Major Tax reforms in the works to increase tax collection and plug loopholes

Reform will include increasing PIT slab and introducing GST by next year

The Ministry of Finance (MoF) is in the midst of drafting a comprehensive tax re-haul and reform measures which are targeted to be implemented by 2020.

Lyonchhen said that the government, as part of measures to increase internal revenue, will come ‘strongly on Taxes’ and also the Mines and Minerals Act.

“DNT has plans to review our taxation policy,” said the PM clarifying that work was still at an early stage. The PM said that all stakeholders would be consulted and the tax reforms could roll out by the middle of 2020.

One thing that people can look forward to is the fact that DNT’s pledge to increase the Personal Income Tax slab from Nu 200,000 to Nu 300,000 will be factored in this. This means that annual income up to Nu 300,000 will not be taxed.

A source said that increasing the PIT slab will endeavor to narrow the gap as it will provide tax relief to those with smaller incomes.

DNT had pledged to do away with Business Income Tax (BIT) for business establishments that have less than Nu 200,000 annual turn over.

The tax reforms are also expected to look at the pledge to do away with the voucher tax of around five percent.

The MoF will also look at the property transfer tax which is currently at five percent. It is also studying the Inheritance Act in line with this. The DNT manifesto says that it will consider instituting luxury and inheritance taxes.

The tax reform will also look at the existing minimal land tax, building tax and others taxes.

As per its manifesto it will take a closer look at the real estate and land transactions and recognize and formalize them. This so that they can be regulated and also come under the tax bracket.

Currently, there are huge real estate transaction being done, but the government is not getting the tax benefits from those deals.

One increasing criticism is on how quite a few major business houses pay quite minimal tax due to various deductions and loopholes.

There is also the question of the many who are still outside the taxation system and do not pay tax.

For this the main measure of the government will be to bring in the Goods and Services Tax (GST) system in Bhutan by 2020.

A senior MoF official said that the GST taxation system will combine the current different taxes like sales tax and custom duties tax into one tax and come up with a similar rate with a list of exemptions or items where rates will be higher.

The genius of the GST system, if implemented well, is that it incentivizes businesses to be a part of the taxation system by avoiding double taxation of the same items, giving tax refunds and encouraging people to buy from GST complaint businesses where goods will be cheaper.

It is not expected to affect exports as export items will not be taxed like under the current regime but goods being imported in will still be taxed.

One impact of GST is that it will broaden the tax base given its benefits, but at the same time by avoiding double taxation for the same items it will also make goods cheaper.

However, the main challenge with GST will be automation of the tax system and training of tax officials followed by awareness among businesses. It will have to avoid the pitfalls of GST implementation in India where its complicated nature led to less than expected tax collection.

The tax reforms will be an important initiative for the DNT government to raise its own internal resources given that it is short of Nu 29 bn in the Nu 310 bn 12th plan. It also does not have money for many of its pledges which it had promised to fulfill.

The DNT in its manifesto promised to build a stronger and more transparent tax system,’ which should ‘enable everyone to pay their fair share for the good of everybody and the country.’

Its manifesto famously promised to recover Nu 10 bn by streamlining and strengthening tax collection.

It plans to achieve this by ensuring that income and taxes are monitored by developing linkages between financial sectors and services to enable more transparent information sharing and ensuring that everyone pays their fair share.

The other aim is to strengthen the revenue and custom’s department to monitor and act on tax evaders and institute penalties that deter such practices.

The DNT also promised to consider instituting progressive taxes and benefit systems as part of its strategy to narrow the gap.

While the broad outline of the tax reforms is visible and the intent is clear, the exact details and rates will only by known by 2020.

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