Revenue leakage through BIT loopholes

Small and micro businesses fall through the cracks as they do not keep proper accounts

Tax: One late afternoon, four officials from the department of revenue and customs (DRC) walk into a general shop at Changjiji and ask the shopkeeper for his trade license.

One of the officials checks the license’s date of issue to determine the amount of business income tax (BIT) payable, while others inspect the shop.  The amount of BIT payable depends on the number of years the enterprise has been in operation, location and stocks available with the shopkeeper.

“I don’t have enough sales in my shop,” the shopkeeper says. “It’s difficult to even pay rent.”

The officials explain to the shopkeeper how BIT is calculated and fix the amount payable on the spot.  The BIT payable for the shop adds up to about Nu 4,000.

DRC officials have been working their way through the town, going door to door, collecting business income tax (BIT) since January 1.  The collection of BIT will continue until March 31.

However, by going door to door, tax officials could be relying on inefficient manual processes to track BIT payers. “The BIT payable depends on the capacity to pay,” an official from DRC in Thimphu, Dorji Phuntsho, said.

Nima, a businessman dealing with imported utensils in the heart of the town, said the tax collection system is unfair and leaves room for revenue leakage. “Big shops pay more tax, while smaller shops that do not maintain books of accounts but still earn more profits pay less then us,” he said. “This is unfair.”

He explained that some people open a small shop, but authorities cannot trace if they also owned a wholesale business. “They’ll be hiding their stock somewhere, while some operate wholesale business, but only have a small shop to show customs officials,” he said.

However, the tax officer said that everyone would be traced, as they will have to come to DRC for a clearance certificate. “Some shops may be left out, but they come to our office to file BIT,” he said.

Small and medium enterprises maintain proper books of accounts and file tax based on the profit. “We ask the tax officials to lower the tax if we don’t have a good turnover,” a garment shop owner Pema Choden said. “It’s natural that they have to lower the tax amount, if we don’t have income.”

She also maintains proper records and files BIT based on her profit. “Only small shops pay tax in lump sum,” she added.

Nima said he has been running his shop for the last eight years, and last year he paid about Nu 85,000 as BIT.  He also said that small enterprises that buy from wholesalers pay tax only once.

“Whereas we have to pay customs duty and BIT, so we’re taxed twice,” he said. “It would be better if we’re allowed to pay tax in lump sum like micro enterprises.”

He said he also annually pays Nu 10,000 to a consultant to prepare his accounts.

Those, who run businesses without licenses, also cause revenue leakage. “We’ve encountered a few shops operating without license, but we can’t do anything, because anything to do with license is the work of the trade department,” the tax officer said.

While some say that their license is under process, some taxpayers do not pay on the spot.  A shopkeeper at Changjiji did not pay BIT when tax officials came to collect it from her shop last week. “It’s better for me to go to the revenue office, because I know someone there who can lower my BIT amount,” she said.

Meanwhile, some shopkeepers said BIT has been rising rapidly while income has remained stagnant.  An elderly grocery owner at Changjiji said his BIT shot to Nu 4,000 this year from Nu 700 three years ago.

“But our income hasn’t increased so significantly,” he said. “We hardly have any sales enough to earn a profit.”

He said the opening of Food Corporation of Bhutan (FCB) sales counters at various places has affected small businesses. “We can’t compete with FCB, because they can sell all goods at lower prices, and customers come to us only when they want to buy on credit,” he said.

The national budget 2014-15 estimates that collection from BIT for the current fiscal year will be slightly more than Nu 2B, an increase of 8.3 percent from the previous year.  There were a total of 22,331 business licenses at the end of 2013.

The government has also exempted small and micro businesses in rural areas from BIT to encourage growth of small and micro-businesses in rural areas with effect from last year.

While this is expected to incur some revenue loss, customs officials said this exemption is expected to ensure greater fairness and equity in the system. “Currently, the tax burdens borne by the small and micro businesses in the rural areas are relatively high compared to PIT payers,” states the 2014-15 budget report.

Approximately 11,122 taxpayers will benefit from this incentive.

By MB Subba

 

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