As the Indian government embarks on a new goods and services tax (GST) regime from July 1, Bhutan will experience two-edged implication. Imports may become cheaper, but exports could become dearer.
The GST, in the Indian context, is designed to boost export and limit import while stimulating their domestic industries. Under the integrated GST Act of India, no taxes will be levied on exports while imports to India will be treated equivalent to inter-state trading unlike in the past where inter-state taxes are levied.
This means GST will subsume 17 different taxes within India and imported goods in India will no longer enjoy the same preferences. Because of inter-state taxes in India, Bhutanese goods enjoyed an upper edge in terms of competitiveness in Indian market. Now, whether Bihar imports goods from Bengal or Bhutan, it will be treated the same.
The good news is that retailers in Phuentsholing will be able to sell goods at a cheaper rate than Jaigoan, provided the Bhutanese retailer pass the benefit down to consumers. This is because exports from India will not be levied GST. For domestic market in India, there is Central GST (CGST) and state GST (SGST) levied separately.
As per the presentation made to the Bhutan Chamber of Commerce and Industry (BCCI) by Naman Sidarth, a consultant with ImsTaxoserivce in India, Bhutan is the only country in Asia Pacific with the sales tax regime. All others have value added tax (VAT) or GST.
“But GST is the modified version of VAT,” he said.
Should Bhutan opt for GST regime, Ethiopia or New Zealand’s model is the best, he said.
While it is obvious that Bhutanese products will lose the competitive edge with the same production cost, the question some industrialists raise is how can Bhutan promote the local industry. In fact, the country has already injected Nu 5B into the economy to enhance export, substitute import and to generate employment.
Cement and steel industries, some industrialists said, would be hit the hardest. This is because the GST for coal has been brought down to five percent from 11.69 percent. Limestone’s is also reduced to five percent. Coal being the raw material for both thermal power and cement industry, Naman Sidarth speculates that price of electricity may come down and so will the cost of cement production in India. The indirect tax for cement is also expected to decrease from 28 percent to 24 percent. Cement, however, is among Bhutan’s top ten export commodity to India.
The greatest barrier in India currently is the non-tariff barrier among the states. However, the Indian government is also going to implement a law stating goods can only be inspected once in one state and any state cannot hold the goods in transit for more than 30 days, thus reducing the transportation cost.
Bhutan, for instance, exports mineral water bottles to India and it enters India without any duty. For a retailer in India, due to inter-state taxes and non-tariff barriers, it is cheaper to import from Bhutan than the neighbouring states. VAT too is levied at point of sales. Now, the importer in India will have to pay the GST at source and it cannot cascade down to the consumers be it the water from Bhutan or any other parts of India.
Even the export procedures have been tightened. Earlier, Bhutanese goods would enter the Indian market and VAT would be levied at point of sale. In the new regime, Indian importers will have to pay GST at source. But from this GST, the Indian importer shall be allowed to avail credits. Same applies for export, but the GST would be refundable upon verification.
However, electricity, petroleum, alcohol and real estate are not under the purview of GST. This protects alcohol and beverage industry.
The fact the GST regime is also designed to reduce the operation cost of warehouses by 50 percent, Bhutanese agriculture produce will have a tough time competing in the Indian market.
With imports getting cheaper, a local economist also questioned as to how the government will ensure that consumers benefit.
The industries will reap some benefit because the raw materials imported from India would get cheaper. But industrialists said they would lose the competitive edge in every other aspects becasue of the Bhutan sales tax.
As for the imports, it is more beneficial for the Bhutanese importers to import directly from the manufacturers. Should the Bhutanese importers buy goods from retailers in India, they would pass down the GST levied on them by the manufacturers. On the flipside, the GST would be exempted at source if Bhutanese importers procure directly from the manufacturers.
In India, the Anti-Profiteering Law ensures that every benefit from the GST be passed down to consumers.
Imports getting cheaper and export getting dearer is a concern.
The government’s export promotion drive and import substitution did not work well in improving the country’s trade balance, which began deteriorating since 2013.
The recent trade statistics show a trade deficit of Nu 32.10 billion (B) last year against Nu 32.80B in 2015. The slight improvement last year could be attributed to the increased earnings from electricity export.
Had it not been for the electricity export worth Nu 13.03B, the country would have experienced a deficit of Nu 44.9B last year. In 2015, trade deficit, excluding electricity export, was Nu 44.68B.
The country has imported goods valued at Nu 67.36B, of which around 82 percent (Nu 55.28B) was from India. Likewise, the country’s export earning was valued at Nu 35.25B, of which 90 percent came from India. This means the country’s balance of trade with India is Nu 23.23B in the red and Nu 8.89B in deficit with countries other than India.
Apart from the glitches that export commodities may face in the Indian market, the new GST regime in India, according to Indian Consultant and local economists said would deteriorate the balance of payment. “There is every chance that the rupee shortage problem could strike back economy,” said one of the representatives of the private sector.
Further, the government’s revenue would also be impacted with reduced excise duty refund. Just yeaterday the GoI refunded Nu 2.9B excise duty for 2015.
Since almost all goods and services come under the purview of GST, the Bhutanese government will henceforth get excise duty refund of only select commodities like the petroleum products. This too is due for notification from the Indian side to incorporate it under the GST.
The free trade agreement with India covers only customs duty exemption, which remains valid but is outside the scope of GST.
What is GST?
GST is a single tax on the supply of goods and services, ranging from zero to 28 percent, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage.
For instance, factory A produce rice and sells to B at Nu 100 and B makes it into flour and there is a value addition of Nu 20. GST on value addition, which is Nu 20 would be levied on factory B. Now if factory C buys the flour and produce bread with a value addition of Nu 10, GST on the value addition would be levied, thus avoiding the cascading effect.
The final consumer will bear only the GST charged by the last dealer in the supply chain with set-off benefits at all the stages.
The GST would be automated and electronic, creating a robust and comprehensive IT system ensuring all indirect tax rates and structures are common across India and curbing the instances of tax evasion almost completely.
The subsuming of major Central and State taxes in GST, would reduce the cost of locally manufactured goods and services. This will increase the competitiveness of Indian goods and services in the international market and give boost to Indian exports.
Should Bhutan adopt a GST regime, the Parliament has to come into the picture. However, an official from the finance ministry said that the country could adopt some counterveiling measures under the current tax regime.
The finance minsterNamgay Dorji said that a team has been sent to New Delhi to study the impact of GST on Bhutanese economy. He said that Bhutan has been preparing to implement the GST regime since 2015. However, Lyonpo Namgay Dorji said that the government is requesting the GoI to consider zero GST for Bhutan in the interim. “This will have a major implication on all the sectors in Bhutan.”
To boost export and make it financially viable and competitive, the Indian consultant said that it is logical for Bhutan to grant full exemption for goods exported. He said that rationalisation of taxes are required on the Bhutanese side to mitigate the losses on excise duty. To pass the benefit to consumers, he said Anti-Profiteering law also must be enacted in Bhutan.
Complications arise in case of export of services in Bhutan because the Indian GST law states that import of service is now taxable and export of services from India must be paid in foreign exchange. Experts said that this clause needs further clarification.
Since most of the tax commissioners in India are being either transferred or removed, it was highlighted that not only the Bhutanese officials, but also the Indian traders and consultants are facing difficulty getting the right interpretations of Indian GST law.
According to Indian media reports, legal firms are already getting enquiries indicating that more legal cases could emerge from the big companies.