Background
There are many lessons that Bhutan can learn from Japan, in particular the Furusato Nozei system, as the system embeds lots of productivity that Bhutan could potentially gain. The stark difference between Bhutan and Japan cannot be more evident, so to doubt the relevance of any policy from Japan to be applied to Bhutan would be merited. However, looking beyond the typical rhetoric of developmental status, one might find many similarities between Japan and Bhutan. For example, like Bhutan, Japan is an isolated, relatively mountainous country with only about 11% arable land, 68% forest coverage and no natural resources. Additionally, the social and traditional values are similar to a certain extent. More impressive is the zeal, strength and commitment to preserving the independence and identity of these two countries. Much of Japan’s success could be traced back to the Meiji Restoration and the events before it, namely during the Edo period that lasted from 1603 to 1867. One may have a different opinion about that era, but Western powers’ “gunboat diplomacy” was said to have been the primary motivation for Meiji Restoration. Major reforms ensued to preserve independence and identity, leading to rapid modernization and the rest is history. But for the Bhutanese, what should interest us more is how an isolated nation with no natural resources and not located on any trade routes (isolated) became a global power within a short period, all due to its human capital and the policies adopted.
Furusato Nozei translated as ‘tax payment to hometown,’ is a system of hometown tax donation launched by the Japanese government in 2008. The system collected a total donation of 8 billion Yen in 2008, and increased to 830 billion Yen in 2021. In this system, individual taxpayer’s can donate their taxes to any eligible registered regional government in Japan. Individuals can claim the total tax amount donated as a deduction from their final tax payable while filing income tax, after subtracting the minimum applicable tax (2000 Yen). The tax donation is regarded as ordinary tax revenues for the regional government. In return for the donation, the regional government sends the donor a “reciprocal” or “thank you” gift. Donors can choose the gifts from the list offered by the regional government. The gifts consist of local specialties, local products and local services, including ryokan (Japanese-style hotels similar to homestays). The system’s objective was to revitalize rural areas and narrow the difference in tax revenue between urban and rural areas. One example of the system’s success is during the Great East Japan Earthquake, where the Furusato Nozei system became an effective way of helping disaster victims. The objective of this system is what makes it relevant for Bhutan.
Bhutan’s context
Bhutan can benefit substantially by implementing such a program customized to suit our needs and avoid the drawbacks of the Furusato Nozei system. We can have our system, we will call it Lung-chok Gongphel program for ease of reference in this article, with the following proposed attributes. First, Dzongkhag Yargay Tshogdu (DYT) needs to annually approve a developmental activity to be listed under Lung-chok Gongphel program. The developmental activity needs to be strictly capital expenditure in nature. Second, individuals (irrespective of residence, nationality, or taxpayer status) should be allowed to donate to the Lung-chok Gongphel program to a Dzongkhag of their choice, except to the Dzongkhag where the individuals reside/work/operate business. As discussed in the next para, individuals can be classified under two categories. Third, a “thank you” gift to reciprocate altruism needs to be sent to the donor. The gifts should be strictly local products, including services such as farm-stay and pilgrimage packages. Businesses with multiple operating locations or incorporated companies should be refrained from supplying gifts, specifically those in service industry, to avoid rent-seeking behavior. The gift value sent to donors by the Dzongkhag should be capped depending on the category of donors to ensure that net revenue is fiscally sustainable, in the case of Japan the gift value is capped at 30% of the donation. Fourth, the Lung-chok Gongphel program should have a centralized agency and website where all the developmental activities and gifts are registered and listed under different Dzongkhags offering it. The agency should preferably be one that could mobilize and coordinate with various stakeholders (such as government agencies, NGOs, cooperatives, etc.).
The first category of individuals is the personal income tax (PIT) payers in Bhutan. Other forms of taxpayer or tax should be excluded to avoid complexities and tax evasion. Under the proposed program, individuals should be allowed to donate their PIT to a developmental activity to a listed Dzongkhag of their choice. The maximum donation level should depend on their income level and be allowed as a deduction from their final PIT payment after reducing the minimum applicable tax. For example, let’s assume that a minimum applicable tax is set at an ad-valorem rate of 30% or a flat rate of Nu. 1,000, whichever is higher. An individual donating Nu. 5,000 PIT to a Dzgongkhag, will be allowed deduction of Nu. 3,500 from final net PIT payable. In essence, tax obligations for individuals do not change. However, with this proposed program, the PIT will directly go to the Dzongkhag and activity, both as per taxpayer’s choice. PIT revenue only accounted for 5.03% in the fiscal year 2021/22 and 4.67% on average from 2009/10 to 2018/19 of total revenue, thus, it will not significantly impact the central government’s revenue and budget allocation. The government should monitor effective net tax collected to avoid tax leakage.
The second category is others. The Lung-chok Gongphel program should be extended to include individuals who are not taxpayers, non-residents and foreigners. With time, the number of Bhutanese living abroad or going abroad has increased. Although the Bhutanese economy benefits from the remittances sent by these individuals to maintain the balance of payment, their ability to contribute directly to nation-building is limited. In this regard, the program will enable them to participate in developing the Dzongkhag of their choice and raise their fellow citizens’ living standards. There is no doubt that they are already donating resources in times of need. Such a program provides extra options for altruistic individuals to continue contributing to a cause while receiving gifts as gratitude. Under this category, the “thank you” gift should be the core component for the donor (even if they do not want it), as no taxes are involved. It would give exposure to the Bhutanese product both in terms of the market as well as the statutory requirements of those places. Such exposure might provide a relatively high-end permanent market for rural Bhutanese products.
Benefits of the program
Decentralization: The efforts to decentralize administrative authorities and fiscal delegation to regional government began in the 1980’s. The Lung-chok Gongphel program will further bolster and facilitate such decentralization efforts as it would give DYT a certain degree of autonomy. Under the program, DYT will have authority, responsibility and accountability to propose, approve and implement the program. However, the Dzongkhags will have to compete for the resource by directly appealing to the taxpayers and donors. This arrangement will promote healthy inter-Dzongkhag competition. Unhealthy competition needs to be eliminated through complete transparency and periodic assessment. Currently, individuals from a village or gewog often come to a consensus to collect donations for a project informally, mainly through creation of different Tshogpas. The program could institutionalize and capitalize on existing informal arrangements.
Market development: The “thank you” gift under the Lung-chok Gongphel program will drive demand and provide market for rural goods and services. The gifts should be restricted to local specialties, products, or services produced or consumed in that Dzongkhag. Since Dzongkhags need to compete for resources, the authorities will need to help farmers or producers not just to produce goods and services but also help to make their products marketable. In some case help producers to meet the regulatory standard if the goods are destined for foreign markets. Further, as in Japan, our educational institutions, such as colleges and high schools, should collaborate with the farmers for product development, which involves product development, design, packaging, and branding. Such an arrangement provides inter-generational transfer of ideas and opportunities for youths to contribute to the community.
Infrastructure development: For the Lung-chok Gongphel program to work, a decent logistics infrastructure and supply chain must evolve. In the case of domestic payment, the diffusion of digital payment systems in Bhutan is quite remarkable, and we think it is fair to say that the innovation and implementation in this area far exceed what we see here in Japan. However, in the case of transportation and other logistics, we need to make a drastic effort. This is where we believe that the Bhutan post, just like Japan post, will need to play a vital role. As a byproduct of the program, we see that a decent logistics infrastructure and network of enterprises along the supply chain might develop.
Participation in nation-building: Needless to specify, this program provides a platform for individuals, irrespective of citizens or foreigners and resident or non-resident, to participate in the nation-building process. Not just by directly contributing to developmental activities but also by providing a market for the rural farmers and being active consumers of their products.
The opinions provided here might be viewed as being idealistic, but the opportunity cost seems next to zero. The program itself is relatively simple to incorporate, however, it requires adequate policy and sophisticated infrastructure to support the program and avoid drawbacks.
Contributed by
Pema Dorji
(JDS Fellow)
Nagoya University
dorjipemma@gmail.com
Professor Mitsuyoshi YANAGIHARA
Nagoya University
yanagi@soec.nagoya-u.ac.jp