…ranging from zero to 100 percent, separate EET on select commodities

Tshering Dorji

Should the Parliament pass the GST law, tax regime in the country would be digitised and integrated through an on-line platform.

During a consultative meeting with the members of the private sector at the Bhutan Chamber of Commerce and Industries (BCCI) office yesterday, Lyonchhen Dr Lotay Tshering said that GST is the way forward to institute a 21st-century tax regime.

However, he said initially the government is only proposing for a broad-based tax rate of seven percent so that people and businesses will not feel the pinch.

The government also expects many of the issues the economy is grappling with today, to be addressed through these fiscal measures. For instance, on one hand, there have been efforts to promote local agriculture produce and on the other, there isn’t any tax levied on imported vegetables and meat items.

With the implementation of GST, all goods and services imported into the country will attract seven percent tax, save for those in the exempted list and zero-taxed commodities. The current Bhutan sales tax (BST) that has 11 different tax brackets would be done away with.

“Even with this imported vegetables would still be cheaper,” Lyonchhen said adding that if the government levies a higher tax, it will lead to distortion in price stability and local produce lack economy of scale. “This could put the economy in trouble. But in the long-term, as the nation progresses and people’s income increases, the tax will also increase,” he said. Meat, for instance, has been intentionally not included under the zero taxed commodity but if produced within the country, it will not be taxed.

The GST exempt goods and zero taxed commodities, he said also might change with the economic policy. For instance, rice and other essential items are zero taxed. GST exemptions were also provided on the import of sporting gears, gym and IT equipment and electronics like mobile devices and laptops. This is to encourage a healthy lifestyle and promote digitization.

“Likewise, the list under the exemption and zero tax rate may be amended and revised in future, according to the economic policy of the day,” he said.

However, the GST has another component called the Excise Equalisation Tax in addition to the GST to discourage import of select commodities, for instance, alcohol and tobacco, vehicles and plastics, among others.  But this EET, officials from the finance ministry said is not levied on exports.

Vehicles of engine capacity of below 1,500cc is proposed an EET of 30 percent, excluding the green tax, customs duty (If imported from third countries) and other permissible charges. A GST of seven percent makes the effective tax rate to 37 percent, meaning that there is a reduction from 45 percent.

The effective tax rate for bigger luxury cars becomes 47 percent (40 percent EET and 7 percent GST), down from 50 percent. This again doesn’t include the customs duty and green tax.

However, the Prime Minister said that vehicle prices might reduce. But tax on fuel is currently five percent will increase to seven under the GST law.

Likewise, goods like alcohol and beverages and tobacco will attract 100 percent EET on top of the seven percent GST.

All exports will be zero-rated and all GST registered business entities will receive the input tax credit. For instance, a firm imports raw materials and it has paid the GST on imports. But when the finished goods are exported the firm can avail tax credits or refund.

How does it work? 

A supplier purchases goods worth Nu 500,000 and it is liable for seven percent GST, which comes to Nu 35,000. The supplier then earns Nu 700,000 from the sale of those goods and the GST (at 7 percent) comes to Nu 49,000. Because the supplier has already paid Nu 35,000, the firm has to only pay the difference of Nu 14,000 tax (Nu 49,000-Nu 35,000).

However, if the earning from the sale is less than the purchase, the firm can avail an input credit or a refund. The tax doesn’t cascade down to the end consumers but one consumer pays for the value addition along the chain.

In a GST cycle, the producer of a raw material supplies goods worth Nu 200 to a manufacturer. For the sake of the calculation, assuming that the GST is 10 percent, a tax of Nu 20 would be credited to the government coffer and the manufacturer pays Nu 220 as the total cost.

Then the manufacturer adds value to the product and sells to a retailer at Nu 500. This will attract a GST of Nu 50 and the retailer will pay a final cost of Nu 550. But since the manufacturer has already paid Nu 20 while purchasing the raw materials, the entity can avail this as input credit. So the manufacturer will have to only Nu 30 because of the liable tax of Nu 50, Nu 20 is already credited.

Then in the final cycle, buyers and consumers purchase the same good from a retailer, whose final cost is Nu 1,000. The consumer pay Nu 1,100 inclusive of GST of Nu 100. But the retailers will have to only pay Nu 50 since the retailer already has a credit of Nu 50 when it made a purchase from the manufacturers.

In all these phases, the entities are already aware of how much input credits are available because the GST system will track all the goods and services from the source until it reaches the end consumers. When input credits are known, each entity can build its pricing a mechanism so as to pass this benefit to the consumers.

All services alike, for instance, contractor when bidding for works must embed the GST chargeable in its bidding documents.

Meanwhile, the implementation of GST will be done in phases beginning with consultation, advocacy and registration.