USD 3.8 mn impact on dollar reserves
This is at a time when there is no money in the govt with Nu 9 bn T-Bill loans funding the govt
72 MPs including ministers are eligible to get Prado quotas
Even before the MPs had their first Parliament session, around 57 of them promptly applied for their vehicle quota for a 3000 cc vehicle which is popularly called a ‘Prado Quota,’ given that is what the quota is used to purchase.
Of 57 applications, around 56 have already been issued as of 2nd January 2018. Of the 56 issued quotas, 25 belong to the NC who had applied earlier and 31 belong to the NA MPs who had applied recently. More applications and issuances are expected.
Each Prado quota saves a buyer Nu 3.8 mn in taxes. According to the STCBL, the cost of the Prado that is commonly bought with such a quota is Nu 8.6 mn after sales tax, customs duty and green tax.
The MPs’ Prado quota ensures that you can get the same Nu 8.6 mn Prado for Nu 4.8 mn, which is almost half the price, saving around Nu 3.8 mn in sales tax and customs duty tax.
This savings has ensured that the MPs’ Prado quota is a much sought after item among the rich in Thimphu, especially after 2014 when the then 70 percent tax on Prados increased to 180 percent.
Vehicle imports had been completely banned from 2012 onwards after the Rupee crisis and imports were allowed again, but only after higher taxes with lesser taxes for smaller vehicles and much higher taxes for bigger vehicles.
As a result, the vast majority of the MPs ended up selling their Prado Quota with the current rate being around Nu 2 mn per quota.
The Parliamentary Entitlement Act itself and the Parliamentary Entitlement Rules and Regulations 2018 does not mention that MP’s cannot sell their vehicle quotas.
However, ‘The Sales Tax, Customs and Excise 2000’ under section 33.1 says that a person who is not eligible for the quota has to pay the full taxes even though an exempted item is sold to him.
The MPs have loop holed over this clause, like their civil service brethren, by keeping the vehicles registered in their name even after selling the quota.
Unlike MPs, civil servants have to sign a legal agreement with the Ministry of Finance saying they will not sell their vehicle quota.
MPs in addition to the 2 mn from selling a vehicle quota also get a Nu 1 mn grant to buy a vehicle.
With this up to Nu 3 mn bonanza most MP’s either buy a smaller Indian vehicle and then save the rest of the amount or some who already have a vehicle save the whole amount.
This is not taking into account the Nu 120,000 in salaries and various allowances every month and the Nu 100,000 a year in discretionary allowance.
The 56 Prado Quotas will mean that the government stands to lose Nu 212.8 mn in tax revenue foregone.
This comes at a time when there is no money with the government which is functioning with money borrowed from financial institutions in the form of Treasury Bills issued by the Royal Monetary Authority (RMA).
The government is running in part on Nu 9 bn in T-bills, that it has borrowed from the banks on a short term basis.
This amount has to be refunded to the banks once the grants and revenue start coming in.
Another major impact of the Prado Quotas will be on Bhutan’s precious dollar reserves.
The 56 Prados quotas will lead to the import of 56 Prados each worth Nu 4.8 mn without taxes coming to a total of Nu 268.8 mn. This comes to around USD 3.82 mn (taking one dollar as Nu 70.28).
This also comes at a time when Bhutan’s dollar or foreign currency reserves are at USD 969 mn as of 31st December 2018.
The dollar reserves of Bhutan are an important component of managing the stability of the rupee reserves as a portion of dollars or foreign currency grants are automatically sold for Rupee or INR, as the projects result in imports which require rupee.
Another issue to also be considered is the fact that the selling of the quotas will not only result in the outflow of dollars but also rupee.
This is because quite a few MPs end up buying Indian cars and save the rest of the quota and vehicle grants money.
This also comes at a time when the Rupee Reserves are at a record low of INR 11.5 bn as of 31st December 2018. This is down from INR 21.431 bn in October 2018.
This is because of no rupee grant and other revenue coming in due to the elections and a long transition period between two governments.
A question to be asked here would be if the government can prevent the imports of Prados for now until the financial situation is better.
However, it may already be a bit late as the STCB has so far received around five orders for Prados through the Prado Quota.
The trend usually is for the MPs to go for their vehicle quota earlier, mainly to sell it to business people, while the ministers normally take their Prado Quota towards the end of their term as they have a Prado duty vehicle already.
If all the 72 Prado quotas are calculated, then the total tax loss would be Nu 273.6 mn in five years.
Apart from that USD 4.91 mn (Nu 345.6 mn) would also flow out of Bhutan’s reserves.
If all the Prado quotas are sold at Nu 2 mn a piece, then it would result in Nu 144 mn in additional revenue for 72 MPs and a portion of this would be used to import Indian cars which in turn would lead to an outflow of INR.
Apart from the issue of tax lost, scarce finances and dipping into valuable foreign reserves- the Prado Quota has become a major symbol of inequity in Bhutan.
The 180% tax on Prado’s not only push it out of the reach of most Bhutanese but the Prado quota for MPs gives them the sole access to this vehicle and also the means to enrich themselves with it.
The March 2014 second Pay Commission report had recommended doing away with vehicle quotas for all public servants (which includes civil servants and MPs) and giving Nu 160,000 instead.
The MPs at the time were already getting Nu 700,000 as vehicle grant and so this Nu 160,000 would be on top of the Nu 700,000.
However, the MPs in Parliament, during the deliberations on the entitlement amendment bill decided to not only go against the pay commission recommendation and keep their Prado quota but they also increased the vehicle grant amount to Nu 1 mn.
This decision led to a huge controversy and subsequently the former government was also forced to give the civil servants the old vehicle quota system which had been stopped in 2012 following the Rupee crisis.
In the light of the rupee shortage in 2012, a special government task force report pointed out that between 2002-2011 the government gave up Nu 900 mn in tax revenue through vehicle quotas of civil servants.