In what can be called as a major overhaul to the tax regime, to reinforce the tax administration and to recoup an additional revenue of Nu 3B, the finance minister yesterday proposed goods and services tax Bill (GST), introducing a standard single rate of 7 percent, which would subsume the sales tax and modify the excise system.
GST is a consumption-based tax and it is supposed to eliminate the cascading taxation effect. Just like any other GST regime across the globe, business entities and individuals in the country would be levied GST on all goods and services either manufactured within or imported. Exports, on the other hand, are considered zero-rated supplies, free of tax.
“This ensures that Bhutanese exporters are not at a competitive disadvantage,” the finance minister said.
The good part of the GST is that it will eliminate the compounded tax that is usually passed down to the consumers. For instance, a manufacturer procures raw materials from a vendor and it is inclusive of taxes. The manufacturer adds value and sells it to a consumer and selling price includes the tax accumulation. Consumers, in the end, bear the brunt of all the taxes that are cascading. With GST, the manufacturer can claim tax inputs to negate the taxes borne by him. This means that end consumers pay for the taxes only on the investment for value addition borne by the manufacturer, while the manufacturer is eligible to avail tax credits or returns for the taxes imposed on procuring the raw materials.
However, if a firm imports goods and services, GST is levied. But that doesn’t mean that all goods and service are slapped with a flat seven percent GST. The fiscal tool lies in the new regime called the Excise Equalisation Tax (EET), meaning that luxury and negative goods like vehicles, alcoholic and non-alcoholic beverages, plastics and so on will attract both GST and EET.
Vehicles of engine the capacity of below 1,500cc is proposed an EET of 30 percent, excluding the green tax, customs duty (if imported from third countries) and other permissible charges. A GST of seven percent makes the effective tax rate to 37 percent, meaning that there is a reduction from 45 percent.
The effective tax rate for other vehicles above the engine capacity below 3,000cc becomes 47 percent (40 percent EET and 7 percent GST), down from 50 percent. This again doesn’t include the customs duty and green tax
Likewise goods like alcohol and beverages, and tobacco will attract 100 percent EET on top of the seven percent GST.
The GST permits exemptions and classified some commodities as ‘zero taxed’ and these constitute items like rice, milk powder, vegetables and meat, among others.
Under the GST regime, all essential goods and services related to agriculture, education and health will be exempt; export will be zero-rated and all GST registered business entities will receive the input tax credit.
As a result, GST is expected to have a positive impact on the economy due to reduced tax burden and improved competitiveness. Since the GST implementation will be fully supported by an automation system, it will strengthen tax administration, improve taxpayer services, minimize leakages and enhance tax collection.
“Upon full implementation of GST at a standard rate of 7 percent, the additional annual revenue is estimated at Nu 3B,” the finance minister said.
However, businesses and entities, whose turnover is less than Nu 5M are not required to register for the GST. Although it is voluntary, such businesses cannot avail input credits while GST on imports would be in keeping with the norms.
Businesses would be also required to file their taxes after every month. But understanding the complexities of the implementation, business types and modalities, the new GST regime has worked out a formula for every circumstance.
For instance, an individual processing multiple business licenses declares loss and defaults on one business. However, his or her other business is thriving. A modality has been placed to recover the taxes from one pocket as the proceeds go to one pocket.
The GST has many aspects depending on the diversity and modality of business operation. This is further administered by a carrot and stick approach.