The Bhutanese Leading the way.
GST concerns from both officials and business people
The Goods and Services Tax (GST) Bill has been passed in the National Assembly (NA), and is currently under discussion in the National Council. However, there are some concerns.
The first issue is that the reduction of the GST rate from the proposed 7% to 5% by the NA on the recommendation of the Economic and Finance Committee (EFC) will mean a revenue loss of Nu 2.63 billion (bn). This is because the GST forecast under 7% was Nu 9.16 bn and with 5% it is now Nu 6.53 bn.
The GST efficiency level also drops from 73% to 52%.
An official said the original GST proposed to the Cabinet was 10% which would have raised Nu 12.47 bn and been 100% efficient, but the Cabinet was worried about the tax burden and reduced it to 7%.
Another concern coming forth is that the original GST Bill had exempted farm products like fertilizers, farming equipment, etc., which is now under GST due to the EFC recommendation.
Here, an official said the impact on farmers will not be much, and within two years, there will be enough data to see any impact. The official said that the government can use the GST collected to help the farmers in other ways through subsides, etc.
A concern among GST officials is that it is actually best to have no exemptions at all, which have been granted to rice, oil, salt, wheelchairs and sanitary pads.
An official said exemptions will not only lead to administrative burden because, now, every truck will have to be opened up to check for these items, but it also gives discretionary powers to customs officials.
The official said this can lead to diversions and corruption, as GST taxed items can be brought under GST exempt heads to avoid GST. The official said it is best not to have any exemption at all.
A GST concern among some local manufacturers is that there was some level of protection for Bhutanese businesses in the old Bhutan Sales Tax (BST) regime, as products made in Bhutan were generally (except for a few goods such as cement, fizzy drinks) not levied BST.
However, all imported products were levied BST. This created a sort of protection for domestic manufacturers.
“Now with GST, this protection is removed and both domestic manufacturers and imports are on a level playing ground, which means due to economies of scale, lower labor costs, etc. Bhutanese manufacturers are disadvantaged. For example, if you look at cement, domestic BST was 5% and import was 15% but now both are 5% equal. Similarly for TMT rebar, domestic BST was 0% and import was 10%. Now both are 5%. This puts domestic industries at a disadvantage,” said a businessman.
Here, officials say that the GST regime also encourages local businesses to be more competitive and improve their efficacy to compete. The officials said local businesses have to improve their management and systems, and also relook at the profit margin they want to keep. They said the system cannot keep protecting inefficacies.
One possible solution is bringing in a Minimum Import Price, whereby imports are valued higher so that a higher GST is applicable, but it is not sure how such a system can be applied and if there will be a reaction from other countries.
Another concern Bhutanese businesses have is how the GST will actually be implemented, as the ease of paying and getting refund will make or break the success of GST.
The final concern is for the little players, who are ostensibly GST exempt, and thus not affected, but in India, big companies have moved away from procuring from small businesses below the GST threshold as they do not get the GST credit input benefit.
Another businessman said that Bhutanese manufacturers enjoy an exemption from the BST on all raw materials imported from India and third countries.
“With GST, raw materials will now be subject to GST and even though it will be refunded during export it will tie up the working capital. This will particularly affect industries that rely on imported inputs for their production processes.”
But the official said the GST will anyhow be refunded for raw material imports on exporting the finished products which encourages efficiency.
