Phuentsholing City

MoEA recommends slashing Customs Duty, establishing internal road networks and wholesale dealerships in Bhutan to encourage trade

For those parents who buy baby diapers, the Mamy Poko is a popular brand. However, if you buy Mamy Poko imported from India you pay far less and for the same diaper of a better quality imported from Bangkok you pay far more due to the additional customs duty.

Similarly, a lot of Bhutanese individuals’ product choices and even the business and trading option of Bhutanese businesses are restricted due to abnormally high customs duties for similar products from third countries.

An official said the high CD in Bhutan is a leftover legacy from when India was a closed economy before the 1991 economic reforms as the fear in India at the time was that traders in Bhutan may import foreign goods at no CD and then export it to India.

However, now with India itself importing these goods or even manufacturing them and the economy being an open one, this old idea does not hold, but it still hampers Bhutanese businesses and consumers.

Narrow the CD gap

The Ministry of Economic Affairs (MoEA) recognizing this has recommended narrowing the tax differential between third country and Indian origin goods or in other words reducing the gap between sales tax and CD.

This is part of its recommendations to revive the economy after the COVID-19 impact and specifically to do with enhancing the supply chain capacity.

The MoEA says that currently, Bhutan has a two-tier approach to taxing imported goods. Goods imported from India are liable only for the Bhutan Sales Tax (BST) while goods imported from countries other than India are subjected to a CD in addition to the BST.

Based on data for imports of the top 10 commodities in 2019, the average BST rate was 2.5% while the average CD rate was 24%.

As evident, the CD rates are about 10 times higher than the BST rates. This results in imports coming predominantly from India due to the lower import tariff. Generally, therefore, commodities are imported from third countries only when not available from India.

It says that Bhutan’s small domestic market means that businesses cannot achieve economies of scale and thus even internal demand tends to be addressed through imports.

So it says that it would thus be prudent to allow importers to source their products from the most cost-effective market without any external distortion in the form of import tariffs.

The ministry says that narrowing the tax differential between the CD and BST will allow businesses to purchase from the cheapest source and improve dual sourcing, adding to future resilience. Most importantly, it will allow business to be more competitive resulting in benefits accruing to the Bhutanese end users.

It would also allow for Bhutan to diversify its trade and look at more options.

The ministry also says that third country goods imported from dealers in India to be exempted from CD.

For example, if a Bhutanese business wants to import some goods from an American company at wholesale then the least that may need to be imported is a container.

However, if an Indian dealer does this then the Bhutanese business can pay for a part of the consignment and not pay CD.

The idea according to the MoEA is that it would allow Bhutanese traders to benefit from India’s market size that can import in large quantities and it would also conserve forex or the convertible currency. 

An additional benefit of reducing or doing away with CD would make Bhutan’s border areas more competitive for businesses.

Encourage wholesale dealerships in the country

If there is one important lesson that Bhutan learnt from the COVID-19 lockdowns it was the need to have its own wholesale dealerships as it was these outlets that helped source and import goods at a critical time.

Establishing wholesale dealerships would also be about formalizing trade and see Bhutanese getting the products in Bhutan rather then heading to Siliguri or Jaigaon.

The MoEA says that currently, many small and mid-sized business establishments in Bhutan source their imports from India. However, these are sourced from middlemen located in and around the Indian border towns of Jaigaon and Siliguri and not from the manufacturing units or their principal outlets.

Many Bhutanese buyers also prefer to shop for small purchases across the border in Jaigaon rather than in Phuentsholing. Under the Goods and Service Tax (GST) regime in India, goods that are exported from India to Bhutan directly by a manufacturer or a registered unit are not levied the GST which is about 18% in most cases.

Thus, if Bhutanese business establishments source their imports directly from manufacturers or registered units in India, the goods are cheaper in Bhutan than in the neighboring Indian towns of Jaigaon and Siliguri.

It says such a single import mechanism in the form of registered dealers in Bhutan will result in economics of scale in the procurement process leading to lower transport and logistics costs.

This will translate into other benefits for the Bhutanese economy such as reduction in transaction costs for other downstream businesses, options of better varieties and choices, better after sales services, better quality of products, etc. This will also increase transparency for trade flows and statistics for the Bhutanese economy.

The MoEA therefore recommended that establishment of wholesale dealerships be encouraged for the import of goods from India. This can be promoted by offering tax breaks, facilitating industrial linkages, promoting interactions between chamber of commences, hosting trade shows and exhibitions, etc.

Road network within the country

The MoEA says that currently many places within Bhutan do not have a direct inter connected road network and they have to use the road network in India.

For example, the shorter route between Samdrup Jongkhar in the east and Phuentsholing in the south-west is through India. While these two places are connected through an internal road network, the road distance is almost three times as long as the road link through India. The internal road link significantly increases transport and logistics costs and discourages domestic economic linkages.

It says another case in point is the road link between Pugli in Samtse which is an industrial/mineral hub and Phuentsholing.

It points out that using the road network in India has its own share of problems – ranging from security issues to long queues due to blockages and delays to harassment from locals and law enforcement agencies.

The ministry says that having a robust and well-connected road network within the country will help in enhancing our supply chain network which will invariably lead to positive economic benefits at the local and national level.

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