Lack of targets blurs fiscal incentives rationalisation

In contrast to the new Economic Development Policy (EDP), the revised rules and regulations on fiscal incentives is hardly different from the one revised in 2010.

While there have been little deviations and changes, the broad principles have not changed.

For instance, the sector specific incentives to the tourism sector have remained the same despite the Royal Audit Authority’s (RAA) findings in a performance audit of the Business Income Tax from 2009-13. The RAA found an overwhelming benefit of Nu 2.688 billion in fiscal incentives from 2010 onwards that benefited 39 high-end hotels.

Tax breaks were extended for establishing high-end hotels in the former fiscal incentives while the revised incentives rules and regulations renders tax breaks to newly established hotels and hotels upgraded to international tourist standard.  “High end” is not mentioned.

However, the new regulation comes with a clause stating that to avail the incentive, the ownership of the property such as land, building and other facilities must be either in the name of the license holder or in the name of immediate family members.

The six-year income tax break for farm houses registered with the Tourism Council is brought down to five years. The earlier regulation also facilitates a waiver of the daily tourist tariff or royalty for foreign participants of meetings, international conventions and exhibitions (MICE) but the revised regulation is silent on this clause.

Both the regulations exempt sales tax and customs duty on buses for tour operators. Buses, however in the earlier regulation was defined as vehicles of 10 seats and above and the definition is changed to vehicles of 22 seats and above in the new regulation.

In the manufacturing sector, the tax break of 10 years was specifically extended to manufacturing industries earning convertible currencies. IT service industries are included in the new regulations.  In this regard, the earlier regulation excluded the trading sector, which the new regulation does not.

With regard to the customs duty exemption on import of packaging materials for the manufacturing industry, the new regulation mandates that the industries have to earn its own convertible currency. However, for small and cottage industries, an exemption is given for raw materials and packaging material imports up to USD 50,000 per year. Apart from the exemption this clause was not there in the earlier policy.

“Apart from date and time extension and small changes to the existing clauses, the new regulation has no benchmark and target,” a private financial analyst said. He added that the government has to be clear on targets and intent of the policy while it must study and assess the success of the earlier policy.

The RAA, a businessman said will continue to hit the private sector as long as the policy is clear on the achievements and intent of the fiscal incentive policy. “The tax break has benefited the 30 or so high-end hotels but indirect benefits are spread throughout the stakeholders in the tourism sector,” he said.

Some industrialists also question the importance of Indian Rupees in the economy having experienced an economic downturn following the rupee shortage. “But why only industries earning convertible currencies are granted tax break?” he said.

However, the new regulation specifically mentions the mining and energy sector. For instance, an income tax holiday of 10 years is provided for mineral processing industries where the local mineral comprises more than 50 percent in value of the total direct inputs. However, primary mining, quarrying and crushing units will not be eligible. There is also a provision of sales tax and customs duty exemption on equipment and machineries for mining companies. This clause was not there in the earlier policy.

With regard to the energy sector, the new fiscal incentive regulation indirect taxes on hydroelectric projects as governed by bilateral agreements. The same exemption is also extended on plant and machinery for solar, wind, biogas and Renewable Energy (RE) and the energy efficiency sector.

RAA’s findings on the earlier fiscal incentives

The fiscal incentives rendered to the business establishments through the EDP did not benefit the cottage and small industries but 39 high-end hotels and nearly 80 percent of business entities availing tax holidays located in Thimphu, Paro and Bumthang, the performance audit report of Business Income Tax conducted by the RAA revealed.

The government has foregone Nu 2.68B tax revenue by providing a tax holiday and other exemptions on sales tax, customs duty and sector specific incentives. In spite of the incentives, the RAA points out that the percentage of growth in tourist arrivals while increasing between 2010 and 2012, has declined below the 2008 level. The fiscal incentive package was introduced with the EDP in 2010.

Another intent of the fiscal incentives was to achieve balanced regional development. For instance there was a 15-year tax holiday for high-end hotels in the six eastern dzongkhags compared to 10 years in other dzongkhags.

Further incentives were also provided to encourage sectorial development for agriculture, information and communications, tourism, film and media, construction, transport, education and health.

The RAA report states that the entire eastern region had only 5.7 percent of total recipients of tax holidays, accounting for only five business units out of 88.

“This shows that fiscal incentives did not pave the way for balanced regional development as intended because very few firms availed those facilities in the southern and eastern region of the country,” the RAA report states.

The RAA also notes that there isn’t any single business unit in the health sector availing the incentives. This incentive is again provided in the revised regulation.

The RAA found that fiscal incentives were not properly assessed and provided to the most pressing areas of development and growth or in areas likely to have profound and positive impact.

Unbalanced regional development, unequal distribution of wealth, market distortion, loss in tax paying culture, among others, are cited as some of the risks that earlier fiscal incentive posed.

The government earlier had discussed the possibility of rationalising the incentives to address the audit findings.

Tshering Dorji

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