In what will be the biggest reform of Bhutan’s indirect taxation system the Department of Revenue and Customs (DRC) under the Ministry of Finance is aiming to replace the current sales tax, customs duty tax and excise duty tax with a single Goods and Services Tax or GST.
Though not related, India recently passed its own GST law in Parliament and it is seen as its own biggest financial reform since independence. Currently more than 160 countries have a GST system including neighboring Thailand where it is known as VAT.
Advantages of GST
For consumers the GST system if implemented well will mean a cheaper price of goods as it will avoid double taxation at various points of trade.
More importantly for the government the GST will mean more tax revenue by broadening the tax base, avoiding tax avoidance and leakages and a much simpler tax administration reducing administrative burden
For businesses GST will mean less tax complexity, less tax burden and an incentive to file taxes as they can even claim tax credit or refunds.
However, apart from the advantages GST could also raise the cost of movie tickets, eating out, flying etc as GST could mean an increase in taxes for service based industries.
What is GST?
The GST is a single indirect tax that replaces other indirect taxes like Sales Tax, Customs Duty and Excise duty.
A direct tax on the other hand is something like Personal Income Tax, Corporate Tax and Business Income Tax which is not affected by GST and will continue as it is.
Sales tax is the most common tax in Bhutan charged for all goods and services from the point of entry or the point of production to the point of sale or service. When you buy a consumer item like a soap or Fridge it will have a sales tax component included in it. Similarly when you eat at a restaurant it will have a sales tax mentioned at the bottom of the bill which is sometimes also called a service tax.
Customs Duty is like sales tax except that it is levied only at the point of import and is only for all goods from third country imports or all countries other than India with whom we have free trade agreement. A good example is third country cars like Toyota Prados imported from Japan not only having to pay the normal sales tax but also the customs duty.
An Excise duty is typically a duty or tax charged at the point of manufacture and in some cases in import. In Bhutan industries do not pay excise duty for production. Industries producing for export pay no tax at all while industries producing for internal consumption like cement or wood charge and pay a certain sales tax. In Bhutan’s case the Bhutanese importers importing goods from factories in India end up paying excise duty to the Indian tax authorities which is then refunded to Bhutan on an annual basis based on the strength of the documents produced by Bhutan.
Currently all of the above taxes are administered by the DRC which has different tax rates making tax administration very complex for both DRC and businesses.
GST in addition to replacing the above taxes will come up with a single tax rate for all Goods and Services in the country and hence the name Goods and Services Tax. It is up to the government to decide the rate for GST and also come up with minimal exemption list where either no GST is to be charged or it is supposed to be higher than GST.
GST is a destination and consumption based tax. This in common speak means it will tax all imports heading into Bhutan and also all goods and services consumed within Bhutan. On the other hand like in the current tax regime there will no taxes on exports.
GST is also a tax imposed on the final consumer and while businesses will collect the tax at different stages they will not have to incur it.
It is also a tax collected progressively at each stage of production and distribution in a manner that avoids double and triple taxation.
How GST works in practice
A good example here would be the mineral water industry and business. So to make a cartoon of 12 mineral water bottles the factory, let’s say, will have to purchase items like plastic bottles, carton boxes, equipment etc which lets say would cost around Nu 100 per carton box with already Nu 10 included as the tax for the raw materials. The factory then does value addition of Nu 20 and so the total price comes to Nu 120 per box. If the tax rate is 10 percent then it comes to Nu 12.
However, under GST the company can set off the Nu 10 tax already paid for the raw materials against the total tax which is 12. This means 12 minus 10 and so the effective GST rate is only Nu 2.
The factory then sells the Nu 120 per box to a whole seller who in turn adds value or his or her margin of Nu 10 per box bringing it to Nu 130 per box (Nu 120 plus Nu 10). Here again at a 10 percent tax rate the wholesaler is libel for Nu 13 in tax.
Under GST the wholesaler by keeping proper paper work and accounts like the factory can set of this against the total Nu 12 tax already paid by the factory on the items. Therefore with 13 minus 12 the wholesaler’s effective GST rate is only Nu 1.
Finally the wholesaler sells the mineral water carton at Nu 130 per box to a retailer who in turn decides to add value or a margin of Nu 20 bringing the total cost of the mineral water carton to Nu 150 per box (Nu 130 plus Nu 20). Here if the tax rate is 10 percent the total tax payable would ordinarily be Nu 15.
With GST the retailer by keeping proper records and filing his GST can set off his tax against the tax for which he brought the item. This means the presumptive Nu 15 tax minus the tax of Nu 13 paid already by the factory and wholesaler bringing the effective GST tax to only Nu 2.
This would mean that the total GST from the factory, wholesaler and retailer on the mineral water bottle box would be Nu 10 + Nu 2 + Nu 1 + Nu 2 = Nu 15.
Without GST the total tax would have been more than double due to double and triple taxation so it brings down the prices of goods.
The system also incentivizes business people to file GST taxes and keep proper papers and accounts as it would reduce their tax burden. It would also encourage businesses to buy from those that are GST compliant. Therefore this would broaden the tax base and discourage tax avoidance thereby increasing revenue.
Currently the proposal from the DRC is to apply GST based on the business turnover as the only criteria. The DRC would set a certain threshold or amount of turnover over which businesses are expected to apply for GST. The amount would be set to ensure that the business in question has the capacity to comply with the record keeping obligations.
It is proposed that GST return is filed on a monthly basis by the largest taxpayers and exporters while it can be filed once every two months for others.
The GST return form will be a relatively simple and one page form which is accepted as a self assessment. There will also be a provision for refund so that any refund is given back in time.
To make it easier businesses can chose an accounting system that is easier for them which can either be cash flow based or based on invoices issued and received. Large businesses will be encouraged to us the latter.
All GST payers must keep adequate records. Since GST taxpayers must keep records, they should be required to file accounts-based Business Income Tax returns too.
It will be a legal offence to not register when required, fail to file returns, keep records, or supply information and provide tax invoices to other GST-registered businesses and for filing false returns. There will be penalties for violations.
However, well before GST cam come into effect in Bhutan there are a host of challenges facing its very formulation.
The biggest challenge in GST implementation is the budget as its complete implementation is expected to cost Nu 393 mn.
There is no government budget allocation for GST implementation and while the government is seeking external funds no funding has been secured yet. Though there are ongoing discussions with the World Bank and Asian Development Bank a significant funding gap is anticipated even with external assistance.
Currently the GST project team has only four members working on a part time basis with no defined roles within the team. According to an official this is insufficient to carry the project forward.
To implement GST there will be a host of major activities like planning and project administration, policy and legislation, information technology, business process design, logistics, staff training and communications.
One of the first tasks is to prepare a Cabinet proposal that outlines GST design features so that the cabinet can take a decision on it.
The DRC has proposed a National GST Steering Committee headed by the Finance Minister that will have a mainly policy, directive, legislative and coordinating role.
This will be supported by a GST Technical Steering Committee headed by the Director of DRC whose main job will be to implement the GST, ensure coordination, monitor the GST project team and also provide guidance.
In terms of technical assistance the International Monetary Fund is providing GST policy and implementation advice and the World Bank is providing GST strategy paper, micro simulation and legislation.
When it will come in ?
Currently the dates are yet to be finalized by the DRC which has three options for the Finance Ministry and the Cabinet. The earlier date for implementation after getting all cabinet approvals, drafting the law and getting it through Parliament is after June 2018. The second date is after December 2018 and the farthest date is after June 2019.