Chairperson of the EFC Committee, Kinga Penjor, of the Gangzur Minjay constituency.

India’s GST considerably impacted Bhutanese exports and SOEs are competing with Pvt Sector: EFC Report

The Economic and Finance Committee of the National Assembly presented its review report on the balance of trade in the Parliament today pointing to six major issues.

The report was presented by the Chairperson of the Committee, Kinga Penjor, of the Gangzur Minjay constituency.

GST Hit

The Committee has observed that the implementation of the Integrated Goods and Services Tax (GST) in India has impacted exports considerably in general.

The imposition of 12% to 28% as GST and 1% as Cess Tax has influenced highly on the export of Bhutanese goods.

For instance, the export of cement to India loses a competitive advantage due to the imposition of 28% GST and 1% Cess tax.

On the contrary, there is a levy of only 5% Bhutan Sales Tax (BST) while importing cement from India.

Further, the recent revision of power tariffs led to an increase in the cost of production in heavy industries The recent hike of power tariff of more than 35% from 1st September, 2022 by the Bhutan Power Corporation (BPC) has approximately escalated the power cost by 10-12% which used to be 6-7%.

The committee recommended to address GST differences through a Preferential Trade Agreement, reform BST for competitive advantage and revisit to lower the high voltage power tariff.

SOEs as competitors

Most of the State-Owned Enterprises operate in commercial sectors such as manufacturing, energy, natural resources, financial, communication, aviation, trading and real estate sectors.

 According to section 74 of the Public Finance Act 2007, the state enterprise to undertake significant commercial activities which; are not catered for by the private sector, or are required to be undertaken solely or partly by the Government for reasons of social policy or security; or fall in areas of natural monopoly.

However, the committee observed that the state-owned enterprises are seen undertaking businesses that are violating the above 3 sections. The private sector development is discouraged due to the existence of huge competition with the private sector and greater dominance from the state in the economy will lead to market distortion thereby limiting competition.

Bhutan has a sparse population, and the domestic market is also small but high transportation cost impedes private sector development as the risk associated with the private investment are comparatively higher. For example, Bhutan Livestock Development Corporation Limited imports livestock products and competes with the farmers. Thus, farmers are not able to sell their products.

The committee recommends that state-owned enterprises refrain from venturing into businesses that offer better prospects and opportunities to the private sector.

Transport and logistics

The waterways and railways are the safer and cheaper means of transport as compared to the road. It was observed that infrastructure particularly, the load-carrying capacity limit of existing bridges deter the transportation and logistics within the country as well.

Despite setbacks, the Ministry of Economic Affairs is negotiating railway linkage via India to Bangladesh and also, got 6 additional ports of call for the boulder exporters.

The committee recommended to expedite railway link and waterways, explore ropeways and enhance bridge load-carrying capacity.

Import substitution

The committee observed that the domestic market remains a major concern for local industries to compete with foreign products and we need to reduce foreign dependency through local productions such as cement manufacturers, Hume pipe (inferior quality being imported and local products become comparatively expensive), AAC blocks and bricks, Wire mesh, Wood-based products, and Agriculture and livestock products.

If the global economy faces severe food shortages due to the pandemic and conflicts, and with the constant import of goods, the country is exposed to the risk of food insecurity, and as a result, it affects the independence and sovereignty of the country.

 Hence, it was comprehended that it is significantly important to have self-sufficiency by domestically producing edible goods.

For instance, the production of cereals, particularly wheat and barley are grown irrespective of geographic location and temperature, and in recent times, most of the edible goods are made of them and we can cultivate them in a larger quantity.

In addition, as Bhutan’s economy is dependent on agriculture and livestock, it is important to produce sufficient livestock products locally.

The committee said import substitution could happen in Pastas, sweet biscuits, noodles, waffles/wafers, cakes, puffed rice, bread and cornflakes, Rice, Vegetable Oil, Processed Meat, processed cheese and honey, Bricks, Betel Nuts, Pan Masala, Supari and Ice-Cream, Alcohol and mineral water, Tea bags, Juice, Salted Butter and Bamboos worth Nu 10.484 billion in a year.

The committee observed that completing the formalities to acquire licenses, clearances, loan and renewal certificates is cumbersome. There is also inconsistent application of rules and procedures by the concerned officials leading to confusion, inconvenience, loss of time and resources to the business community.

The committee recommended to promote and support local products through policy interventions, encourage the production of cereals, particularly wheat and barley and to intensify the single window service system in order to avoid cumbersome procedures.

Losing business in border towns

The Committee observed that domestic consumers prefer goods across the border due to low pricing. It is observed that the only opportunity for thriving businesses along the southern borders is by creating uncontested market avenues such as the establishment of service industries like entertainment, amusement parks and recreational centers.

 The application of SDF on non-tourists (casual visitors) has forced these individuals to halt across the border. This led to the drying up of service businesses such as hotels, restaurants and entertainment centers.

The committee recommended to initiate and facilitate the establishment of service industries along the southern borders as alternative business. Waive SDF for visitors (nationals of India) to border towns provided they do not halt more than a certain number of days as prescribed in the rules.

SDF for non-tourist

The Article 20(8) of the Constitution of the Kingdom of Bhutan states that “The Executive shall not issue any executive order, circular, rule or notification which is inconsistent with or shall have the effect of modifying, varying or superseding any provision of a law made by Parliament or a law in force.”

The levy of SDF on non-tourist categories is observed as not in accordance with section 4 of the Tourism Levy Act 2022 and Article 20(8) of the Constitution of the Kingdom of Bhutan.

The committee recommends the Government not to levy SDF on non-tourist categories.

The committee observed that the Ministries, departments and agencies are working in silos which are hampering public service delivery.

The committee strongly felt the government to coordinate agencies to minimize the duplication of procedures.

The Committee remains thanked the efforts and cooperation provided by the private sector and agencies for providing necessary assistance during the course of the review.

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