The proposed reduction of the customs duty (CD) to 10 percent on import of goods from third countries has led to a strong debate both inside and outside the Parliament.
If the government succeeds in getting the Bill through the National Assembly, then it could become effective from the day it is tabled in the Parliament as is the case with such money Bills.
The main concerns are that the proposed CD will open floodgates for international goods that would kill local industries and worsen the trade deficit situation for the import-dependent economy.
The government has proposed the new tariff at a time when the pandemic has dealt cottage and small industries, which account for more than 90 percent of non-hydro productive activities, a heavy blow. One of the 12th Plan objectives is to reduce import dependency through the expansion of domestic production.
The expected decrease in prices of third-country imports is expected to affect mainly small industries that do not enjoy economies of scale.
A manufacturer of household furniture said that consumers would prefer imported furniture to local furniture if the proposed CD were applied. “We cannot reduce prices of our products as the labour and material charges have increased drastically,” he said.
The National Assembly’s economic and finance committee had proposed a CD on word-based products at 30 percent but was rejected by a majority decision. The government today charges CD of up to 50 percent on wood-based products.
The proposed CD could lead to increased imports, resulting in a depleted convertible currency (CC) reserve, which stood at USD 1.17 billion (B) as of March 2021. As the CC earnings from tourism have dried up due to the pandemic, the main sources of building and maintenance of the CC reserve are through borrowings.
One of the concerns is the harmful effect of imported products on public health.
Some of the goods imported from third countries do not have labelling in English.
Chukha’s NC member, Sangay Dorji, said that the reduction of the customs duty on food products would undermine the government’s priority to provide locally grown nutritious food for a healthy Bhutan.
The Opposition Party says that the continued dependence on imported goods would affect the growth of the agriculture sector and food self-sufficiency targets. However, the government says that the country will not see a significant increase in demand given the low fertility rate.
The proposed CD is also expected to have deteriorating impacts on macroeconomic indicators that are already ailing amid the pandemic.
In 2020, the overall trade deficit decreased to Nu 18.38 billion (B) from Nu 21.6B in the previous year. However, the proposed tariff is expected to have negative implications on efforts to narrow the trade deficit, which signifies the gap between the value of exports and imports.
In an ideal situation, the trade deficit narrows when exports grow faster than imports. Exports, to some extent, will be affected if the new CD impacts local manufacturers.
The government says that the reduction of the CD on imports from third countries would not have much impact as about 80 percent of goods are imported from India. However, the trade dimension is expected to change quickly as imports from third countries become cheaper.
According to trade statistics 2020, imports from India decreased to Nu 66.456B in 2020 from Nu 68.9B in the previous year on account of Covid-19 restrictions.
But imports from countries other than India increased to Nu 15.258B from Nu 12.453B during the same period.
During the same period, non-electricity exports decreased by 33 percent, to Nu 20.7B from Nu 31.2B.
Critics of the government’s CD proposal say that improving economic indicators by reducing dependence on imports and protecting local industries would benefit the country in the long run.
Advantages of reduced customs duty
The main arguments for reducing the CD is that such measures are favourable for an import-dependent country like Bhutan and most of the imports come from India, not third countries. And one of the possible impacts is that the proposed CD will help diversify the import market, should imports from third countries increase.
The reduction of CD is likely to have a balancing effect on medium and large wood-based industries as the cost of raw materials from third countries is expected to make finished products more competitive in terms of prices.
An official from a wood-based industry in Phuentsholing said, “We don’t pay customs duty on raw materials from India, but we are currently paying a total of 30 percent tax, including a 20 percent CD on raw material imports from third countries. We will benefit.”
Similarly, other manufacturers who import raw materials from third countries and do not face much competition from imported goods are expected to benefit.
Representatives of local industries said that the proposed duty would have both negative and positive impacts on local industries but that they needed some time to have a clear picture of the possible new situation.
President of the Association of Bhutanese Industries (ABI), Pema Tenzin, said that local industries would assess how the proposed customs duty would affect them. “We want access to the best raw materials from the best places in terms of prices,” he said.
Secretary General of Bhutan Chamber of Commerce and Industries (BCCI), Sangay Dorji, said that he was hoping that the benefits of the reduced CD would trickle down to consumers. “We cannot blame shopkeepers for the price rise as transportation costs have increased,” he said.
Customs officials said that the country should not stick to the obsolete economic philosophy of import substitution. The decision, according to them, will bring in competition and force them (local industries) to relook into their business and make them competitive.
The benefit is on the consumers because CD is an indirect tax. When the price of imported goods goes down because of less CD, the benefit is passed on to the average consumer.
Another benefit of the reduced duty is that tax compliance will be improved. “We will see less or no cheating on importers under-invoicing or negotiating or begging customs officials at entry points. It will also improve trade facilitation, and therefore ease of doing business,” a customs official said.
The improved tax compliance will broaden the tax base and result in increased revenue to the government, according to officials.
More Bhutanese can also have access to quality goods, both imported and local, as the quality of local produce will improve to remain in the competition. For instance, if Bhutan’s water (bottled) is better than those imported from Thailand or Singapore, people will still drink Bhutanese.
An importer and wholesaler said that the chances of importers resorting to unethical practices were high and that it could lead to leakage of revenue for the government. He said that although the customs duty has been reduced the tax base would increase as everyone can afford to pay.
“We have to pay other taxes besides the customs duty. The goods not only become expensive for customers but also become unaffordable for importers to pay all the taxes,” he said.
A major portion of the debate on the Customs Duty Bill 2021 is focused on the country’s wood-based industries, which according to some observers, will be affected. The sector has one of the biggest potentials in terms of exports and generation of employment in the country.
However, Agriculture Minister Yeshey Penjor argued in the National Assembly that the country should not prioritise local wood-based industries given the Constitutional requirement to maintain 60 percent of the country under forest cover.
Professor in Economics with Royal Thimphu College, Sanjeev Mehta, said that tariff liberalisation tends to benefit the economy in many ways, including lower prices and that it will ease the inflationary pressure.
“Tariff is often used as a protectionist measure, but at the expense of protecting inefficiency. In the case of Bhutan, even import substitution is not possible in a large range of activities, due to limitations imposed by the small size of the market, limited raw materials and expensive labour,” he said.
He said that the fear of opening the floodgates to foreign goods was not realistic. “Even with higher tariffs, foreign goods are entering the domestic market as domestic substitutes are not available.”
The professor said that the revised duty structure would not affect small producers much as they receive benefits such as concessional loans and tax rebates. He said that the proposed CD is a right step to promote competition.
No change has been proposed on the tariff on alcohol, vehicles, alcohol, tobacco, gold and silver. The proposed customs duty covers more than 500 goods including medical equipment, agriculture and education-related products. In the case of goods imported within the South Asian Free Trade Area (SAFTA), the customs duty is levied based on the preferential tariff rates as agreed by the member countries.
The proposed CD is being reviewed by the National Council, where some of the members have expressed views for retaining the 50 percent CD on wood-based imports. While some of the members supported the government’s proposal to reduce the CD on fertilisers to zero, others were against it.
The House of review will submit its recommendations to the National Assembly, which has the sole authority whether or not to accept them.
By MB Subba
Edited by Tshering Palden