This paper has found that the overwhelming amount of the Nu 6.603 bn in fiscal incentives which started from 2010 till 2014 benefitted mainly big manufacturing industries located in Pasakha and other areas.
Also of the remaining amount many of the incentives also went back into the government coffers with the government’s
own imports. In the key tourism sector the benefit was take mainly by bigger hotels.
The 2010 Fiscal Incentives was an important part of the umbrella 2010 Economic Development Policy that was brought in by the former government. It was meant to layout an economic roadmap and strengthen economic growth in Bhutan.
Of the Nu 6.603 bn of incentives a big chunk of Nu 4.206 bn went in waving off sales tax and customs duty for importing raw materials for the manufacturing sector. The imports were primarily made by big industrial houses located in Pasakha. The government or government companies’ imports comprised only around 4 percent of the sales tax and 10 percent of the customs duty.
Raw materials are composed of materials like wood charcoal, iron ingots, nails etc.
The 2010 Fiscal Incentives Rules says the sales tax and customs duty exemption will be granted on the import of permissible raw materials till December 2019. This would mean that the exemptions granted would be even much higher by 2019.
The 2014 Bhutan Trade Statistics shows that of the top ten imports the raw materials for industries comprise four items. The third highest imported product at Nu 2.400 bn in 2014 is Ferrous Products obtained by direct reduction of iron ore used mainly by Steel Factories.
At number five is wood charcoal at Nu 1.387 bn used by a host of manufacturing industries. Two coal items are coke and semi coke at Nu 871 mn and another items is ‘other coal’ at Nu 851 mn.
In contrast the Cottage and Small Industries which also got exemption for labour saving devices and waste recycling devices only availed Nu 0.5 mn in incentives.
In the area of Tourism of the Nu 173.14 mn in sales and custom duties exemptions the majority of the amount has gone to big and newly established hotels. The exemption is till 31st December 2015 except for a few exceptions.
A peculiar trend in the Fiscal Incentives is also how government companies and ministries have also cornered a large part of the incentives after the major industries. In almost all the below cases the exemption is till 31st December 2015.
Of the Nu 1.872 bn exempted from 2010-2014 for plant and machinery around 77 percent of this has gone to government companies and agencies. One example would be the Bhutan Power Corporation which imported several products for rural electrification.
In the case of Agriculture Nu 88.80 mn in tax exemption for farm machinery were taken almost entirely by the Ministry of Agriculture.
In health Nu 114.98 mn in tax exemptions were taken by the Ministry of Health primarily on account of the imports of medical equipments and drugs. The MoH always got an exemption but the updated 2010 Fiscal Incentives decided to also include this.
In ICT around 80 percent of the Nu 49 mn fiscal incentives for computers and related hardware and software of IT enabled services and imports by the IT Park developer was taken by the government and government agencies.
In Education of the Nu 19.28 mn in exemptions in import of buses, books and furniture around 34 percent has been availed by the government.
There are, however examples of smaller private companies also taking advantage of the exemptions.
The Film sector has been one of the biggest beneficiaries with around Nu 49.98 mn in exemptions. This is followed by Environment at Nu 15.07 mn and Transportation at Nu 5.96 mn. Other very small amounts are Nu 376,539 for the Financial Institutions and Nu 7,699 for the Construction Industry.
However, the above total incentives figures capture mainly only exemptions for the import of materials and goods. It does not capture the Income Tax exemption given for five to fifteen years to various entities and sectors of the economy mentioned above.
If this was included the actual exemptions would be much higher. However, here too those who actually availed of the Income Tax exemptions so far are from mainly high-end hotels and bigger businesses.
In the 2013-14 financial year the government gave up Nu 142 mn in exempt Income Tax revenue. Of this new high end Hotels consisted a major chunk of it apart from other big companies.
Though the main aim of the incentives was to strengthen economic growth this has not yet become visible or apparent either in the economic growth numbers or the performance of many of the sectors.
A government official said that making items like wood charcoal and others available in the country tax free would in fact discourage import substitution.
From the figures above it is also not clear how the Fiscal Incentives have brought about socio-economic welfare for the small businesses and cottage industries.
The lack of sufficient Foreign Direct Investment, export oriented industries and the rupee and credit crisis from 2012 ensured that the Bhutanese growth rates further shrank downwards.
Bhutan has around 30,000 plus business licenses comprising of mainly small businesses but so far the incentives have mainly favored bigger companies and also the government itself.