The Bhutanese Leading the way.
The Indian government has told a Bhutanese delegation from the Ministry of Finance that Bhutan would have to wait for two months before India can make any special concessions for Bhutan on the new Good and Services Tax (GST), which came into effect from July 1st
A senior official said. “The Indian government said that it needs to fully implement and see the impact of GST before coming to any decision on Bhutan’s requests.”
The Indian government itself has given till September 16 for the full implementation of GST.
The GST is a single integrated taxation system within India that combines a dozen state and central taxes in India into one with rates varying from 0 to 28 percent.
What is of interest and relevance to Bhutan is that GST is also targeted at making Indian exports more competitive with zero tax and imports more expensive with higher taxation.
The requests of the Bhutan government are also in this regard.
On the exports front Bhutan’s exports become more expensive for two reasons. The first being higher rates on certain key products like cement. The second and main reason is that unlike the earlier system where tax collection for exports from Bhutan was at the point of sale it is now at the point of entry of the goods into India under GST.
This essentially means that Bhutanese exports to India automatically become more expensive as the entire GST tax is being collected upon entry.
The Bhutanese delegation requested that instead of collecting GST at the point of entry it instead be collected at the point of sale like in the earlier system.
The other issue is imports as the zero rated GST tax on items will not only make imports to Bhutan cheaper, but the absence of excise duty refund on all goods barring petroleum and alcohol will also mean an excise duty revenue drop for the government.
In this regard the government delegation explored the possibility if GST for exports to Bhutan can be levied at the source for Bhutan and refunded to the government like the excise duty refund of the past.
The Bhutan government is pinning its hope on a rule in the GST rules which allows the Indian government to make certain exceptions in the bilateral context with other countries.
Bhutan got Nu 2.9 bn in excise duty refund last year. The government is yet to know what will be the exact impact on this annual excise duty revenue refund from India.
The only certainty so far is that since currently petroleum products are not under GST Bhutan will continue to get the excise duty refund for petroleum imports which constitute a large share of the excise duty refund. The share of petroleum excise duty refund last year was Nu 1.556 bn.
This still leaves Bhutan short of around Nu 1.4 bn as of now.
A key concern of the government apart from the above issues is that since imports would get cheaper then it may lead to an increase in imports through Bhutanese consuming more consumer goods. The fear is that if it goes beyond a point it may impact the rupee reserve that has been successfully rebuilt since the last four years.
In such a scenario with increased imports and falling government revenue, an increased tax on imports to make up for the zero duty taxes from India could be considered by the government.
Meanwhile, Bhutan is also working on coming up with its own GST system that would subsume the three taxes of sales tax, custom dusty and excise duty into one.
An official said that Bhutan would study the impact of the Indian GST law and according come up with a Bhutan GST that can best adapt to meeting the challenges of the Indian GST regime.
However, Bhutan’s GST is a long way off and is expected to take anywhere between 18 months to two years for formulation and implementation. The biggest hurdle is a potential Nu 393 mn bill to implement Bhutan’s own GST.
Understanding GST
The GST is a single indirect tax that replaces other indirect taxes like Sales Tax, Customs Duty and Excise duty and other taxes in India at the state and central level in India.
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.
While it brings about uniformity in rates of taxes within India all exports items have zero tax.
GST is a destination and consumption based tax. 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.
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.
