Fixing the rental tax system loopholes

Yangyel Lhaden

The state is losing a substantial amount of revenue in rental income tax (RIT) from private residents in absence of a stringent tax system.

Department of Revenue and Customs (DRC) officials and building owners admitted that it was an open secret that many landlords manipulate the amount of rent in their annual income tax return.

Tax for houses rented to businesses and offices is deducted at source and deduced through the accounts the businesses and offices submit to the department. However, there is no practice of deducting tax deducted at source (TDS) for residential properties. Officials of DRC said that there was no way to deduce the rental income of individuals without TDS.

Under the current tax system, individuals while filing their annual personal income tax (PIT) returns have to submit details of rental income from each tenant with a legal undertaking.

Anyone found to have concealed or given false details of any particulars of the rental income, as per the Income Tax Act 2001 the individual has to pay a fine equivalent to two times the tax amount sought to be evaded in addition to the tax due.

However, officials said and building owners know that verifying the rental income of each individual is difficult. 

There is no database or any study carried out on the actual amount of rental income with what was declared to DRC.

DRC Officiating Director General, Wangdi Drugyel said, “Without the data, the department cannot know the extent of revenue loss but the department is aware of the revenue leakage through RIT.”

The department came up with various approaches to deduce the actual rental income of individual but failed. The department tried to verify the tax returns with money receipts, and online payments made by tenants. It also sought support from the thromdes but they didn’t have data on the rental amount. Ad hoc surveys of tenants also did not yield anything concrete.

In 2019, DRC made it compulsory for the property owners to issue rental money receipts to the tenants to detect the actual amount of rent.

However, most tenants do not receive money receipts from their house owners.

Ugyen Dorji, a tenant, said, “We have a group chat where we send the screenshot of rent deposited online.”

Another tenant said that he was not bothered about the money receipt. “I don’t get any benefit from the money receipt. I’d ask my house owner for money receipt only if I get concession during PIT with the money receipt.”

“Money receipt does not work. However, property owners who issue rental money receipt to the tenants could be declaring the actual amount of rent with the department,” Wangdi Drugyel said.

There are various mischiefs that are happening with money receipts. For example, if the rent of the house is Nu 15,000, the money receipt reflects only Nu 10,000. “Some tenants pay half the rent in cash and half online,” Wangdi Drugyel said.

Wangdi Drugyel said that housing shortage could be a reason the tenants do not ask for money receipt.

“During inspection, we found out that the house owners had instructed the tenants to lie about the rent amount. The tenants will suffer if they challenged their house owners as they have no problem in getting another tenant,” he said. “We inspect house owners when we find the PIT filing faulty.”

The best the department could do given the circumstances was to track down those who didn’t pay PIT from records with the thromdes.

“This is the best we can do. The department is in dilemma not knowing what next approach to look into to deduce rental income,” Wangdi Drugyel said. “Unless there are informers to report to us we would not know.”

The department is hoping to acquire the results of the ongoing survey in Thimphu thromde to derive data to deduce rental income of house owners.

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