The Association of Bhutanese Industries (ABI) in a letter addressed to the Finance Minister and Economic Affairs Minister has requested to raise taxes on certain imported goods which are already being manufactured by local industries.
The letter says that if there is a slight increase in the Bhutan Sales Tax (BST) on such items it would help with the imbalance caused by India’s Goods and Service Tax (GST), lead to import substitution by the local industries and enable the Bhutanese industries to be slightly more competitive.
The ABI points to the current account deficit which increased from 29.8 percent of GDP in FY 2014/15 to 31.2 percent of GDP in FY 2015/16. It says the trade deficit also widened by 34.4 percent to Nu 35.8 billion.
It says that India is Bhutan’s biggest trading partner but Bhutan’s current account deficit with India increased from 25.2 percent of GDP to 29.8 percent in 2015/16. It says the trade deficit has widened from 19 billion to Nu. 28.8 billion.
“With the roll out of GST and a drop in commodity prices, imports from India will invariably increase. Coupled with the fact that Indian manufacturers will become more competitive vis-à-vis Bhutanese manufacturers as exports from Bhutan to India are subject to 18% IGST. Thus limiting exports to India, it is a real concern for Bhutan’s trade balance. The already large trade deficit with India will only grow, putting more stress on INR reserve,” says the letter.
The ABI said that Bhutan’s economic dependence on India will deepen with the new GST regime.
The letter mentions a Better Business Council study on the ‘Impact of Indian GST on Bhutan’ and says that the excise duty refunds received by the Bhutanese government in the past have constituted around 10% of RGoB revenue.
However, due to the new GST regime, the Duty Refund will also likely decrease as most of the goods will now be outside the purview of excise. This will decrease overall national revenue and create a bigger budget deficit in the coming financial years.
With the subsuming of excise duties and other taxes under GST in India, RGoB would lose revenue worth Nu. 14.034 billion.
It says tax revenue has been declining relative to the country’s GDP over the last four years, from 15.2 percent to an estimate of 13.7 percent in 2015/16.
The letter says that public expenditure will continue to increase in the short and medium term. In the medium term, the social sectors will exert pressures to expand public expenditure in line with Bhutan’s constitutional commitment to provide free health and educational services to all.
The ABI said that in light of the above it would like to make a ‘win –win’ recommendation to provide protection to the local industries by way of granting preferential treatment thereby curbing the fiscal deficit and promoting import substitution.
In order to facilitate import substitution by the local industries and partially offset the impact of Goods and Service Tax (GST) on the macro economic imbalances and the national revenue ABI said it would like to request the RGoB to increase the current Bhutan Sales Tax (BST) on import of products that which are also manufactured by the local industries.
It says this way; the government’s revenue shall increase by way of increased BST collection, while the local industries manufacturing similar products shall be able to substitute imports curbing the macro economic imbalances.
The ABI also attached a list of the local industries and their product details. The items include cement, furniture, timber and plywood products, cattle feed, TMT bars, soft drinks, mineral water, water pipes, billets, bitumen, animal feeds, ferro silicon, pet bottles, oxygen, nitrogen, water tank, barbed wire, nails, CGI sheet, copper wire, electric wires etc.
However, a senior government official said that GST is a general tax and if it is increased on one item then it would also apply to domestically manufactured products at the same rate. The official said given a free trade agreement with India it would not be advisable to levy import duties as India could do the same for Bhutanese products.
The official said that GST does not give an upper hand to Indian products as raw materials imports by industrialists have become cheaper. The official, however, said that the earlier tax advantage enjoyed by some industries has gone away and so now both sides are at par.
The official said that the government would take a look at the ABI proposal though and respond.