Pasakha Industrial Estate Phuentsholing

Manufacturers ask for GST exemption to survive foreign competition due to GST

Association of Bhutanese Industries submits a letter to the Parliament and the Govt on concerns over GST

The Bhutan Chambers of Commerce and Industry (BCCI) has forwarded a letter from the Association of Bhutanese Industries (ABI) listing out concerns on how the uniform 7 percent GST tax can impact local industries if measures are not taken.

The letter says the ABI would like to submit its concerns and comments on the GST Bill for onward submission to oversight agencies in the Parliament.

The letter starts by pointing out that in the 2019-20 budget Bhutan has a trade deficit of Nu 27.94 bn and on an average Bhutan has an annual trade deficit of Nu 22 bn for the last five years.

It says export earnings by local industries and import substitution by local manufacturers must play a significant role in offsetting the negative trade balance with India.

The ABI puts forward four main issues in the GST Bill light of the above.

Protection of import substitution industries

The ABI is requesting a zero waiver or zero rating of the GST applicable on the sale of locally manufactured goods within the country to protect and promote domestic industries.

It says this waiver or zero-rating must be incorporated within the GST Bill itself to provide a structural and long-lasting advantage to local industries over imports.

It says this must be done in verifiable manner to ensure there is no abuse of this.

The letter says, “We have heard that these maybe addressed through Fiscal Incentives, however, FI are short term in nature and may lead to short-termism in the private sector, without a long-term vision or planning for the economy which may not be desirable.”

The letter says that presently local domestic industries are already suffering from structural disadvantages like small domestic market, distance from market, lack of value chain, economies of scale, lack of skilled manpower, high cost of finance and others compared to industries in India with whom 80 percent of Bhutan’s trade occurs and who does not face the above issues.

It says in addition to this, local industries have to compete with an influx of sub-standard goods, manufactured with inferior quality materials priced relatively lower.

Explaining the need for a GST waiver the letter says that currently under the Bhutan Sales Tax (BST) local industries are protected from 5 percent to 15 percent with the most common rate of BST being 10 percent levied only on imported goods.

However, the proposed GST Bill recommends a GST rate of 7 percent on imported goods resulting in imported goods becoming cheaper by 3  percent.

It says the Bill also recommends a GST of of 7 percent on sale of locally manufactured goods sold within the country which would result in locally manufactured goods becoming more expensive by 7 percent. This is because in the current BST regime, locally manufactured goods are exempt from BST barring a few products such as cement and carbonated beverages.

According to the letter the above will mean that local industries and their products will be rendered uncompetitive, as the cost of Bhutanese goods will increase since Bhutanese products will lose a 10 percent competitive edge compared to Indian products.

It says that since GST is paid by the consumers they will prefer cheaper imported products.

The letter says that while the government may benefit from revenue in GST collections it will lose out reduced direct taxes as the uncompetitive local industries may not be in a position to pay the same level of direct taxes (CIT, BIT, PIT). It says that Bhutan maybe in the danger of increasing unemployment rates, socio-economic problems and increase in trade deficit.

Exemption of GST on import of raw materials

The letter points out that currently all industries –whether export oriented or targeted at import substitution –are exempted from paying BST on the import of raw materials and primary packaging materials at the point of entry under the Fiscal Incentives.

It also says that in the past the sales Tax, Excise and Customs Act of 2000 exempted local manufacturing industries from paying BST on raw materials.

Pointing to the problem the letter says that the GST Bill proposes that raw materials imported by export-oriented industries be exempt from GST through a credit-offset mechanism which allows input tax credits for GST. It says this seems to imply that GST will be levied at the point of entry and will be refunded later during the time of export.

The letter says this will lead to a huge margin money requirement as funds are blocked in a sector where the highest levels of efficiency are required to compete in the export market.

Given the above ABI says it would like to recommend that import of raw materials and primary packaging materials be exempted or zero rated at the point of entry for both export oriented and import substitution industries through a clause in the GST Bill itself rather then though Fiscal Incentive measures that maybe effected from time to time. It says that this would also be in line with the existing system.

Time to refund GST

The ABI says that in addition to the above requests to exempt GST there will be many instances of GST application like hiring of local consultancy services, rental of offices, etc. which may need to be refunded if there is a negative net GST amount paid but there is no concrete and clear timeline for the refund of GST.

The ABI recommends that a timeframe for GST refund should be specified in the GST Bill to avoid liquidity crunch for industries due to delay in refund process and instead a penalty clause for late refund should be instituted.

EET exemption

The ABI said that on the food and beverage industries where the Equalization Excise Tax is applicable, they would like to request the government to levy the proposed EET on the cost of production and not on the selling price.

The letter said that since the GST Bill is scheduled for deliberation in the Parliament on 6th February it would like to submit the concerns at the earliest.

Though not mentioned in the letter another concern of local manufacturers of beverages and packaged food products is that they will have to pay EET not only on the final product but also components like plastic, fructose, syrup etc., which will make their products less competitive again imported products who don’t face such double taxation.

Finance Minister responds

With regard to delay in refund of GST payments and request to exempt GST at the source the Finance Minister Lyonpo Namgay Tshering said, “The input tax credit filing can be done on a monthly basis and so there won’t be any blockage of funds.”

He said this means that businesses can get back their money within a month.

On the issue of domestic food and beverages being uncompetitive due to cascading taxes on manufacturing elements like plastic, fructose etc., and a tax on the final product, the minister said that firstly external products will also attract the GST tax.

He said that for the internal domestic production or manufacturers as a whole the government will design and give fiscal incentives.

In the case of EET on plastics and other products the minister said that incentives will be transferred to these companies to encourage them to use more bio-degradable and eco-friendly materials.

Apart from the minister’s reassurance the Department of Industries has indicated willingness to work with the ABI to sort out some of the issues.

Lyonpo said that on locally produced goods they are yet to discuss about EET but under GST Bill they have an exhaustive list of products which falls under exempted categories the government will see what more products can be exempted.

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