The Bhutanese Leading the way.
The Minister of Economic Affairs (MoEA) has come up with a slew of measures to help Bhutan’s manufacturing sector which has been impacted by COVID-19.
Convertible currency to purchase cheaper raw materials from third countries
The MoEA says that it is economically viable to support Bhutanese industries that cater to the Indian market where raw materials are not available in India or are more expensive in India than in a third country.
The ministry points out that World Trade Organization (WTO) estimates that India’s tariff is 7% for trade-weighted average. The World Bank reports that India’s applied average tariffs were 6.3%.
On the other hand, Bhutanese exports are not subject to any import duties in India as per the existing free trade agreement between the two countries.
It says under such circumstances Bhutanese industries have an edge over their Indian counterparts as the Indian industries have to pay a relatively higher customs duty when they import raw materials into India.
However, as per the current norms industries are provided Convertible Currency (CC) only for purchase of capital goods and not for import of raw materials. If industries require CC to purchase raw materials, they are required to earn it themselves.
Under the prevailing arrangements, Bhutanese firms are currently subject to only a 3% concessional customs duty when raw materials are imported from a third country while Bhutan Sales Tax (BST) on raw materials is exempted provided that certain conditions are fulfilled.
Under such circumstances, if these Bhutanese industries who do not earn their own convertible currency from the export of their finished goods, which will be the case for many industries as the market for their finished goods is India, are given access to convertible currency to purchase raw materials, they stand a good chance of being able of compete in the Indian market.
Such a mechanism is also in place in many other countries so as to facilitate the establishment of local industries either to promote exports or for import substitution.
It says currently, the government sells its convertible currency to the extent of USD 200 million annually directly to the Reserve Bank of India (RBI) to avail the much-needed INR to meet its import requirements.
The MoEA says rather than selling all this CC to the RBI and availing the INR directly, the CC can be made available to domestic manufacturing industries to purchase raw materials for value addition. The finished goods when exported to India will earn the INR for the Bhutanese economy and will result in the government having access to this INR ultimately.
The government will therefore still be able to avail the INR indirectly while at the same time give domestic industries a comparative advantage.
The MoEA, however, proposes that certain conditions be put in place prior to making this facility available.
Industries can be given access to a CC quota annually at about USD 50-100 million so that the government is still able to have access to the much-needed INR within a shorter turnaround time. A CC cap can also be extended to each industry at about USD 1-2 million per industry.
Industries have to meet a minimum domestic value addition (DVA) threshold. The quota for the CC can be distributed to industries based on the DVA ranking so that the industry having the higher DVA gets access to this quota first.
Industries export their finished goods to India to earn INR. This will ensure that the CC used to purchase the raw material will ultimately result in an inflow of INR after value addition.
The MoEA feels that having such a mechanism in place will not only help in promoting and establishment of more local industries catering to the export market but will also ensure that they are more competitive in the Indian market.
It will also ensure that Bhutan’s trade deficit with India will narrow and lead to the strengthening of the Bhutanese economy in the long run.
Income tax breaks for all export industries
The MoEA says that the Fiscal Incentives Act of Bhutan, 2017 currently provides Income tax exemption of ten years on convertible currency earnings from export excluding INR earnings. This mechanism was put in place with the introduction of the Fiscal Incentives in 2010.
The ministry said the current trade deficit with India as of 2019 is about Nu 17 billion while the overall total trade deficit is about Nu 27 billion. In 2019, about 62% of the total trade deficit was with India.
It says this lopsided imbalance in trade is not a desirable and healthy situation and this needs to be corrected.
“In order to rectify this, it is imperative that we promote more exports from Bhutan. One way to do this would be to begin by promoting exports to India first due to our proximity and Free Trade arrangement with India besides promoting industries for import substitution,” said the ministry.
To promote export-oriented industries catering to the Indian market the MoEA recommends some level of income tax exemption to industries for INR earnings arising from exports similar to the one currently extended to industries earning CC.
However, the government can extend a lower benefit margin for INR earnings as compared to CC earnings as earning CC is considered to be more difficult than INR. Accordingly, the RGoB can look at the possibility of providing a benefit to the extent of about 50% of the total payable tax for a period of about five years to such industries.
The ministry says this should also be extended only for new industries that will be established rather than to existing ones as the intent of this benefit is to promote new investments in the industrial sector to cater to the Indian market. An investment window can be specified also for example new industries have to be established by December 2022.
It is felt such a mechanism will help in the establishment of more export- oriented industries catering to the Indian market, narrow the trade deficit with India and ensure a substantial INR inflow into the Bhutanese economy. This will ultimately translate into the Bhutanese economy being more salubrious and resilient in the long run.
Waiver off customs duties on import of raw materials
The MoEA says that though Bhutanese manufacturing firms are currently exempt for paying Bhutan Sales Tax (BST) on import of raw materials, they are liable to pay Customs Duty (CD).
Exemption on the payment of CD on raw materials is allowed only for those manufacturing industries that earn their own CC through the export of their finished products manufactured from the imported raw materials.
For companies that do not earn the CC from the export of their finished goods, a concessional CD of 3% is applicable provided the manufacturing unit employs at least 80% Bhutanese nationals throughout the income year. This waiver will also expire on 31 December 2020.
To reduce the cost of end products and ensure that domestic manufacturing industries are cost competitive in the Indian market, it is recommended that the levy of CD besides BST for import of raw materials be exempted for all manufacturing industries irrespective of whether they meet the employment criteria.
It is also recommended to extend this incentive for the next 3-5 years as it expires by the end of this year.
More predictable Electricity tariff and railway
In the current electricity tariff regime, the tariff is approved for a period of three years only so end users and investors are not able to make prudent investment decisions in the industrial sector.
The MoEA has recommended a clear and definite electricity tariff price path for the medium and long-term time horizon of at least 10-15 years into the future.
It says this is critical for energy intensive industries as firstly they take a high degree of risk by making huge capital investments and secondly, they are unaware of costs of one of their primary inputs as electricity comprises almost 30% of their overall production costs.
It says that even if the tariff is indicative in nature, it would be beneficial as it will provide a general idea of the increase over time. This it says will ensure that end users and investors will be able to make prudent investment decisions as the cost structure and the business environment will be more predictable.
The ministry also recommends that Bhutan needs to ensure that its industries have access to almost all parts of the Indian market rather than just the Eastern part of India as is the situation currently.
It says having a direct rail link between Bhutan and India would help Bhutanese industries to import raw materials more competitively as well as enable finished goods to access other areas within the Indian market faster and cheaper.
It says although, the rail link project has been under discussion for a very long time now, this project now needs to be fast tracked and implemented at the earliest possible.
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