The Bhutanese Leading the way.
A common complaint from small and medium sized businesses these days, like shops, restaurants, etc., is that their estimated Business Income Tax (BIT) has gone up considerably.
The common explanation provided so far to them has been that their tax is higher since the tax is now assessed on the turnover in their CD Account.
While the above is true, this is not the full picture as the BIT has gone up also due to an increase in the Industrial Average Ratio used to calculate the BIT for those who do not keep a book of accounts or file taxes, according to the Department of Revenue and Customs (DRC).
For a business that keeps the books of accounts, it is relatively simple to calculate BIT as if they have made Nu 100,000 income in a year and have Nu 90,000 in expenses the profit is Nu 10,000. The 30% BIT will be charged on the Nu 10,000 profit which means a BIT of Nu 3,000 to be paid.
This means the business has paid Nu 3,000 as tax on an income of Nu 100,000 which makes the Tax Ratio at 3% (3,000) of the income (100,000). The DRC surveys some more similar businesses in the area to check their tax ratios too and arrives at the average which will be the Industrial Average Ratio for that particular type of business in that area.
When a similar business in the same area that does not maintain a book of accounts approaches the DRC for BIT tax evaluation, the DRC will take all the income in the CD account as the turnover, which let’s say is Nu 150,000. It will then apply the Industrial Average Ratio of 3% on the turnover of Nu 150,000 which means the BIT payable is Nu 4,500.
The DRC has increased this Industrial Average Ratio in the four Regional Revenue and Custom Offices (RRCOS) of Thimphu by 13.1%, Phuenthsoling by 10%, Samtse by 5% and Gelephu by 5%.
There are no changes for the RRCOs of Paro, Samdrupjongkhar, Bumthang and Mongar.
The DRC explained that the Industrial Average Ratio had gone up in Thimphu, Phuentsholing, Samtse and Gelephu because when the businesses with books of accounts had filed BIT there was an increase in sales and profitability meaning more tax paid,and hence, the tax rate also went up on those without the books of accounts in similar businesses.
The increase in the Industrial Average Ratio in a RRCO region does not mean the increase was uniform across all businesses there as some would have higher increases than others, and a very few would have no changes or even a decrease.
For example, while the Ratio went up by 13.1% in Thimphu it was different for different businesses.
Education consultancies have been doing well, and so the ratio this group went up by more than double for this class. There was also a major increase for retail trade of wine and liquor. The ratio went up on businesses, like bakery, retail trade, grocery, restaurant, etc.
At the same time certain things, like dry cleaners and ECCDs stayed the same and there were even decreases in hotels, software consultancy, fruits and vegetables, etc.
The Director General of the DRC, Sonam Jamtsho, said that if people are not happy with their BIT taxes, then they have the option of keeping books of accounts.
He said in some cases, the taxes had come high as people had done personal transactions in their CD accounts, and if they bring proof then the DRC was considering it. For example, in some cases the loans were released into CD accounts inflating the turnover.
The DG said that the Income Tax Act of Bhutan 2001 empowers the DRC to make an estimated assessment when a person has failed to maintain accounts or file a return.
The DG said that CD accounts are also a factor in the higher taxes.
The DRC in August 2022 had taken out a notification mandating small, medium and large businesses to open CD accounts by 31st October 2022 for all business transactions.
In 2023 it first started estimating taxes based on the CD accounts, and this was done in a bigger way in 2024 as CD accounts had been made mandatory.
The DG said that before CD accounts the estimated BIT for businesses without accounts was charging a little more than the year before which is not the correct way as it has no proper basis.
Before CD accounts another way of estimating the turnover for bigger businesses was looking at their imports.
A Ministry of Finance official said that people should now understand that Bhutan is heading towards tax compliance and also a modern way of doing things like checking the CD account.
The DG said that they know certain businesses keep a savings account for payments to reflect a lower turnover in the CD account, but here, he said the DRC does checks and those caught are fined.
In 2023 there were a total of 45,657 business licenses of which 15,652 were exempt being small businesses in rural areas, 25,317 were not exempted and 4,688 were Accounts filers.
