Govt increases property taxes but takes it away from LGs

The Property Tax Bill of Bhutan 2022 with its 0.1% annual tax based on the value of the land and house will generate upwards of more than Nu 600 mn a year up from the current Nu 57 mn collected every year.

Currently the Property Tax is collected by Thromdes and Gewogs in their CD Accounts where they use the money as revenue for various purposes.

However, the Finance Minister Namgay Tshering while presenting the Bill said that the money will be centralized with the government and then redistributed.

He said Thimphu Thromde will have more than enough revenue and it can be shared with Samdrupjongkhar Thromde which will not have enough.

Section 5 of the Act says, ‘All taxes, including penalties, payable under this Act shall be deposited into the Government Revenue Account.’

This is a major change as if the Thromdes and Gewogs deposit the land tax into the Government Revenue Account then they will not be able to use it.

A Thimphu Thromde official, on the condition of anonymity, said Thimphu Thromde collects around Nu 220 to Nu 250 mn a year in revenue which includes land tax, water fees, parking fees etc and it is from here that the Thromde meets all its recurrent expenditure and also some capital expenditure.

As a result, all recurrent expenditure like salaries of all Thimphu Thromde staff and maintenance of roads, drinking water, sewage lines, garbage collection etc are done from this recurrent budget. Some capital works like new infrastructure projects are done too.

So this revenue collected by the Thromde is absolutely essential to keep the city and its services functional.

The Thromde had been hoping for many years that the land tax increase will improve its finances to be able to deliver better services.

The official said that even if the government wants to take over all the revenue as long as there is some way to send money to the Thromde for its recurrent expenditure then it is fine, but if that arrangement is not there then it will make it difficult for the Thromde.

This is the similar picture in the three other thromdes like Phuentsholing, Gelephu and Samdrupjongkhar.

Even in the case of the 205 Gewogs the land tax is collected in the CD Account of the Gewog where the money is used for ad-hoc activities like meetings, a government guest coming etc and the money can be withdrawn only after a committee agrees and bills have to be maintained for the expenditure.

Here Kencho, the Gup of Genekha Gewog under Thimphu Dzongkhag, said that the CD account is useful for the Gewogs as the revenue from land tax, cattle tax, horse tax, rentals etc are deposited there and money can be used there for Gewog activities and events.

He said he has heard that in the near future the entire CD account itself would be closed for all Gewogs which he said will create issues in the smooth running of the Gewog and meeting unforeseen expenditure.

He said there are some local leaders who also ask why should they even bother to make collections if all the money will be taken by the central government.

A legal expert said that there is nothing legally there to prevent the government from taking the local land taxes into the central budget but the action in some aspects goes against the idea of having local governments, empowering them to collect revenue from their local residents and then being held to account for it.

After the Finance Minister’s announcement in Parliament Thimphu residents have started questioning if it is correct for the government to collect Thimphu’s local taxes and share it elsewhere for vote bank politics.

They observe that while Thimphu can generate more revenue it is also growing and has a lot of needs.

Finance Minister says cannot have parallel system

The Finance Minister said what the government is doing is legal as while the Constitution allows the local government to collect tax it does not say the local government (LG) has to spend what they collect.

He said while the LG can levy taxes as per the Constitution but the government decides the rate.

“We are planning to centralize it mainly because there is a lot of disparity and inequity as there are Gewogs and Thromdes which have better revenue source due to sheer size of the population,” said Lyonpo.

He said the government is already supporting around 100% of the capital expenditure of the LGs.

He said Thimphu city is a growing city and there are not of challenges and urban amenities that needs support.

“With this tax (land) money they will never meet the capital expenditure,” said Lyonpo.

“It is sounding like if they have better collection they can afford to be lavish, but this does not mean there can be a situation where some undergo financial tightening while others who have collection can spend lavishly. Whatever the require they will get from the government,” added Lyonpo.

Lyonpo said if the land taxes are left to LGs then the Gewogs that are adjacent to Thromdes will do really well as compared to far flung gewogs.

 “You cannot have this parallel system running where you say that Chang Gewog can meet your recurrent expenses, but for Lunana you will get separately from the government coffers. The rules should be applied uniformly,” said Lyonpo.

Walking back his line in Parliament on sharing Thimphu’s land tax with others he said he did not mean it like that though it sounded like that. He said whatever is collected will come in the Government Revenue Accounts which is a common basket which will automatically feed into the Consolidated Fund.

“So wherever we spend we will spend from the same purse. When the government collects PIT, BIT, CIT from Thimphu it cannot say the business is located here,” said Lyonpo.

He said the elected local government cannot act like an island kingdom as they are also government functionaries and an arm of the government.

“You cannot say LG is elected, Thromde is elected and so they have financial autonomy otherwise even gewogs will claim the same,” said Lyonpo.

Lyonpo said another thing is that they are trying to clean up the system.

“A lot of LG functionaries are maintaining a CD account. On one front we are just banking on the government consolidated fund and we say we are running negative and might need to raise T-Bills, but we are not taking into account the money being maintained in the CD accounts elsewhere,” said Lyonpo.

He said this cleaning of the system stared since 2021.

“Ideally we want to do away with the CD Accounts. We have an account where all transfers are made transparently from the MoF to the LG. We don’t want them to save their revenue separately so that they have a discretion to use that separately,” said Lyonpo.

“They can continue to maintain the CD account but tomorrow if the government says that we are coming up with another guideline and you cannot use CD Account as and when you like then that is it,” said Lyonpo.

Lyonpo said the overall property taxes collected from 205 Gewogs and 21 Dzongkhags is only 57 mn.

He said the total direct and indirect taxes, is Nu 20 billion (bn) but we have spent 20.8 bn in salary, pay and allowances. So the land tax is hardly enough to meet the recurrent expenses.

When asked how people can hold LGs accountable if the local tax revenue is taken by the central government, Lyonpo said people can still hold them accountable, and people mainly want works that are capital in nature and there the government is pumping in money.

Lyonpo said the land tax revenue is not a major revenue gain for the government as tax to GDP is 12% only and wage bill to GDP is almost 13%.

Lyonpo said this does not mean the government is collecting money to meet salary.

“We are trying to lay the foundation. This is part of the reform exercise. I have told my team to not worry about the revenue implication as long as we don’t go negative,” said Lyonpo

Lyonpo said it is high time to reform the tax revenue which the two previous governments have completely neglected.

He asked how can there be the same tax of one acre in Debsi and one acre in Lunana.

MoWHS Minister says it’s a joint effort

The Minister for Works and Human Settlement Dorji Tshering said, “To the government from wherever it is collected it is the same. It will be distributed, but does not mean will we will give it from Thimphu. Thimphu’s top up will not be enough as the capital budget not be covered by the land tax.”

Lyonpo said that with the property tax tax even if current and capital budgets are enough then Thimphu still cannot claim all the revenue.

He said the value of land and buildings are going up in Thimphu as it is a relative value where the whole nation is contributing as if Thimphu is not the capital then the value is not there.

He said there needs to be equal distribution from one coffer and for whom it is not enough.

Lyonpo said if Thimphu Thromde is given a deal to keep the land tax and not get any help from the government then Thromde will back out. Lyonpo said the government takes projects from ADB, Word Bank etc and gives it to Thimphu.

Lyonpo said since Thimphu Thromde collection is better and they can meet recurrent expenditure the government has given Thimphu less capital budget asking them to use it from there.

“For example, the recent wall collapse repair money was met from the recurrent budget,” said Lyonpo.

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