial for the pharmaceuticals company. Bibliography 1. Md. Zackary Hossain. Value Added Tax: Act, Rule and Usages. 2. Shamsul Islam Khan. The VAT Act, rules and procedure (3rd edition) 3. Mohammad Zakaria Masud, Nikhil Chandra Shil, Mohammad Faridul Alam. BANGLADESH INCOME TAX (Theory and Practice) 4. Information of Incepta Pharmaceuticals Ltd. Available: http: //www.inceptapharma.com (April 17, 2010) 5. Information National Board of Revenue. Available: http:// www.nbr-bd.org(April 12, 2010) 6. Different Mushok Forms. Available: http: // www.nbr-bd.org/ publication.html and http: // www.nbr-bd.org/ SPOs/ Publications/ vat/vat Pustika-1.pdf 7. Large Taxpayer Unit. Avaiable: http: // www. Ltubd.org (March 28, 2010) 8. Information about Tax. Available: http: // www. taxguidebd.com/vat/vat.php and http: // www. taxguidebd.com
Incepta Pharmaceuticals Ltd. is a leading pharmaceutical company in Bangladesh established in the year 1999. The company has a very big manu...