Government will revise the fiscal incentive policy after the EDP is revised

Audit: The fiscal incentives rendered to the business establishments through the Economic Development Policy (EDP) did not benefit the cottage and small industries but 39 high-end hotels and nearly 80 percent of business entities availing tax holidays located in Thimphu, Paro and Bumthang.

This was highlighted in the performance audit report of business income tax administration conducted by the Royal Audit Authority (RAA).

Fiscal incentives are tax measures geared to encourage industrial development and designed to assist entrepreneurship.

The government has foregone Nu 2.68B tax revenue by providing tax holiday and other exemptions on sales tax, customs duty and sector specific incentives. Currently, hotels are the highest beneficiaries since the intent of providing tax holidays or fiscal incentives to star-rated hotels throughout the country was to improve tourism facilities to attract tourists.

In spite of the incentives, the RAA points out that the percentage of growth in tourist arrivals while increasing between 2010 and 2012, and has now declined below the 2008 level. The fiscal incentive package was introduced with the EDP in 2010.

The decline in tourist arrivals, the RAA states may be a matter of concern and that feedback gave an indication of lack of roads and facilities, rather than the standard of hotels.

Another intent of the fiscal incentives was to achieve balanced regional development. For instance the 15-year tax holiday for high-end hotels in the six eastern dzongkhags was prescribed compared to 10 years in other dzongkhags.

Further incentives were also provided to encourage sectorial development for agriculture, information and communications, tourism, film and media, construction, transport, education and health.

The RAA report states that the entire eastern region had only 5.7 percent of total recipients of tax holidays, accounting for only five business units out of 88.

“This shows that fiscal incentives did not pave the way for balanced regional development as intended because very few firms availed those facilities in the southern and eastern region of the country,” the RAA report states.

The report also mentions that lack of awareness of the policy amongst business entities and inadequate policy formulation could have attributed to the case in point.

The RAA also notes that there isn’t any single business unit in the health sector availing the incentives.

The Authority is of the view that fiscal incentives were not properly assessed and provided to the most pressing areas of development and growth or in areas likely to have profound and positive impact.

Currently 39 high-end hotels reap benefits while three waste and environment management units and four export-based units availed the incentives.

A study on the impact of fiscal incentives in 2010 carried out by the revenue and customs department and the World Bank shows that fiscal incentives face a lot of risk that could hamper its effectiveness.

Unbalanced regional development, unequal distribution of wealth, market distortion, loss in tax paying culture, among others, are cited as some of the risks.

This coupled with inadequate monitoring and evaluation of tax, which is another finding of the RAA could pose greater risk.

For instance, the RAA notes that several businesses have been showing recurring losses year after year, as such 105 entities have declared losses consecutively for three years or more.

While recurring losses results in erosion of capital base, the audit recommends that tax authorities must ascertain as to how the recurrently loss making entities finance their working capital and sustain their operation.

The RAA pointed out that the income tax Act or its rules and regulations lacked clarity on how different firms are identified for taxation. It was observed that many business entities had more than one license against their names but filed tax as a single business entity.

For instance, the Tashi Commercial Corporation has 15 licenses and Dolma enterprise has 21 licenses against its name. Both the entities filed tax as a single establishment. With so many licenses, filing tax as one entity could result in wrong assessments, the RAA says.

The RAA observes that the porous border that the country shares with India is prone to smuggling and illegal practices despite the existence of many checkpoints. As for the border with China, it was observed that Chinese products in the market in huge quantities were available despite limited accessibility. These products, the audit claims, were not imported from formal gateways and the DRC could not trace the source of these products due to the lack of a proper and formal trading system with China.

There were also cases when the business units were declared un-operational but had made huge profits.

While the RAA has come up with 11 recommendations to improve tax administration, the finance minister said the government will take note of it.

Lyonpo Namgay Dorji, however, said that should fiscal incentives prove more beneficial to cottage and small industries, more entrepreneurs should take up business. Because the number is too small, he said the benefit accrued is also small.

The economic affairs ministry, has submitted the final draft of the economic development plan to the Gross National Happiness Commission for screening. After the EDP has been revised, he said the fiscal incentives too will undergo a revision.

The economic affairs minister, Lekey Dorji said that instead of blanket fiscal incentives, as is the case in the current policy, the government is planning to rationalise the incentives. The audit issues, he said would hopefully be addressed by the revision in fiscal incentives.

Tshering Dorji