The Bhutanese Leading the way.
Last Saturday on 31st May The Bhutanese did a story on the Income Tax Bill 2025 pointing to its various features like reductions in Personal Income Tax (PIT) slab, 30% Business Income Tax (BIT) being done away with and it now being brought under PIT, reduction in Corporate Income Tax (CIT), PIT deductions for first time homeowners’ loan, disabled and PIT tax credits for those with young children.
The same story also pointed to the Bill’s proposal to charge a 10% tax on fixed deposit interest and do away with the Nu 30,000 tax deduction for dividends.
The story link from last Saturday is here .
In the meet-the-press yesterday on 6th June The Bhutanese asked the government representative in the form of the Ministry of Industry Commerce and Employment (MoICE) Minister Namgyal Dorji about the issue of 10% tax on fixed deposit interest and doing away with the Nu 30,000 tax deduction for dividends.
The reporter said that while the Tax reforms are progressive with relief given to various sectors however, there are some who feel tax being charged on fixed deposit interest and the Nu 30,000 deduction being removed for dividend tax are anomalies.
The reporter asked if the government will reconsider the above given that the tax on fixed deposit interest was done away by the PDP government in 2016 to encourage bank deposits and a savings culture and the Nu 30,000 tax deduction for dividends benefits small investors on the stock market.
The reporter also asked if the tax on the fixed deposit interest was clashing with the governments own recently released ‘Bhutan 10X National Economic Vision’ document that aims to promote a savings culture in Bhutan.
The MoICE Minister responding on behalf of the Finance Minister, who was not present, said dividends are considered as passive income, and international practice has shifted away from imposing a Dividend Distribution Tax (DDT) at the corporate level; instead, dividends are taxed directly in the hands of shareholders.
“Under the proposed Income Tax Act, interest income (for fixed deposits) is levied as a final withholding tax. Because both dividends and interest represent passive income streams, subjecting them to a uniform 10% withholding tax ensures equitable treatment and prevents distortions in investment decisions,” said Lyonpo.
This was deemed fairer than exempting one form of passive income while taxing another.
He said, “Interest-bearing instruments are predominantly held by high-net-worth individuals. Taxing interest income (fixed deposit) promotes economic fairness and efficiency by discouraging passive wealth accumulation and encouraging investment in productive sectors. It reduces income inequality and prevents distortions that favor low-risk, unproductive capital.”
Lyonpo pointed out that final withholding at source effectively eliminates opportunities for underreporting or misclassification of passive income, since the tax liability is discharged before the proceeds reach the recipient.
“By applying a single 10 % rate to dividend and interest income, the Act promotes horizontal equity—taxpayers with identical types of income bear the same tax burden, regardless of the underlying instrument.”
Furthermore, Bhutan’s Double Taxation Avoidance Agreements cap withholding taxes on dividends and interest at 10%; adopting a flat 10% rate aligns automatically with treaty ceilings, avoiding conflicts and eliminating the need for taxpayers to claim refunds or treaty benefits.
From the government’s perspective, a flat 10% withholding tax is straightforward to administer: it generates a stable, predictable revenue stream without imposing additional compliance costs on the tax administration.
The Ministry of Finance (MoF) reply said that for taxpayers, the simplicity of a single final withholding rate provides certainty and convenience, as no further filing or reconciliation is required – once the tax is withheld at source, the obligation is fully satisfied. Internationally, withholding rates on dividend income range from 10% to 25%; by setting the rate at the treaty‐ maximum of 10%, Bhutan strikes a prudent balance between maintaining competitiveness for investors and safeguarding its revenue base.
Going a bit beyond the MoF response that the MoICE Minister was reading, he said that the 10% tax on fixed deposit interest had been debated in the cabinet but it was retained.
Lyonpo said that both the issues are in the Tax Bill as a proposal but there are discussions expected on this in the Parliament which will give the final shape to the Bill and the issue.
The 10% tax on fixed deposit interest means that if someone puts Nu 100,000 in a fixed deposit for 10 years at 8% interest rate the fixed deposit interest earned will be Nu 80,000. This Nu 80,000 fixed deposit interest will be taxed at 10% meaning a deduction of Nu 8,000.
The PDP government in 2016 had done away with taxes on fixed deposit interest.
The proposed reintroduction of the tax on the fixed deposit interest and removal of the Nu 30,000 deduction for dividends has not gone down well with the public and now threatens to overshadow the entire Income Tax Bill.
Members of the public pointed out that the tax on fixed deposit interest will discourage them to save when the need of the hour is to promote a savings culture. Some pointed out that it may even hurt remittances. They also feel that removal of the Nu 30,000 deduction for dividends will hurt small investors in the stock market.
