VAT on sales of locally-produced APIs likely to go from FY23

The government is going to exempt local manufacturers of active pharmaceutical ingredients (API) from paying value-added tax (VAT) at the sale or supply stage to make pharmaceutical raw materials easily available.

The National Board of Revenue (NBR) in its budget proposal has suggested VAT exemption at the supply stage of APIs, sources at the revenue board told The Business Standard, adding the finance minister may announce the exemption on 9 June while presenting the national budget for fiscal 2022-23 in parliament.

Currently, local API manufacturers have to pay 15% in VAT on their sales or at the production stage. 

NBR sources said the revenue board has come up with the VAT exemption facility for the API manufacturers with a view to helping the country achieve self-reliance in APIs and laboratory reagents and attract foreign investment. But, to avail of this opportunity, entrepreneurs have to adhere to some conditions, they added.

People concerned feel the VAT exemption will enable local manufacturers of APIs to supply the products to pharmaceutical companies at competitive prices, as imports of the APIs are subject to 15% VAT.

At present, Active Fine Chemicals manufactures raw materials for some of the top pharmaceutical companies in the country, apart from catering to their own demand. But other pharmaceutical companies chiefly manufacture the raw materials for their own use only.

According to the Bangladesh Association of Pharmaceutical Industries, the country's pharmaceutical companies have a demand for around Tk7,000 crore worth of raw materials, and the market is growing at an annual rate of 12%. Local companies currently manufacture a paltry Tk400-500 crore worth of pharmaceutical raw materials.

SM Shafiuzzaman, secretary general of the Bangladesh Association of Pharmaceutical Industries, has welcomed the government's move to waive VAT on API sales. He said the facility would encourage local investment and boost exports.

Saifur Rahman, managing director of Active Fine Chemicals Ltd, also hailed the government initiative as a "positive move".

He noted that the sector has huge potential to grow as the large domestic market is still mostly dependent on imports, while there is a huge demand for these products in the international market as well.

He went on to say his company had received a huge number of export orders of pharmaceutical raw materials in the last two years during the pandemic when some companies in China and India were not able to supply the products.

As a backward linkage of the pharmaceutical sector, the API industry has the potential to grow 20% annually, he added.

Bangladesh will not get the benefit of patent exemption under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) from 2033.

In this situation, discussions on making the country self-sufficient in pharmaceutical raw material production have gained momentum over the past several years. The government also is extending necessary cooperation for this purpose.

In 2018, the commerce ministry formulated the National Active Pharmaceutical Ingredients and Laboratory Reagents Production and Export Policy to incentivise API production. The policy aims at producing 370 key API molecules for exports and cutting reliance on raw material imports by 2032.

As per policy, local API manufacturers have been getting a VAT waiver on their raw material imports since 2019.

Besides, they are getting a tax holiday facility till 2032, subject to complying with certain conditions. According to the NBR, raw material manufacturers will have to spend 1% of their annual turnover on research and development to be eligible for the tax break.

Those who manufacture three APIs or laboratory reagents will get a 22.5% cut in corporate tax, meaning they will pay 7.5% in tax. Failing to conform to the conditions, non-listed companies will count a 30% regular corporate tax, while the listed ones will pay 22.5%, according to the NBR.

Besides, the producers get a 20% cash incentive on exports if they add a minimum 20% value locally. The conditions of value addition will be reviewed after 2026.

APIs account for 30% of total drug costs in the case of small molecules and can go up to 55% for generic products.

Currently, Bangladesh meets 98% of the demand for finished-form pharmaceutical products locally. Despite being nearly self-sufficient in the area of finished drugs, the country depends on imports for more than 90% of APIs.

Heavy reliance on raw material imports makes the pharmaceutical industry vulnerable to supply chain disruptions and price volatility, according to industry insiders.

At present, 15 local companies, including Square Pharma, Beximco Pharma, Active Fine Chemicals Ltd, ACI Limited, Globe Pharma, Gonoshasthaya Pharma, Opsonin Pharma, Drug International, and Eskayef, produce around 40 APIs.

Among them, Active Fine Chemicals Ltd is the only company listed on the capital market, which does not produce any finished medicine.

Gonoshasthaya Pharmaceuticals Limited alone accounts for about 60% of APIs manufactured locally.

According to IQVIA, a US-based healthcare data science company, the country's pharmaceutical market surpassed Tk27,000 crore in 2020 with an annual growth of more than 10%.

Bangladeshi companies also exported medicines worth around Tk1,500 crore in FY21. However, the country's top 10 companies sell about 71% of total medicines.