VAT implication on Sales of FMCG companies

Sales by Sale by Sale by Purchase by

FMCG Co. Distribution House Retailers Consumers
Type of Primary Sales: These are sales Secondary Sales: These are sales Offtakes (Tertiary Sales/Final Consumers buy at the
Sales in from the company to the from the distributor to the Sales): These are sales from the final stage!
FMCG distributor e.g. the amount of retailers. retailer to the end consumers.
Co.: there product that a distributor While offtakes are not tracked by
are types purchases from the company. the company, trends of offtakes
of sales are tracked by some market
in FMCG research agency.
Co.

Pricing DP: Distributor Price: TP: Trade Price: MRP: Maximum Retail Price: Consumers buy at MRP,
prevailing Distributor Price is the price at Trade Price is the price at which a Maximum Retailer Price is the unless discounted!
in FMCG which a FMCG Co. sells its Distributor sells its products to price at which retailers sells the
Co.: there products to Distributors. Retailers. product to the final consumers
are three Or, Or,
prices in DLP: Distributor Landing Price: LPR: Retailer Landing Price:
FMCG Co. Distributor Landing Price is the Retailer Landing Price is the price
against price at which the distributor at which retailer purchases goods
three purchases goods from the from the distributor. Retailer then
types of manufacturer/company. The sells the product at MRP (or offers
sales distributor then sells the product some discount over MRP).
at TP to Retailers.

Prepared by Mohammad Farid Molla ACA

Finance, Accounting & Tax Professional
 VAT implication on Sales of FMCG companies
Price Chart

Product X DP: 97.79 TP: 102.68 MRP: 115

Example Sale at DP: 97.79 Sale at TP: 102.68 Sale at MRP: 115 Buy at MRP: BDT 115
VAT – 15% VAT – 15% VAT – 15% | 4%**| 5%** Consumer buys at 115
Margin – 30% Margin – 5% M – 12% and pays VAT Tk. 15

Distributor Selling Price Tk. 97.79 Distributor Selling Price Tk. 102.68 Retailer Selling Price Tk. 115
Output VAT (97.79/1.15*.15) = 12.76 Output VAT (102.68/1.15*.15) = 13.39 Output VAT (115/1.15*.15) = 15
Product Price exc. VAT = Tk. 85.03 Product Price exc. VAT = Tk. 89.29 Product Price exc. VAT = Tk. 100
FGCG Co. Margin = Tk. 19.62 Distributor Margin = Tk. 4.25 Retailer Margin = Tk. 10.71
Input VAT 9.81* Input VAT 12.76 Input VAT = Tk. 13.39
Net VAT Payable: 12.76 – 9.81= Tk. 2.95 Net VAT Payable: 13.39 – 12.76 = Tk. 0.63 Net VAT Payable: 15.00 – 13.39 = Tk. 1.61

Actions by FMCG Co.:

If you work in the Accounts/VAT department of an FMCG Co., you will see that FMCG Co. sells its products to its distributors at 97.79 which includes
VAT. If you back-calculate, you will find the Output VAT Tk. 12.76 i.e. VAT payable amount is Tk. 12.76 but FMCG Co. will not pay this amount, rather it
will adjust its Input VAT (VAT Rebate) Tk. 9.81 against VAT payable amount (It has paid input VAT on raw material purchases/imports (if imported,
then Advance Tax (AT) will come into the scene and for simplicity import is not considered) as well as other inputs like VAT paid on overhead costs).
After adjusting Input VAT of Tk. 9.81, FMCG Co. will finally pay Tk. 2.95.

Actions by Distributor: (If you work in an FMCG Co., you have nothing to do with Distributor’s VAT process)
Distributor has purchased the goods at Tk. 97.79 which includes Input VAT of BDT 12.76. As Trade Price is fixed by the FMCG Co., Distributor will sell
the product to Retailers at 102.68 (at TP). If you back-calculate, you will find the Output VAT Tk. 13.39 i.e. VAT payable amount is Tk. 13.39 but the
Distributor will not pay this amount, rather it will adjust its Input VAT (VAT Rebate) Tk. 12.76 against VAT payable amount (It has paid input VAT on
purchases from FMCG Co.). After adjusting Input VAT of Tk. 12.76, FMCG Co. will finally pay Tk. 0.63. It’s assumed that the Distributor maintains
required VAT books.

Actions by Retailer: (If you work in an FMCG Co., you have nothing to do with Retailer’s VAT process)
Retailer has purchased the goods at Tk. 102.68 which includes Input VAT of BDT 13.39. Retailer sells the product at MRP to end consumers at 115. If
you back-calculate, you will find the Output VAT Tk. 15 i.e. VAT payable amount is Tk. 15 but the Retailer will not pay this amount, rather it will adjust
its Input VAT (VAT Rebate) Tk. 13.39 against VAT payable amount (It has paid input VAT on purchases from Distributor). After adjusting Input VAT of
Tk. 13.39, FMCG Co. will finally pay Tk. 1.61.

Now if you see that Government has realized total Tk. 15 VAT in different stages (9.81* + 2.95 + 0.63 + 1.61)

Prepared by Mohammad Farid Molla ACA

Finance, Accounting & Tax Professional
 VAT implication on Sales of FMCG companies
**Issues remain:
It’s not practically possible to maintain VAT books by all retailers (local shopkeepers) due to various reasons: small scale of business, extra cost
burden to main VAT books (Purchase Book, Sales Book, VAT Challan). What they do is they buy products from distributor at TP and sell at MRP and
they don’t pay VAT as a result Gov’t loses VAT of Tk. 1.61! To mitigate this issue Gov’t/NBR imposed “Package VAT” (VAT based on the location of
traders/retailers of under the old VAT Act 1991. But the current VAT Act, 2012 doesn’t keep such provision. VAT Act, 2012 has given the opportunity
to small traders to keep out of VAT net yearly sales (turnover) doesn’t exceed Tk. 50 Lac (Section 2(48) & (57)). If yearly sales/turnover exceeds Tk. 50
Lac but doesn’t exceed 3 Crore, then the small trader/retailer is bound to enlist under Turnover Tax and pay VAT (TT) at 4% (Section 63). If yearly
sales/turnover exceeds Tk. 3 Crore, then the small trader/retailer is bound to register under VAT and pay VAT at the Applicable Rate. Applicable Rate
for local trader/retailer is 15% (Section 15) or 5% (Trade VAT, as per para 3 of 3rd Schedule of VAT & SD Act, 2012). It’s the retailer’s choice to go with
15% standard VAT on sales and take input credit or go with 5% trade VAT on sales and no input credit is available.

* This amount of Vat has been borne by the FMCG Co. for production inputs and Gov’t got this amount from the suppliers of RM & Overheads.
Pharmaceuticals’ companies are supposed to undergo the same VAT process as FMCG companies but there’s special for pharma industry for VAT
payment. In one next episode It will be discussed!

N.B: The issue of Trade Schemes/Trade Promotions has been excluded due to simply understanding the VAT implications in selling FMCG products.

Prepared by Mohammad Farid Molla ACA

Finance, Accounting & Tax Professional