Fiscal incentives and growing expenditure is a concern
Economy: Expanding expenditure when aggravated by loss of revenue from various exemptions and incentives is impeding efforts to increase the collection of domestic revenue.
It is a Constitutional mandate to meet the entire recurrent expenditure from domestic revenue.
In the financial year 2014-15, the net collection of domestic revenue amounted to Nu 25.14 billion (B) against the initial estimate of Nu 24.9B. The total revenue collection has exceeded the recurrent expenditure by 13.6 percent, which means around Nu 3B of domestic revenue was available for capital expenditure after having fully covered the current expenditure.
However, between 2010 and 2014 the government had forgone more than Nu 6B from tax exemptions alone.
The total revenue foregone in 2014 through fiscal incentives and exemptions amounted to Nu 2.68B. Most beneficiaries of tax exemptions are in the service industry, especially hotels and educational institutes like private schools and institutes.
Bhutan Development Bank Ltd alone was exempted from a Nu 84.5M tax.
Additionally, 10,254 businesses availed business income tax exemptions amounting to Nu 14.34M as a result of the government’s decision to exempt businesses in rural areas from taxes.
As for the revenue, corporate income tax contributed the highest of 25.8 percent of the total domestic revenue, followed by dividends the state enterprises remitted (14.7 percent).
The lift of the import ban and the introduction of the Green tax on fuel, sales tax on telecom services and revision of tax rates from July 2014, led to a substantial increase in collection under indirect taxes.
The delay in commissioning of the Dagachhu hydropower project left an impact of Nu 486.7 million (M) in 2014-15.
Nevertheless, the collection of revenue during the year surpassed the target set by one percent.
Besides the tax revision, the relaxation in minimum daily package rates for tourists from Thailand led to increased royalty from tourism by Nu 271.29M.
While tourism contributed the most royalties, followed by mines and minerals, and forest products, royalty from hydropower declined.
This was attributed to the government decision to fully subsidize the cost of electricity to the people living in rural areas.
The collection from non-tax revenue for the year stands at Nu 6.75B, recording a decrease of 4.4 percent. The decline was a result of a decline in dividends from Druk Green Power Corporation and interest receipts from corporations as compared to the previous year.
At the beginning of the 11th Plan, the domestic revenue in the planned period was projected at Nu 139B. However, the recent projection made in December 2015 revealed that the country could only generate about Nu 123B, resulting in a shortfall of Nu 16B.
This is attributed to the reprioritization of the hydropower target since the majority of domestic revenue comes from export of electricity.
According to initial projections, Bhutan could lose Nu 13M for every megawatt if the planned 10,000MW by 2020 does not come through.
On the expenditure side, the government had to undertake a lot of non-planned activities like formation of a few new state enterprises. And Bhutan could face scarcity of external grants and aids as the country graduates from the list of Least Developed Countries.