The Bhutanese Leading the way.
The Finance Minister Lyonpo Namgay Tshering introduced the Goods and Services Tax Bill 2020 (GST) on 16th January 2020.
The GST Bill is the legal basis of the GST tax which will subsume 11 different rates of Sales Tax (ST) for goods and services manufactured or imported into Bhutan into one single and simple rate of 7 percent GST.
GST, simply put, is the biggest tax reform in Bhutan. Work started in 2016 under the Department of Revenue and Customs (DRC) and it fit in well with the DNT Manifesto that aimed to recover Nu 10 bn by sealing tax leakages.
The biggest tax leakages are in the indirect tax system like ST where there is no incentive to keep proper records, declare the right taxes and also no way to check leakages.
GST aims to address all of the above and more.
As per the 2019-20 budget the projected income from ST is Nu 4.176 bn. To get an idea of the scale of GST the Finance Minister declared it would enhance revenue by Nu 3 bn a year, which is like increasing the ST revenue by almost 71.8 percent within a year.
The projected increase in revenue is also closely linked to how GST works.
The whole idea behind GST is that you can collect more indirect taxes from more people by reducing tax, simplifying it, giving an incentive for them to keep proper records and declare the right numbers and then having a robust online system to track the defaulters.
The important thing to note is that GST registration is compulsory for any business that has a turnover of Nu 5 mn or more. In neighboring India, it is 2 mn but Bhutan kept it higher to ensure better implementation.
However, businesses below the Nu 5 mn mark can apply for it to get the benefits of GST.
An example of how GST will work can be given through import of clothes into the country.
So, a wholesaler in Phuentsholing imports cloth worth Nu 100,000 and he pays GST of 7 percent or Nu 7,000.
He might want a profit margin of 15 percent or Nu 15,000 on the Nu 100,000 and sell it to a retailer in Thimphu at Nu 115,000.
Here, under GST, since the 7,000 tax has already been paid, the retailer is charged GST only on the Nu 15,000 profit which is Nu 1,050.
In the current ST system, the entire Nu 115,000 would have been charged with ST again.
The retailer in Thimphu who is also GST registered gets his clothes at Nu 115,000 with Nu 1,050 GST.
He decides to sell the cloth to a customer with 15 percent profit or Nu 17,250 on Nu 115,000 at the total of Nu 132,250.
Under the current system he would be charged tax on the while 132,250 but under GST he can offset this by showing the GST was paid on the Nu 100,000 and Nu 15,000 and so he is liable to pay GST only only the profit margin of Nu 17,250.
The GST system in avoiding double and triple taxation gives a huge incentive to businesses to register under GST and give the correct sales figures.
Under the current ST system since there is tax on tax at every stage both wholesalers and retailers indulge in undervaluing their imports or purchases to avoid high taxes. They also undervalue their sales to avoid paying higher taxes.
Another advantage of the GST system is that once the products enter the GST system through the wholesaler at the entry point, both the wholesaler and retailer cannot deflate its value and it would not make sense to do so as they are avoiding tax on tax.
The DRC is also currently working on the online Bhutan Integrated Tax System (BITS) which be able to access financial transactions and assets of the business or person.
So, if a person is declaring fake losses, then he can be caught in two ways. One is through the GST filings of the previous person like the wholesaler and the other is if there are huge bank transactions and growing assets like Land Cruiser or land.
The additional advantage of the being a GST business is the retailer in Thimphu can make additional claims to get even more tax breaks. For example, if he buys a Nu 1 mn truck for his business which has 7 percent GST at Nu 70,000. He can offset this by showing that the 7 percent GST has already been paid by the truck importer saving him Nu 70,000.
A non GST business would not get such benefits.
While exports under both the ST and GST systems are tax free the local manufacturer has an additional edge under GST. Even though the GST compliant manufacturer is paying zero tax, he can make GST claims from other products that go into his manufacturing. So, if he has bought a truck and paid GST for it then he can claim the amount already paid by the importer.
The DRC would be the implementing agency and so using its tax and other related database it will already automatically register all businesses in Bhutan with a turnover at or above Nu 5 mn under the GST system.
A GST business would be given an online account and password to file GST. The proposed timeline is monthly but Lyonpo said that filing every three months can also be considered.
In the filing, the shop, based on its record keeping, would have to give the overall monthly sales and profit and the GST amount that has to be paid or refunded back to it.
There is no fixed timeline but the DRC is looking at early 2021 as a possible implementation date.
Lyonpo said that around 40 percent of manufactured and imported goods would become cheaper while the remaining 60 percent would be around the same or slightly higher.
The GST has an exhaustive exemption list of 250 items including basic commodities like rice and oil, health related items, education related items and agriculture related items.
Lyonpo said that GST can also be used to make domestic manufacturers more competitive against foreign imports. He said foreign imports can pay the 7 percent GST but a domestic company manufacturing the same item can be made exempt from GST.
The minister said there is a triangular benefit to GST with a simplified and reformed tax system, businesses avoiding double taxation and the consumer getting lower prices.
The GST Bill has an anti-profiteering clause whereby they are supposed to pass the benefits down to the consumer.
EET and higher taxes on sin goods
The GST Bill also has an Excise Equalization Tax (EET) which are there for two reasons. The first is that since sales tax is being made uniform at 7 percent the EET can be used to balance the highly reduced sales tax in components like vehicles.
The second reason is for the government to impose higher taxes on junk food and unhealthy items.
Alcohol and Tobacco products already have a 100 percent ST but under GST the EET will be 100 percent with an added GST of 7 percent on it.
A tax official said that the above does not mean that the effective tax is 107 percent now as the GST 7 percent tax would be applied on the 100 percent EET and so the real effective tax is around 114 percent.
Pasta, noodles, chocolate and sweets have 15 percent ST but now it will have 20 percent EET and an additional 7 percent GST on it with an effective tax rate of 28.4 percent.
Betel nuts have a ST of 20 percent but now it will have an EET of 20 percent and a GST of 7 percent with an effective tax rate of 28.4 percent.
Sugars like lactose, fructose, caramel etc. has zero tax but it will now attract 20 percent EET and 7 percent GST.
Ice-cream has a ST of 15 percent but now an EET of 20 percent and GST of 7 percent is proposed with an effective tax rate of 28.4 percent.
Plastic carry bags and doma wrappers has 20 percent ST but now it will be 20 percent EET and a seven percent GST with an effective tax rate of 28.4 percent.
Other plastic plates, sheets, film, foil which as 10 percent ST will now have 20 percent EET and 7 percent GST.
For vehicles there is small drop in taxes across the board with more drops for smaller vehicles.
For vehicles not exceeding 1,500 cc like an Alto the ST is 45 percent but now it will have an EET of 30 percent and GST of 7 percent.
An official again said that the above does not mean that the effective tax is 37 percent now as the GST 7 percent tax would be applied on the 30 percent EET and so the real effective tax is around 39.1 percent. This means the total EET and GST is lower by around 6 percent from the ST.
For vehicles exceeding 1,500 cc the ST is 50 percent but now it will have an EET of 40 percent and GST of 7 percent.
The real effective tax is around 49.8 percent. This only brings down the prices of cars above 1,500 CC by 0.2 percent which is negligible.
On bikes those below 250 cc currently pay 10 percent ST but under GST this is reduced to 7 percent with no EET.
For luxury bikes with cylinder exceeding 800 cc the current ST is 20 percent but now it will be 40 percent EET with 7 percent GST with an effective tax rate of 49.8 percent.
On Mineral water there is an existing 30 percent ST which will now be 20 percent EET and 7 percent GST bringing the effective tax rate to 28.4 percent which is 1.6 percent lower.
