… from fiscal perspective 9% or higher made sense

Tshering Dorji

The intent of the goods and services tax (GST) is to initialise a robust and smart taxation system and this must begin without placing undue burden on the people and businesses, according to Prime Minister Dr Lotay Tshering.

If the intention was to strengthen revenue, a GST of nine percent or higher would make for an affirmative fiscal position.

While many are yet to understand the new taxation system, Lyonchhen said that this system would curb leakages, give local products competitive edge in the export market and limit imports of luxurious and unhealthy products.

The government, he said even debated on imposing a GST of five percent. In this case government is at the losing edge.

The GST is a broad taxation attracting seven percent levy on all goods and services, save for those in the exempted and zero taxed list. Consequently, for the consumers and producers prices of goods and services might change because 11 different slabs of the existing Bhutan sales tax (BST) will now be done away with.

For instance, imported vegetables and meat was zero taxed under the BST regime. 

With GST, a seven percent tax will slapped. Lyonchhen said that the concern hereon until the Bill is passed is that the exemptions and zero taxed items may expand in the Parliament for political reasons.

The government, he said has been cautious and aware of implications. Vehicles and processed food will attract both GST and EET, making vehicles cheaper by atleast three percent and latter attracting 27 percent.

Excise Equalisation Tax is another aspect of the GST Bill to discourage import of select commodities, for instance, alcohol and tobacco, vehicles and plastics, among others. But EET, officials from the finance ministry said is not levied on exports.

The good part of the GST is that it will eliminate the compounded tax that is usually passed down to the consumers.

Another historic turn in passing the Bill comes with the date of commencement. The Speaker of the national Assembly has already declared GST as a money Bill. By law, a money Bill takes effect from the date of tabling the Bill.

However, GST Bill is an exception since the implementation has different stages beginning with awareness, education and registration. The software is not even ready. Lyonchhen added that this was extensively deliberated at the cabinet, whether to lay out the infrastructure and the propose the Bill or to do it otherwise.

The future

As the tax paying capacity among the people improve, Lyonchhen said that the government might have to increase the GST.

Similarly, the EET might have to be revised, exempt items and zero taxed list may get reduced to encourage domestic production.

For instance, he said that there were proposals to slap EET on red bricks and vegetables imported from India. Doing so in the immediate course, Lyonchhen said, could lead to inflation since local produces cannot meet the demand and quality is constantly being questioned. 

Imported red bricks and fuel may attract two percent more tax, as five percent BST will be replaced by seven percent GST.

“But as local production increases and quality improves, revising the EET on imported items make sense,” he said adding that this is the whole intent of GST-to introduce a smart taxation system.

Imported noodles, like wise attract 10 percent BST. But in the proposed new regime, it will attract seven percent GST in addition to 20 percent EET.

One issue with the Indian GST, which could surface in Bhutan, too is the threshold. Since the threshold to mandatorily register for GST is that businesses should have an annual turnover of more than Nu 5M.

In this case, big businesses that procure materials from small businesses will stop doing so since big businesses do not reap tax credits. Lyonchhen however said that while registration threshold is there, it is voluntary. This means that if small businesses making supplies to big businesses want to reap the benefits of tax credits, they can go for voluntary registration.

Because the GST keeps track of goods and services from one point to another, Lyonchhen said that revenue leakage could be substantially arrested. This is because of the input tax credit which not only ensures that cascading effect is minimised but also guarantees that at some point of time in the value chain, products are taxed.

In line with tax reforms

The GST regime will subsume some components of fiscal incentives in near future because incentives in the trading of goods and services are ingrained in the GST Bill.

As the GST evolves, Lyonchhen said that a point in time might arise where people don’t have to pay Personal Income tax because GST is consumption based tax, meaning everything consumed is taxed. Consequently, the corporate income tax should be as low as possible while GST may increase.

Currently, Lyonchhen said it is unfair for the salaried employees because they pay personal income tax and also bear the tax burden for all consumable. To lift this burden, he said the government has proposed for increasing the PIT slab to Nu 300,000 while adding a surcharge to those earners in the highest bracket. In addition, taxes on dividends were relaxed.

The property transfer tax is now formally becoming an Act, should the Parliament approve it. To encourage more transactions and ownership transfer, the government proposed to lower the tax by two percent.

During a consultative meeting with civil servants on January 24, both the Prime Minister and Finance Minister acknowledged that they had sold their vehicle quotas while in civil service. Transferring ownership was costly and there is no monitoring mechanism in place.