The Bhutanese Leading the way.
With the rollout of the Goods and Services Tax (GST), the main focus has been on the prices of goods, with some like vegetables, beef, fruits, cereals, medicines, etc., going up by 5% and some like packaged food, cars, poultry, pork, etc., going down, and a lot of debate in between.
However, the majority of the goods under GST, except for essentials which were zero-rated, were already paying the Bhutan Sales Tax (BST), and so BST is being replaced with GST.
In all of this, what has largely not been discussed is the impact of GST on the large service sector, which earlier largely never paid BST except for a few sectors.
Only a few categories of services had sales tax or BST, such as cable television services, tourist-rated hotel and restaurant services, and telecommunication services on tourist SIM cards.
1,544 Service Companies under GST
However, now for the first time, 1,544 service-related businesses and companies will be paying the 5% GST.
This means these service providers will have to collect GST from their clients, and this will push up the cost of services.
Many service sectors that will be impacted are construction, architectural and engineering services, real estate, plumbing and heating and air-conditioning installation, manufacture of building materials, demolition, logging, and quarrying.
Then there are tour operations, restaurants and hotels, amusement parks, and theme parks.
Also included are consultancy, law, financial services, accounting services, telecom, electricity, security, medical and dental practices, education activities (not tuition fees), activities of religious organisations, creative arts, and entertainment.
Adding to the list are the manufacture of food products and drinks, manufacture of alcohol, manufacture of vegetable oils, processing of fruits and vegetables, raising cattle and poultry, and support activities for animal production.
More include the manufacture of jewellery, plastic products, rubber tyres and tubes and retreading, glass products, structural metal products, and non-metallic mineral products.
There are also automobile services, publishing, repair of computers and equipment, freight by road, washing and dry-cleaning, courier services, TV broadcasting, repair of consumer electronics, research and development, repair of footwear and leather goods, warehousing and storage, packaging, and more.
More Expensive Services
While the above is not an exhaustive list, the prices of services that touch many Bhutanese lives directly and indirectly will be going up by 5%, except for cable television services and tourist-rated hotel and restaurant services, which had BST before.
For example, if a person wants to buy a Nu 6 million apartment, earlier there was only a 3% property ownership transfer tax. Now, if one buys it from a GST-registered real estate company, there will be an additional 5% GST.
Even if a private citizen builds a house by hiring a contractor, in all likelihood the contractor will be GST-registered and charge 5% for services.
GST on services is already starting to impact the tourism industry.
The owner of one of Bhutan’s biggest tour companies, who brings in tourists in large numbers and spoke on condition of anonymity, said, “Many of our foreign agent counterparts are refusing to pass on the 5% GST to tourists, as they say Bhutan is already very expensive with the USD 100 Sustainable Development Fee (SDF), monument fees, etc. If we insist, we will lose partners and guests. We have decided not to pass on GST and bear it as a loss ourselves and pay the government.”
Another major tour operator specialising in high-end, longer-stay tourists said GST will increase the total tour package cost. He said tour operators must charge an additional 5% GST on land costs (accommodation, transport, guiding, meals), which were not previously subject to GST, directly increasing the overall package price.
He said tourists already pay SDF and visa fees, which are fixed and unavoidable. With GST applied on land costs, tourists perceive this as multiple layers of taxation.
He said the added GST inflates Bhutan’s tour prices compared to competing destinations that either have lower indirect taxes or bundle taxes invisibly, discouraging cost-sensitive travellers.
“Tour operators cannot absorb GST fully because margins are already tight, forcing them to pass the tax burden to tourists and increasing advertised prices,” he added.
He said GST will also negatively impact group and long-stay tours, as longer stays and larger groups experience a higher absolute tax burden, making extended visits less appealing.
With respect to the hotel sector, the replacement of BST with GST has resulted in a 5% reduction in tax. Apart from changes related to regulatory compliance and input-output tax credits, the impact on hotels is relatively limited compared to tour operators.
There is also concern in the construction sector. The Executive Director of the Construction Association of Bhutan (CAB), Sonam Wangchuk, said GST will push up construction costs. Contractors will have to charge even government clients 5% GST, as well as private clients.
Ugyen Dorji, head of the Automobile Association of Bhutan, said GST will push up automobile service costs.
He said around 20% to 30% of any automobile bill is for services, which earlier had no BST but will now bear GST. Equipment already had BST or customs duty, so there is no major difference there.
The IT Association President, Mani Pradhan, said IT services like repairs and maintenance will increase as GST is applied. He added that earlier smartphones, laptops, and desktops had no taxes, but now they will have GST.
Compliance Burden and Costs
The concern among Bhutan’s service sector is not only increased costs but also administrative and compliance burdens. Most service companies are small, with employees usually in single digits and heavy multitasking.
A lawyer from Basnet Attorneys and Law said his company is registering under GST.
“Legal fees are already high in Bhutan, with even a simple case costing Nu 100,000 to Nu 200,000. With GST, the burden will increase for clients,” the lawyer said.
He is also worried about monthly GST filing without a full-time accountant. They are considering hiring someone with a financial background.
A senior lawyer at Garuda Legal Services said they are finding their way around GST and will discuss registration with DRC. He admitted the firm does not have a full-time accountant but hopes filing will not be too complicated since the firm works with only a certain number of clients in a year.
An accountant with an accounting firm said many service companies lack full-time accountants, and GST paperwork and monthly filing will pressure the service companies to hire professionals. Their cost of compliance will go up.
“If a service company asks me to file GST monthly, I will have to do a lot of work and charge around Nu 10,000 a month, or Nu 120,000 a year. Hiring even an inexperienced accountant may cost more,” he said.
Losing Out to Non-Registered Competitors
A major concern is losing out to competitors not registered under GST, as they will be 5% cheaper.
For goods, GST is applied widely and registered traders can claim input tax credit. In services, however, input tax credit is limited.
For many service companies, the biggest expense is vehicles, but here they cannot claim GST as an input tax credit, as such vehicles are not eligible.
A Disquiet and Inflationary Impact
Between higher costs and even higher administrative burdens, there is growing disquiet in the service sector on the impact of the GST, especially at a time when the economy is not doing well.
The service sector is, by far, the largest private employer in Bhutan, providing jobs to tens of thousands. Any disruption will have wide ramifications on not only the sector but also the people who use these everyday services.
GST on Bhutan’s unique and mainly small-scale service sector will have an inflationary effect in the coming months and years, and increase administrative and compliance costs.
The Bhutan Chambers of Commerce & Industry (BCCI) President, Tandy Wangchuk, said they had raised concerns of GST on the service sector during consultations but exemptions were not agreed to.
The only major beneficiary is hotels, whose 10% BST has reduced to 5% GST, though hoteliers say the impact is minimal, given their limited business and the cloud they are under.
DRC Responds
The Department of Revenue and Customs (DRC) said that under the earlier tax regime, only a limited number of service providers were taxed. Under GST, all service providers are included.
DRC said that while registered providers may appear disadvantaged initially in the first 3 months, the medium- to long-term impact is positive.
DRC said GST registered service providers are eligible to claim input tax credit on the GST paid for their eligible business expenses (office rent, office equipment, any GST incurred on any other inputs used in the business), and this will quickly reduce the effective cost of providing services and allows them to price very competitively. Whereas, unregistered service providers, by contrast, cannot claim input tax credits, thus any GST they pay on input becomes part of their cost structure, making their services less efficient and competitive in the long run, requiring improved business efficiency to remain competitive from a pricing perspective.
DRC said for registered business clients the 5% GST charged by registered service providers is not an extra burden as it can be claimed back as input tax credit.
DRC also said it strengthens transparency and integrates businesses more into the formal sector, whilst creating the environment for improving business efficiency.
The department also said that for unregistered service providers since they cannot claim back GST these embedded taxes are passed on to customers indirectly, and so in essence, there is an embedded GST component in the price of services from unregistered providers, though it is not shown separately on the invoice
DRC said that earlier the growing service economy was not able to be fully integrated into the formal economy. The introduction of GST at 5% represents a significant reform. It is designed to be comprehensive and inclusive, applying uniformly and formality to both goods and services, which are both forms of consumption. DRC said this ensures fairness, full inclusivity across sectors, neutrality, and transparency.
On the increased compliance costs, a DRC official said this means more business for accounting firms and accountants, and that is good for economic activity.
