Exemption clause in GST Bill clashes with Supreme Court Tax verdict

The DNT government in bringing about the GST Tax Bill may have unwittingly put in a provision in the Bill that clashes with the 2011 Supreme Court Tax verdict.

The GST Bill in section 72 titled ‘Exemptions to manufacturer’ says, ‘On the recommendation of Ministry of Economic Affairs and Ministry of Finance, the Lhengye Zhungtshog through an executive order may exempt GST and/or EET on supply of manufactured goods by specified manufacturing industries.’

The above section clearly talks of using an executive order to provide exemption from the GST tax and the EET tax.

However, this clashes with the Supreme Court order which requires a law to change taxes and this means that it will have to go through Parliament and not an executive order from the cabinet.

The verdict essentially said that the government has to follow Article 14 section 1 of the Constitution which says, “Taxes, fees and other forms of levies shall not be imposed or altered except by law.’

The 2011 tax verdict came about when the then PDP opposition took the then ruling DPT government to court in 2010 over some vehicle taxes which were not presented and passed in Parliament.

It also became the first Constitutional tax case setting some important precedents on how taxes are to be applied or exempted.

The section 72 was inserted to provide help and exemption to local industries faced with stronger foreign competition due to a flat 7 percent GST rate which is lower than the 10 percent Bhutan Sales Tax normally levied on imported products.

The section was also intended to allow the cabinet to provide targeted and immediate relief to Bhutanese industries or manufacturers in trouble due the GST regime.

Perhaps aware of this, even the Association of Bhutanese Industries (ABI) in its appeal (see main story on pg 1) to the government on various GST issues has insisted on their changes being recorded in the GST Bill itself.

A businessman on the condition of anonymity said, “The section says the cabinet will give tax exemptions through an executive order which clashes with the Supreme Court tax verdict and so it is better the tax changes are made in the current GST Bill itself than any future exemptions by the cabinet which would be illegal.”

FI case background

Ironically, the DNT itself took the former PDP government to court over the alteration of Fiscal Incentives in 2017.

The former Finance Minister, in line with the Fiscal Incentives (FI) of 2010 and 2013, during 2017 presented the 2016 fiscal incentives in the Parliament as a report for information along with the Budget, which was separately treated as a Money Bill.

The assumption made by the Ministry of Finance based on earlier FI precedence and its reading of the 2011 Supreme Court tax verdict and tax laws was that it had the right to give incentives or tax breaks, as it was not the same as altering tax rates, which needs parliamentary approval.

However, this precedence and assumption was corrected by a combination of the NA Finance Committee, Speaker and also the Opposition. Ultimately the National Assembly resolved that based on the Constitution, Public Finance Act and a more complete reading of the Supreme Court verdict the incentives will be treated as a money bill.

The only issue was that the incentives were already in effect from January 2016 and the so the FI was supposed to apply retroactively. The Finance Minister requested for the retroactive application of the FI from January 2016 otherwise money would have to be paid by various businesses for 17 months.

At the time DNT issued a press release where it asked the Prime Minister and the Finance Minister to step down form their posts.

Their then release said, ““This selective Tha Damtshi to the Constitution is very serious and when done by the PM himself, is unacceptable and has brought a national shame to Bhutan’s tryst with democracy. Now, the Prime Minister and the Finance Minister should take moral responsibility and step down to prove their allegiance to the Constitution and to the Tsa-Wa-Sum,” thundered the release.”

The party at the time said that in the greater interest the Nation and for the future of Bhutan’s infant democracy the Government of the day or any other political party must refrain from setting a wrong precedence.

DNT also quoted that Article 14 section 1 of the Constitution.

The DNT then filed a case in the High Court against the former government in August 2017 saying it had breached the Constitution and that DNT was taking up the case to uphold the Constitution.

The High Court in 9th November 2017 said that DNT did not have a legal standing to sue. DNT decided to not appeal the dismissal but wrote to the Opposition to take up the case.

Finance Minister responds

When this legal anomaly was pointed out, the Finance Minister said there are three main chapters in the GST bill and these are GST, EET and the Schedules. He said that next time when they put it for amendment only the schedule or the rates will change but not the entire principal of the GST.

He said the government will not take the power of adjusting or changing the tax rates which is under the schedule. He said that the schedule can be brought in anytime as a money bill. The Finance Minister clarified that the changes of the cabinet will go through the Parliament.

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