While legality issues remain, the state has foregone Nu 15B in granting incentives

The fiscal incentives (FI) policy, having brought under the purview of money Bill, is now an Act.

To implement the fiscal incentives 2017 Act, rules and regulations is being drafted for submission to the Cabinet.

The Parliament’s endorsement of the fiscal incentives 2017 as a money bill from May 8, the day it was tabled for deliberation means that, henceforth the government is required to propose fiscal incentives to the Parliament.

However, the legality issue for fiscal incentives granted from January 1, 2016 until May 8 still remains. This contention will also probe the legal aspects of fiscal incentives granted in 2010 and 2013.

The government’s interpretation of Supreme Court’s verdict is that fiscal incentives are and was a government prerogative. It has decided to consider it as a money bill to disentangle the nexus between the party in power and businesses that may come up in future.

In doing so, an official said, that this would take away the government’s authority in granting exemptions on sales tax, customs duty and excise duty as stipulated in the Sales Tax, Customs and Excise Duty Act.

This Act may need amendment, because exemption and incentives are almost synonymous. If fiscal incentive is a money bill and if proven to be contravening the Constitution, then the government’s prerogative of granting sales tax and customs duty exemption will by de facto be illegal.

The sales tax and customs duty Act grants the authority to government to exempt these indirect taxes. It is under the comprehension of this clause that the government grants exemptions on import of raw materials, vehicles and hydropower equipment among others.



Within the purview of fiscal incentives and by using the government’s authority on sales tax and customs duty exemption, the state has so far forgone a revenue of more than Nu 15B.

In 2011, 33 businesses availed exemptions on direct tax. While the total revenue forgone comes to around Nu 3B, a major chunk of it was on the indirect taxes.

For example in procuring vehicles for the government, public transport, tourism sector, projects and granting quota to civil servants, a revenue of Nu 460M was foregone. Likewise, Nu 746M was waived for import of raw materials for the industries.

In the following year, the government had to forego a revenue of Nu 2.45B. About 44 businesses had availed exemptions on direct tax. Revenue foregone for imports made on hydropower accounted to Nu 467M, while foregone tax for vehicle imports dropped to Nu 128M due to the import ban. Import of raw materials accounts for another Nu 636M.

In 2013, the government had to forego Nu 2.3B from where 75 business establishments had availed tax holiday. Besides the tax breaks on business income tax, hotels received Nu 5.8M worth of exemptions from indirect taxes such as the sales tax and customs duty. Revenue foregone from the import of vehicles substantially dropped to Nu 16.19M. Hydropower projects received a benefit of Nu 454M from exemptions.

As import of vehicles increased after the ban was lifted in 2014, the government had to forego Nu 184M. Hydropower projects got a tax exemption of Nu 817M from indirect taxes. Hotels got a benefit of Nu 96M alone from indirect taxes besides the holiday on business income tax.

In 2015, tax exemptions made on import of vehicles shot to Nu 676M. Even the hydropower projects received an exemption on Nu 616M. Tax exemption on purchase of an aircraft amounted to more than Nu 1B, while the government had to forego Nu 706M for import of raw materials.

About 109 business establishments has availed tax holiday on direct tax amounting to Nu 145M. The rest of the Nu 4.9B tax foregone in 2015 accounts for indirect taxes.


The issue

Besides the legal aspects, some financial experts said that it is important to realise where the incentives are going and who is benefitting.

While the policy has now turned into an Act, officials said that technically the policy is null and void. However, the Act is no different from the policy with some minor changes.

A member from the private sector said that the whole intent of the fiscal incentives is misplaced. For instance, he said most of the tax breaks are given to businesses that are already proving to be lucrative.

On the contrary, he said that farmers are taxed on their income from cash crops, indicating to the recent taxation on income from cardamom. Mining being one of the lucrative businesses, he said, it still enjoys sales tax and customs duty exemptions on purchase of equipment and machinery in addition to 10 years tax holiday for newly established mineral based industries until December 31, 2020.

The good thing about the policy, he said is the exemption of sales tax and customs duty on purchases made with point of sale (PoS) machines, ATMs and electronic cash registers to promote financial inclusion and digitisation of the economy.

The Royal Audit Authority (RAA) has also conducted a performance audit on business tax administration and found lapses in the earlier fiscal incentives.

For instance, incentives of 15 years tax holiday to high end hotels established in six eastern dzongkhags of Lhuentse, Mongar, Tashigang, Tashiyangtse, Pemagatshel and Samdrupjongkhar was granted compared to 10 years for hotels opened in other dzongkhags.

Analysis of those availing fiscal incentives, however, indicated that the fiscal incentives were mostly availed by business entities located in Thimphu and Paro regions.

“If high-end hotels were found benefitting more from the incentive, why did the new policy also grant continued exemption for another 10 or 15 years,” said a private analyst.

Impact assessment of the RAA revealed that fiscal incentives face risks that could hamper its effectiveness or fulfilment of the objectives of fiscal incentives. Unbalanced regional development, unequal distribution of income and wealth, market distortion, exemption creep, loss in tax paying culture and revenue are among some of the threats.

Instead of debating on the content, a businessman said the Parliament got serious in discussing the legal aspects of whether to consider it as a money bill or not.

While members from private sector raise several issues on the fiscal incentive 2016, the finance minister said the Act with few changes would supersede the policy.

Tshering Dorji