The upcoming session of Parliament scheduled for January 2020 will see the introduction of major tax reforms.
The biggest tax reform will be the Goods and Service Tax (GST) that will replace the multiple rate sales tax and customs duty right now with a single GST tax rate. It will also change the way indirect tax is calculated and collected.
The rate could be anywhere between five to 10 percent flat rate though the proposed rate as of now is a 7 percent flat GST rate for all goods and services.
Currently Bhutan has more than a 100 sales tax and customs tax rate listed under the Department of Revenue and Customs.
Other direct taxes that are up for review and change are the Personal Income Tax (PIT), and Business Income Tax (BIT).
The proposal right now for PIT is to raise the exemption limit from the current Nu 200,000 to Nu 300,000. This means that people earning below Nu 300,000 do not need to pay any tax and even those earning above it will not be taxed for the first Nu 300,000 income.
This should not come as a surprise as the exact figures are there in the DNT Manifesto.
However, there are also alternative options of making it Nu 250,000 with other combinations.
Under PIT another change is that top earners may end up paying more as the proposal is to increase the tax bracket from 25 to 30 percent for those who earn the highest bracket of more than Nu 1 mn a year.
However, while the move may show a change in policy it is not expected to bring in much additional revenue as there are not many in Bhutan earning above Nu 1 mn a year.
On the BIT front the idea is that anyone who has a net profit or income of up to Nu 200,000 a year need not pay tax.
The 30 percent BIT and CIT rates are not expected to change which may come as a relief for anxious businesses and companies.
The tax reforms may look at reducing the current property and vehicle transfer tax of five percent to improve compliance.
It could also look at taxing additional source of incomes like lottery winnings.
The Income Tax Act 2001 will also be amended in the upcoming session to reflect changes that will be brought about in the taxation reforms.
The Finance Minister Lyonpo Namgay Tshering said that the GST reform and other tax reforms will aim to improve tax compliance, broaden the tax base and improve tax administration.
Lyonpo said that one major issue he noticed from early on was the issue of tax compliance and the need to improve it.
The Finance Minister said that the draft GST Bill is ready and currently undergoing translation into Dzongkha after which it will be sent to the Office of the Attorney General (OAG) for vetting.
He said after the legal vetting the draft bill will go to the cabinet where the cabinet will take a final decision on the single rate of taxation of GST.
The fact that the GST Bill is a money bill means that it will not require assent from the National Council and like past money Bills it is expected to be passed in this upcoming session itself.
Lyonpo said that apart from the legal framework a lot of work is also going into the implementation modality which has to do with automation and digitization of the systems.
The minister said that GST could realistically be implemented towards the end of 2020.
Lyonpo said that main purpose of GST is to broaden the tax base and also improve tax administration. He said with GST indirect tax collection will become more modernized, digitized and automated and since it is a destination based tax there will be minimal leakage.
The GST implementation in India has been beset by problems due to differing tax rates, three types of GST at the state, inter-state and central level, paperwork and other issues and so there are concerns on its implementation in Bhutan.
Here the minister said that Bhutan had done case studies in not only India but across the world and particularly economies of Bhutan’s similar size and also with similar topography.
Lyonpo said that to keep it simple Bhutan will have a single rate GST tax. The minister here declined to share or confirm any numbers on GST and other taxes saying that it is yet to be presented to Parliament.
He said that the cabinet will take a final call on the final GST rate.
The minister also said that businesses that have to register under GST will have to have a turnover of a certain size and it is voluntary for other businesses who fall below this turnover.
Lyonpo said there will be a detailed sensitization process done and the government will even help the businesses to set up the correct online accounting systems and measures.
He pointed out that with GST individuals will not have to pay tax on tax and the tax burden will be reduced on all levels of businesses who can claim rebates and offsets under the GST system.
Lyonpo said that GST will also help tackle issues like undervaluation and under declaration of taxes due to an automated system which will capture everything.
It will capture data from the center of manufacturing or the point of entry.
The Finance Minister clarified that the main aim of GST is to streamline the taxation and system and not just raise additional revenue which is a secondary purpose. He said reiterated that GST will stop leakages.
Using taxes to meet the revenue shortfall?
The Nu 310 bn 12th plan has an official shortfall or fiscal deficit of Nu 29 bn. However, given that most of DNT’s main pledges are not in the plan this fiscal deficit is expected to go up to Nu 40 bn- in the Prime Minister’s own words to fulfill the many other pledges of DNT.
Of the Nu 40 bn deficit around Nu 10 bn may come from India for the tertiary hospital which still leaves a shortfall of
One of the target to meet a Nu 10 bn deficit is taxation reform.
The DNT in its own manifesto says it will recover Nu 10 bn by strengthening the tax collection system and avoiding tax evasion.
In a March 2019 interview with The Bhutanese the finance minister said that the government will be looking at implementing ‘progressive taxation’ which simply means that the higher the income, the higher the rate of taxes.
He said that progressive taxation will be applied in direct taxes like PIT, Business Income Tax (BIT) and also Corporate Income Tax (CIT).
However, Lyonpo at the time said that it will not all be about increasing tax rates as the other important step will be to seal leakages in the tax system.
He had said that leakages are everywhere and one of the reasons is the absence of a digitized information system on tax payer and this would be addressed though the Digital Drukyul flagship project where there will be a single window of information for all taxpayers which will be stored there.
He said that if a person owns a building in Thimphu then the system will show it so that taxes cannot be avoided.
Lyonpo at the time said that the other thing being considered is that Bhutan has a lot of non-nationals working here but there is no mechanism or system in place to tax them and as a result they neither pay tax in their home country nor in Bhutan.
Lyonpo, at the time said that the majority of the targeted additional tax revenue for the five years is expected to come with the indirect taxes or Goods and Service Taxes (GST).
A month later in April 2019 during the monthly meet the press the Prime minister Lyonchhen (Dr) Lotay Tshering said that if there is one outstanding reason that the government of the day will not be granted another term in the 2023 election, it can be attributed to the taxation policy.
At the time he said “We would have done this country a huge favor by revising the taxation policy very stringently. If a person pays Nu 1000 more, another person might have to pay a million more, however, the tax returns will indirectly benefit the individual in the form of improved roads, water supply, education, health, among many other areas.”
The Prime Minister had said that it is important for the taxpayers to not take the taxation policy personally but rather have a holistic view for the larger benefit of the country.