Tax reforms so far led to a drop in domestic revenue

MB Subba 

The government had pledged to recoup Nu 10 billion (B) by strengthening the tax base and addressing the issue of tax evasion in its manifesto in 2018.

In the past three years, tax revenue decreased by almost 24 percent, according to the latest official data. In absolute terms, tax revenue fell from Nu 27.17B in the fiscal year 2018-19 to Nu 20.66B in the fiscal year 2020-21.

The Covid-19 pandemic has affected tax revenue as hotels, civil aviation, tourism and allied businesses were among the worst hit sectors, according to the government.

However, tax reforms, which basically involved reducing rates, have also contributed to the decline to a large extent.

According to the Royal Monetary Authority’s (RMA) annual report 2021, domestic revenue (tax and non-tax) increased slightly from Nu 34.7B in the fiscal year 2018-19 to Nu 35.855B in the fiscal year 2020-21. The domestic revenue, however, did not decline as the sharp decline in tax revenue was offset by non-tax revenues, which increased from Nu 7.536B to 15.193B during the same period.

Among other changes in the tax policy, the government reduced the Corporate Income Taxes (CIT) from 30 percent to 25 percent on state-owned corporations, the land transfer tax from 5 percent to 3 percent, and did away with the 5 percent voucher tax.

Raising the Personal Income Tax (PIT) slab from Nu 200,000 to Nu 300,000 has also reduced the tax base.

According to information provided by the government earlier, the overall losses in taxes through the reductions were estimated at Nu 850 million (M) annually. For instance, doing away with the 5 percent voucher tax, rich centric, as many say,  alone cost about Nu 190M to the national exchequer.

However, the prime minister earlier justified that the amount of taxes and levies collected through tax reforms would be much higher than revenue forgone.

Some of the government’s measures to offset the impact of the tax reduction are surcharges and taxes on windfall gains in the lottery business.

The introduction of the sustainable tourism fee (SDF) for regional tourists was also expected to increase the revenue, but the tourism sector has been impacted due to the pandemic.

One of the main measures to recoup taxes, according to the government, was the Goods and Services Tax (GST), implementation of which is not likely to be ready by the expected date, July 1.

Prime Minister Dr Lotay Tshering, at the meet the press on Friday, said developers were struggling to give the software. He said they had to scrap GST because of the timing.

Meanwhile, the projected domestic revenue in the fiscal year 2021-22 is Nu 35.6 billion (B). The recurrent expenditure for the same period is estimated to be around Nu 35.598B.

This means that the domestic revenue is just enough to meet the recurrent expenditure.

Finance Minister Namgay Tshering in a recent interview said that the government had mobilised grants and that borrowings were concessional.  “We are expediting the mobilisation of grants,” he said.

The commissioning of the Mangdechhu hydropower project also helped the country offset the impact of the decline in tax revenue to some extent.

While there has been a downward revision in tax revenue, the profit  transfer from the Mangdechhu hydropower  project improved to Nu 11B in the fiscal year 2020-21 from Nu 3B in the previous year.

However, the central bank report states that economic activities are likely to pick up including SDF and visa fees on account of mass vaccination and reopening of the economy.

Consequently, sales tax collection from hotels, airport tax, corporate income tax, and business income tax from tourism and allied businesses are also expected to gradually improve.

Kuensel made efforts to get comments from the government. Officials were not available for comment.