The Bhutanese Leading the way.
The Ministry of Finance (MoF) has acknowledged public concerns that the implementation of the Goods and Services Tax (GST) may lead to higher service costs and place small businesses just above the Nu 5 million turnover threshold at a competitive disadvantage.
Addressing these concerns, the Finance Minister, Lekey Dorji, said that international and regional evidence shows that taxes like GST do not by themselves drive inflation, price changes are shaped by multiple economic factors.
While GST imposes a five percent tax on most goods and services, Lyonpo Lekey Dorji explained that its input tax credit (ITC) mechanism significantly reduces the actual tax burden on registered businesses. By allowing businesses to deduct the GST paid on their inputs, the system minimises cascading taxes and helps moderate the overall impact on both prices and operations.
Under the GST rules, businesses with an annual turnover above Nu 5 million must register, while those below the threshold may remain unregistered or opt for voluntary registration when they cross Nu 2.5 million. Lyonpo said this threshold is designed to promote fairness, support small enterprises, and encourage gradual business formalisation with simplified compliance measures.
Responding to concerns that businesses just above the Nu 5 million threshold, who must charge GST, may lose customers to businesses below the threshold who do not charge GST, Lyonpo Lekey Dorji said that unregistered businesses cannot charge GST but also cannot claim input tax credits. As a result, they bear the full GST cost on their inputs. Registered businesses, on the other hand, charge GST to clients but can recover the GST paid on their purchases, meaning that GST is levied only on the value they add.
According to the MoF, this structure ensures that neither registered nor unregistered businesses have an inherent competitive advantage. Lyonpo explained that unregistered businesses avoid charging GST but face higher embedded input costs, whereas registered businesses charge GST but benefit from credits that reduce their tax burden.
According to MoF, GST is a key fiscal reform intended to strengthen Bhutan’s tax system, enhance transparency, and broaden the tax base by eliminating hidden, cascading taxes. Lyonpo Lekey Dorji said that over time, GST will contribute to a more efficient market system, a level playing field for businesses of all sizes, and a more sustainable economic environment.
