The government calculated Nu 14 bn as the loss of revenue in the 12th plan due to the doing away of the refundable excise duty by India under their new Goods and Services Tax (GST) regime.
However, industries say GST will also affect the profit margins of Bhutanese industries and hence tax revenue for the government.
This they say is due to the very structure of GST designed to make Indian exports cheaper and imports from all countries, including Bhutan, more expensive and also due to its implementation issues in India from 1st July 2017.
The Vice President of the Association of Bhutanese Industries (ABI) Chimi Norbu who also owns a Ferro Silicon factory said, “The revenue for the government from industries will definitely drop. As of now people have not felt the full effect as they want to keep running things but by the end of the year when they start compiling their balance sheets they will find a drop in revenue.”
He gave one example of the affected industry of cement which due to GST has become more expensive to export to India. Chimi said to stay competitive the cement industry had to immediately drop prices by around Nu 600 per metric tonne.
Other industries have also had to cope by dropping their prices and as a result have a smaller margin of profit.
In 2015 the manufacturing sector comprised 8.1 percent of the GDP comprising Nu 10.54 bn of the Nu 132 bn GDP.
In 2014 the manufacturing industry comprising of 37 industries paid Nu 1.5 bn in corporate, sales and custom duty taxes excluding the excise duty component. It also employed 3,864 Bhutanese as opposed to 701 non nationals.
The main barrier for Bhutanese exporters is the fact that their counterparts in India importing Bhutanese goods have to pay the entire GST amount upfront. The GST which is a combination of various taxes in effect has, therefore, made importing from Bhutan more expensive.
Two delegations sent by the Bhutanese government have requested the Indian government to push the GST payment to the point of resale down the line so that Indian importers of Bhutanese goods don’t have to pay higher costs.
On this front the Director of Revenue and Customs, Yonten Namgyel, who led the delegations said that the Indian government has said they are looking into the issue to see if it would be compatible with their laws among other things.
Another big issue is the still ongoing infrastructure issue in the Jaigaon Customs office where a limited number of computers and manpower has contributed to long lines of trucks bringing in goods waiting for clearances. Due to requests and intervention from Trade and Revenue officials in Bhutan more staff and computers were added in Jaigaon reducing the earlier three to two week waiting period down to now around five to six days for imports.
However, industrialists feel that this is still too much waiting time as they end up paying demurrage charges to the truckers for each day of delay.
Chimi said that five to six days waiting period is for bigger industrialists as they use whole trucks but it still takes much longer for trucks used by smaller business carrying multiple consignments for multiple owners. He said a hotel had to recently wait for a month to get its furniture.
The VP said that in an industrial setup every component is important for manufacturing and even the absence of small component or part holds up the whole line. He said the long wait period for trucks increases the costing for factories.
Apart from the issue of delays caused by poor infrastructure another hornet’s nest for Bhutanese manufacturers is the complex and often time consuming paperwork for GST filing that did not exist before.
A businessman said that earlier import and export between India and Bhutan was like between two Indian states and in fact some Indian importers found it easier to import from Bhutan.
However, with GST apart from making Bhutanese exports more expensive it also entails a volume of paperwork and restrictions that is hitting various sectors.
One sector which is hit is the food and beverages manufacturers. A new GST requirement is documentation of testing of all processed food and beverage imports coming into India which in combination with the poor infrastructure at Jaigaon has been holding up Bhutanese exports in this sector by 15 to 20 days. The factories end up paying huge demurrage charges for their exports.
The delay at customs of incoming raw materials with limited shelf life is also making life difficult for this sector.
This sector has benefitted from the fact that imports of raw materials from India have become cheaper like fruit pulps, packaging material etc.
However, earlier the tax in India was at 5% on Juices but now it is 12% in GST, which has also increased the cost of import for Indian importers.
It is even worse for soft drink factories (see story on pg 12).
Even the around eight Ferro Silicon factories are having a tough time with GST regulations. Earlier what made Ferro Silicon a profitable industry was that all its waste and byproducts could also be sold in India.
For example the factories would import charcoal as in input but export the leftover fine charcoal back to tea gardens and the incense industry which would use it. Similarly the coal’s coke product could also be exported along with the fine micro silica dust on the factories chimneys which would be used by the pharmaceutical industry. There was also other waste material like slag. This was additional income apart from the export of ferro silicon.
However, now GST requires there to be certificates of origin for these items and as result all of the above waste are piled up in the thousands of tons in the Pasakha occupying both space and with some running off with rain water. A ton of slag for example would fetch up to Nu 30,000 which means blocked revenue.
A new problem has also emerged of some cases of theft of Bhutanese imports that are forced to wait for days for clearance in Jaigaon.
The DRC director said to deal with the infrastructure issues in Jaigaon’s customs office the Custom’s Commissioner who handles the broader region from Siliguri would be coming during the weekend based on his request. He said that it would the best time for Bhutanese industries to raise their issues.
The Director said that the DRC in Phuentsholing is already working 7 days a week with no break from 6 am in the morning to 10 pm at night and he had requested the same for the Jaigaon office to clear the backlog. The Custom Commissioner has apparently agreed to follow the same for the Jaigaon customs office.
One relief has been that the July backlog of GST bills not updated online by Jaigaon has got a general additional extension by another month to October as per a notification of the Ministry of Finance in India. The earlier worry was that if the manual GST bills are not updated online on time then Indian suppliers exporting to Bhutan would not get their GST refund and so would add GST next time making imports by Bhutan from India more expensive.
However, Bhutanese industrialists say that while general relief has come in the form of time extension the situation could be the same again if the Jaigaon Customs office is not strengthened.
On the issues of business viability the director said that in the meeting between BCCI and the Prime Minister and government officials the PM had said that the industries must compete in the new environment.
The director said that the PM had invited alternate proposals from the business sector but so far no proposal had been put up. He said that already there was electricity subsidy and tax exemption for imports.
He said his office is helping facilitate exports and imports but issues of business viability and profits need to be looked at by the industries themselves. He said the PM had pointed out that businesses need to compete and be more streamline also take advantage of certain advantages that GST has opened up.