Seminar on "Developing The Natural Herbal Industry In Sabah ’’

18 May 1999 (Tuesday)

Shangri-La's Tanjung Aru Resort,

Kota Kinabalu Sabah

Incentive Scheme for Herbal Products

Under The Pharmaceutical Industrial

Cluster In Malaysia

By

Jaswant Singh

Chemical Industry Division

Malaysia Industry Development Authority (MIDA )

Growth of Manufacturing Sector

Note : 1995* Estimate

2000** Forecast

SMIs Contribution To the Manufacturing Sector

• SMIs account for approximately 84% of the total manufacturing establishment in Malaysia
• The majority of SMIs are owned by Malaysians.

SMIs Contribution to the Manufacturing Sector

• Majority of SMI s are involved in manufacturing activities related to food,beverage and tobacco,fabricated metal products (particularly machinery and equipment),wood and wood products,textile,wearing apparel and leather products.
• SMIs have a crucial role in deepening and strengthening Malaysia s industrial base.

Pharmaceutical Cluster Second Industry Master Plan (IMP2)

• Traditional & herbal medicine industry identified for further development.

Manufacturing License Under The Industrial Coordination Act (ICA),1975

• Required if Manufacturing activity involves
• Shareholders Fund of RM 2.5 million and above :

Or

• Full-time Employees of 75 or more.

Investment Tax Incentives for Manufacturing

• Provided Under :
• Promotion of investment Act (PIA)1986
• Income Tax Act (ITA) 1967

General Incentives

• Pioneer Status(PS)
• Investment Tax Allowance (ITA)
• Incentives of High Technology
• Incentives for Dispersal of Industries (Eastern Corridor ) Sabah and Sarawak
• Incentives for Small-scale manufacturing Companies
• Reinvestment Allowance (RA)
• Exemption from import Duty and Sales Tax on Machinery and Equipment
• Exemption from Import Duty on Raw Material and Components

List of Promoted Activities and products

Examples:

• Cultivation of herbs
• Cultivation of medicinal plants
• Cultivation and processing of herbs
• Cultivation and processing of medicinal plants
• Essential oils
• Plant extracts for pharmaceutical, perfumery, cosmetic or food industry
• Basic manufacture of pharmaceuticals

Specific Incentives

• Incentives for R & D
• Incentives for Industrial Training
• Incentives for Export
• Incentives for industrial Adjustment

Pioneer Status (PS )

• Normal

Income tax exemption on 70% of statutory income for 5 years.

Investment Tax Allowance (ITA)

• Normal

ITA of 60% on qualifying capital expenditure incurred for 5 years,subject to a maximum of 70% of statutory income for a year of assessment.

Unutilised allowances can be carried forward to subsequent years.

Pioneer Status / Investment tax Allowance

Criteria of eligibility for PS/ITA

• Promoted product/activity
• To fulfill two following criteria :
• Value added
• Local material content
• Level of technology
• Industrial linkages

Incentives For High Technology

Definition of High Technology Companies - Companies engaged in promoted activities or in the products in areas of new and emerging technologies

Broad areas identified as promoted products/activities of high technology include:

• Advanced electronics
• Equipment instrumentation
• Biotechnology
• Automation & flexible manufacturing systems
• Electro-optic & non-linear optics
• Optoelectronics
• Software engineering
• Advanced materials
• Alternative energy sources
• Aerospace
• Full Tax exemption at statutory income level for a period of 5 years ; or
• ITA of 60% on qualifying capital expenditure incurred within a period of 5 years. The allowance can be set-off against the statutory income for each assessment year without any restriction.

Criteria of eligibility for PS / ITA

• Promoted product /acclivity
• Local research and development expenditure to gross sales should be at least 1%
• The number of science and technical graduates to total workforce should be at least 7%

Special Incentives For Industries Locating In The eastern corridor of Pen. Malaysia Sabah and Sarawak

• Definition

The Eastern corridor of peninsular Malaysia covers the states of Kelantan ,Terengganu,pahang except for the districts of Lipis,raub,Jerantut & Cameron Highland ,but the including the industrial estates approved by the start Government in these districts.For Johor ,the corridor only cover the district of merging.

• Pioneer status (PS)

Income tax exemption on 85 % (Normal 70% ) of statutory income for 5 year.

• Investment Tax Allowance (ITA)

ITA of 80% (normal 60%) on qualifying capital expenditure incurred for 5 year subject to a maximum of 85% (normal 70%) of statutory income for a year of assessment.

Unutilised allowances can be carried forward to subsequent years.

• Criteria of Eligibility for PS/ITA

• Promoted product /activity.
• To fulfill the location requirement plus one of the following criteria :

-Value added

-Local Material content

• Selective List of Promoted products /Activities

Government has identified a selective list of promoted products/activities which would qualify for PS /ITA if they located in the promoted area, which otherwise would not be considered for incentives if located in other areas

Workings Of Pioneer Status

Gross Income RM1,000,000

Less Allowable (Revenue Expenditure) RM 200,000

Adjusted Income RM 800,000

Less Capital Allowances RM 100,000

Stalutory Income RM 700,000

Exempt Income (85% x RM700,000) RM 595,000

Statutory Income Subject To Tax RM 105,000

(15% x RM700,000)

Workings of ITA for a Particular Year Of Assessment (Y/A)

Qualifying Capital Expenditure RM8,000,000

ITA Granted (80% x RM8,000,000) RM 6,400,000

Statutory Income RM2,000,000

Less ITA (Restricted to 85% of Statutory Income) RM1,700,000

(85% x RM2,000,000)

Statutory Income After ITA RM 300,000

Balanced Unutilised Allowances Eligible To Be Carried Forward To Subsequent Y/A

(RM6,400,00 – RM 1,700,00 = RM 4,700,000

Incentives For Small –Scale Manufacturing Computer

Definition

Small-Scale Manufacturing Companies are Companies with shareholders funds not exceeding RM500,000,and having at least 70% Malaysia equity.

Pioneer status if the company manufactures promoted products or participates in promoted activities and fulfill one of the following criteria :

• Product are substituting import ,with local content of more than 50%
• Exports 50% or more
• Provide linkages
• Contributes towards rural development.

Reinvestment Allowance( RA )

RA of 60% on qualifying capital expenditure is granted to manufacturing companies which incur capital expenditure for any of the following :

• Expansion of production facilities

• Modernisation & upgrading of production facilities
• Diversification activities

-The utilisation of RA is restricted to 70% statutory income.

-RA is in addition to normal capital allowances.

RA for Companies Locating in The Eastern Corridor of Pen. Malaysia, Sabah and Sarawak

• RA can be set-off against the statutory income without any restriction.

Working of RA for a Particular (Y/A) (Example l)

• Qualifying Capital Expenditure                         RM5,000,000
• RA (60% x RM5,000,000)                                RM3,000,000
• Statutory Income                                         RM8,000,000
• Less RA (Up to 100% of statutory Income)       RM3,000,000
• Statutory Income Subject to Tax                    RM5,000,000

RA fully absorbed for the particular Y/A

Working of RA for a Particular (Y/A) (Example ll)

• Qualifying Capital Expenditure for Expansion    RM5,000,000
• RA (60% x RM5,000,000)                             RM3,000,000
• Statutory Income                                      RM2,000,000
• Less RA (Up to 100% of                               RM2,000,000

Statutory Income or RA Amount Whichever is lower)

• Statutory Income subject to Tax                 Nil

Unutilised Allowance Eligible To Be Carried Forward To Subsequent Y/A

RM3,000,000 – RM2,000,000 = RM1,000,000

Exemption from Import Duty On Raw Material /Components

• Full exemption for companies manufacturing finished products for the local and export market.

Exemption from Import Duty and Sales Tax on Machinery /Equipment

• Machinery and equipment which attract import duty and sales tax can be considered for exemption.

Incentives For R & D

• Double deduction on revenue expenditure incurred on approved research :
• ITA of 50% on qualifying capital expenditure (related to R & D) for 10 years.

For Independent R & D

1. Contract R & D companies which provide services to companies other than their related companies.

• Pioneer status for 5 years or
• ITA of 100% on qualifying capital expenditure incurred within a period of 10 years.
• Against 70% statutory income

    2. R & D companies which provide services both for its related companies or any other companies

• ITA of 100% on qualifying capital expenditure incurred within a period of 10 years.
• Against 70% statutory income

• Exemption of import duty,excise duty and sales tax on machinery/quipment, materials, raw materials and samples used for research.
• Double deduction on payment for the use for facilities and services of an approved research institution /company.
• Double deduction on cash contribution to approved research institution.

Approved Research Institutions

• Rubber Research institute of Malaysia (RRIM)
• Forest research Institute of Malaysia (FRIM)
• National Remote Sensing Centre (MACRES)
• Unit Penyelidikan,UPM
• Pusat Penyelidikan dan Perundingan, UUM
• Unit Pengurusan Penyelidikan UKM
• Pusat Inovasi dan Perundingan USM
• Unit Perundingan UM
• Pusat Penyelidikan UIA
• Unit Penyelidikan dan Pembangunan UTM
• Malaysia Agricultural Research and Development Institute (MARDI)
• Fisheries Research Institute
• Veterinary Research Institute
• Palm oil Research Institute of Malaysia (PORIM)
• Mineral research Institute
• Standard and Industrial research of Malaysia (SIRIM)
• Institute of Medical Research of Microelectronic System (MIMOS)

Institutional support to boost private sector R & D

• Funding under the intensification of Research in priority Area (IRPA) schema
• Mechanism with the aim of ensuring selectivity and quality R & D activities in the public sector
• Launched in 1988 with an allocation of RM400 million
• Increased to RM1 billion in the 7MP
• Funding under the intensification of Research in Priority Areas (IRPA)Scheme
• Initially open to only public sector research.
• Extended to include private companies in the 1997 Budget to carry out selected research activities so that results of this research can be easily commercialised. (MOSTE has launched the industry R&D Grant Scheme to provide direct,up-front grant support based on the concept of risk-sharing)

Key Sector that received IRPA Funds

• Agricultural
• Industrial
• Medical
• Strategic
• Social Science

Malaysia Technology Development corporation (MTDC)

• Provides seed capital for commercialisation of research.

Commercialization of R&D Fund

• To commercialize research results
• Partial grant from 50% to 70%
• Eligibility : Malaysia majority companies

Lead Agency : MTDC

Web site :www.mtdc.com.my

Eligible Activities

• Market survey and research
• Product/process design and development
• Standard and regulatory compliance and intellectual property protection.

Technology Acquistion Fund

• Companies undertaking technology acquisition – Promoted Activities/High Technology companies
• Partial grants from 50% to 70%
• Eligibility : Malaysia majority companies

Lead Agency : MTDC

Web site : //www.mtdc.com.my

Eligible Activities :

• Purchase of high-tech equipment
• Technology licensing
• Acquisition of patent rights,prototypes and design
• Placement of technology companies and foreign technology institutes
• Export source programme
• Information dissemination seminar /workshop

Human Research Development Fund (HRDF) Scheme

• Launched in 1993 to encourage direct private sector participation in skills development programmers
• Manufacturing companies which employ 50 or more Malaysia workers have to contribute 1 % of the monthly wages of their employees to the HRDF as a levy.These companies can avail themselves to grants provided by the HRDF.

- Effective 1.1.95 manufacturing companies which employ 10 but not more than 50 employees and with a paid-up capital of RM2.5 million and above,will also have to contribute 1% of the monthly wages of their employees as HRDF levy.

- Effective 2.8.1996, manufacturing companies which employ 10 but not more than 50 employees and with paid-up capital of less than RM2.5 million will have the option of paying the levy at the rate of 0.5% of the employees monthly wages. To assist these employers the Government will contribute RM2.00 of every RM1.00 contribution by them. In other word if an employer under this category contributes RM5,000 per year, he will be eligible to apply for training grants up to the maximum of RM15,000

Incentives For Industrial Training

• Companies providing or intending to provide technical or vocational training for the manufacturing sector and other sector such as service and tourism are eligible for an ITA of 100% for 10 years

Eligibility for Training Grants (Financial Assistance) under HRDF

• Registered with HRD council
• Eligible to apply for training grant to defray a major portion of the "allowable costs" of training their employees
• Training must be employees who are Malaysia citizens
• Training must be in areas of direct benefit to their business operation.

Incentives For Industrial Training

• Single deduction for cash contribution to technical / vocational training institution.
• Industrial Building Allowance (IBA) at an annual rate of 10% on building used for technical / vocational training .
• Exemption from import duty and sales tax on machinery, equipment and materials used for purposes of training.
• Manufacturing companies not covered under the HRDF scheme are eligible for a Double Deduction on Approved Training
• Automatic approval on double deduction is given if the employees are trained at designated approved training institution or undergo approved training programmer. Claims can be submitted directly to the inland Revenue Board.

Approved Training Institutions

• Malaysia Timber Industry Boars (MTIB)
• Perak Entrepreneur and Skills Centre (PSEDC)
• Tuas Polytech
• French-Malaysia Institute (FMI)
• Puspatri (Johore Skills Development Centre)
• Pusat Pembangunan Kemahiran Industri dan Pengurusan Kedah (KISMEC)
• Pusat Pembangunan Tenaga Manusia Selangor (SHRDC)
• Pusat Pembangunan Kemahiran Sarawak (PPKS)
• Pusat Pembangunan Kemahiran Pahang (PPKP)
• Institut Penyelidikan Teknologi Nuklear Malaysia (MINT)

Designated Approved Training Programmes conducted By :

• Federation of Malaysia Manufacturers Entrepreneur & Skills Development Centre (FMM- ESDC)
• Institute of Banks Malaysia (IBM)
• Malaysian Insurance Institute (MIA)
• Association of Consulting Engineers Malaysia (ACEM)
• Federation of Malaysia Freight Forwarders
• AFCM Training Services Sdn Bhd
• Institut Pengurusan Malaysia (MIM)

Incentives for export

• Export Credit Refinancing (ECR) Scheme
• Double Deduction of expenses for promotion of manufactured Exports
• Double Deduction of export Credit insurance Premiums
• Industrial Building Allowance
• Drawback Facilities

ECR Scheme

• Short-term credit at preferential rates of interest to promote exports of manufactured goods
• Facility operated by commercial banks
• 2 types of facilities

- pre- shipment facility :

provides working capital to direct and indirect exporters.(l.e. domestic suppliers of inputs to final exporters)

- post- shipment facility :

enables Malaysia exporters to obtain immediate fund upon shipment or eligible good sold on credit terms.

• Eligibility – Good to be exported must satisfy the following criteria :

-product should not be listed in the "Negative" list products not eligible for the ECR)

- minimum value-added of 20%

- minimum domestic resource content of 30%

Maximum period of financing :

- pre-shipment ECR-4 months

- post-shipment ECR-6months

- pre-shipment facility – 70% to 80% of value of exports

- post-shipment facility - 100% of the invoice value

- minimum amount for ECR financing is RM10,000 and minimum drawdown is RM2,000

SMIs : Definition By Small and Medium Industries development corporation (By SMIDEC)

• Annual sales turn over not exceeding RM25 million and
• Full time employees not more than 150

Agency : SMIDEC

Tel : 03-9258585

Web Site : www.smides.gov.my

E-mail : smides@po.jaring.my

Other Incentives /Assistance for SMI

• Terms and conditions
• Manufacturing SMI companies (new,expansion and diversification)
• Implementing Agency
• Bank Industri Malaysia Bhd.

Tel : 03-2929088

Other Incentives / Assistance for SMI

• Industrial Technical Assistance Fund (ITAF) matching Grants :

- consultancy services Scheme (ITAF 1)

- product Development & design Scheme (ITAF 2)

- Quality & productivity improvement scheme (ITAF 3)

- Market Development Scheme (ITAF4)

• Priority given to SMIs which manufacture or intent to manufacture product(s) promoted under the promotion of investment Act,1986

Agency :SMIDEC

Other Incentives /Assistance for SMI

SMI Fund

Eligibility criteria :

• Shareholders fund < RM5.0 million
• Annual Sales turnover < RM50million
• At least 51% Malaysia – owned
• Size of loan RM250,000 to RM2.0 million
• Implemented by 50 financial institutions

Agency :Bank Negara Malaysia

Other Incentives / Assistance for SMI

Industry Grant Scheme (IGS) 1997 Budge(MOSTE)

Eligibility Criteria

• Malaysia majority companies
• Collaboration  lion with public research institute or university
• Priority technology areas : Supportive of IM2 industrial clusters
• R&D in Malaysia

Other Incentives / Assistance for SMI

• Qualifying Criteria

- SMI engaged in manufacturing activities

-Shareholders fund or below RM2.5 million

- 70% of the shareholders are Malaysians

• Item Eligible for financing

- Machinery and equipment

• Loan Size (max : RM1.0 million )

-Not exceeding 75% of total cost of machinery & equipment

-Loan period 5-10 years

- Interest Rate 4% p.a

Agency :MIDF

Other Incentives /Assistances for SMI

• Plant expenditure
• Maximum grant 70%

Soft Loan for Quality Enhancement

Qualifying Criteria

Incorporated under the Company Act 1965

Shareholders fund of below RM2.5 million

70% of shareholders are Malaysia

Companies Involved in manufacturing (Bumiputera)

Item Eligible for Financing

Machinery and equipment

Loan Size - Maximum RM1 million

Long Period : 5-10 years

Interest Rate : 4% p.a

Agency : Bank Pembangunan (BPMB)

• Technology Acquisition

To develop an in-house,indigenous R&D capabilities through acquisition of appropriate technology

Qualifying Criteria

Incorporated under the Company Act 1965

Shareholders fund of below RM2.5 Million

70% of the shareholders are Malaysians

Companies involved in manufacturing activities and related services

Form of Assistance

Direct financial assistance or matching grant

Agency : SMIDEC

Skills Upgrading Programme

• 50% course fees paid by SMIDEC
• In addition, 45% expanses can be claimed from HRDF
• Collaboration with training institutions like PSDS (Penang), PSDC (Pahang), PPKS (Sarawak), etc.

Agency :SMIDEC

• Project Financing and Working capital