Bhutanese businesses and consumers expecting a dramatic drop in the price of GST item goods like cars, electronic and machinery items and most consumer goods from India will not see it happen until Bhutan gives the go ahead to the Indian government.
There is an official understanding between the two governments that the matter should be put on hold until a green light is given from Bhutan.
The Indian exporters to Bhutan in turn are waiting for permission from the Indian government otherwise they would be taking a big risk of not getting back their GST refund.
This has been promoted by the fact that the Bhutanese government is in the midst of coming up with a ‘middle path’ solution to the GST issue.
A senior government official, on the condition of anonymity said that the government is looking at a few options.
One option before the government is to go along with India’s GST and so ask the Indian government to not impose the GST for its zero rated export items to Bhutan. However, this would result in not only a huge excise duty revenue loss for Bhutan of around Nu 1.4 bn a year but also lead to a huge increase in imports and the subsequent depletion of Bhutan’s hard won rupee reserves.
This is in fact the government’s biggest fear of not only losing revenue but also unbalancing the economy by huge overnight exports especially in relation to cars. This is because just for cars the prices could drop by up to 15 percent and even more so for bigger cars.
So this clearly will not be allowed to happen said the government official.
Another option being explored by the government is to ask the Indian government to apply GST at source and later refund it to the Bhutanese government like the Excise Duty Refund of the past.
However, the problem with this strategy is that at a time when people are expecting prices to drop it would in fact push up prices as GST, which is a combination of taxes into one, is higher than Excise duty.
A third option being looked at by the government is to look at the non essential items like higher end cars, luxury goods etc and ask the GoI to impose GST at source on them while not imposing GST on items used by ordinary Bhutanese people.
The problem here for the government is that since the GST is a set rate it cannot negotiate the rate of the GST and so there could again be big discrepancies in prices among items.
With the Parliament session months away the government at the moment also cannot alter the tax rates to balance any GST effect.
So an additional tool being considered by the government is moving the sales and custom duties tax from the point of entry to the point of sale.
Currently when a car is imported it is taxed only at the point of entry or the cost price of buying the car by the Bhutanese importer which could be a vehicle dealer.
However when a tax is imposed as the point of sale it would not only include the cost price of import but also the profit margin of the dealer along with all other associated costs like transport, insurance etc.
For example a car imported by a dealer at Nu 400,000 at 25 percent tax may have to pay incur Nu 100,000 in addition tax at the point of entry in Phuentsholing. However, with the point of sale tax the dealer will not have to pay the point of entry tax but he would have to pay the higher point of sale tax. So at the point of sale the price of the car including the dealers profit and associated costs would be around Nu 600,000. Here the same 25 percent tax would attract a higher Nu 50,000 amount then the point of entry tax.
The government official said that government would take around one to two months to finally come to a decision as they were currently seeing and collecting data on the effects of GST upon the prices of goods in India and also the profit margin among other things.
The official said that ultimately the government would like to go for a middle path way where government revenue is not harmed, exports don’t go out of control and harm the rupee reserves and at the same time prices also do not go up.
The main worry for the government among the imports is car imports, given not only its price, but it subsequent role in fuel imports which is Bhutan’s largest import item every year.
So without a green signal from the Bhutanese government, vehicle dealers in Bhutan are not able to make GST exempt car imports and are still stuck with the current stock imported before the application of GST.
Currently the items not affected are non GST essential items which are mostly food and agricultural items.
The GST is a single integrated taxation system within India that combines a dozen state and central taxes in India into one with rates varying from 0 to 28 percent.
What is of interest and relevance to Bhutan is that GST is also targeted at making Indian exports more competitive with zero tax and imports more expensive with higher taxation.
For exports from Bhutan a Bhutanese delegation to India requested that instead of collecting GST at the point of entry making it more expensive for Bhutanese exporters it instead be collected at the point of sale like in the earlier system.
The Indian government in this regard asked Bhutan to wait for a couple of months before considering Bhutan’s requests given that India itself is still implementing GST.
The Minister for Works and Human Settlement (MoWHS) Lyonpo Dorji Choden during the monthly meet the press confirmed that for exports from Bhutan, the government was negotiating with India to levy GST at the point of sale in India.
On the import front Prime Minister Lyonchhen Dasho Tshering Tobgay confirmed that the government was exploring among others the two options of either a GST levy at source and refund to Bhutan like the excise duty of the past or changing the taxe collection from the point of entry to the point of sale. He said on changing the taxes from the point of entry to point of sale the government was also exploring the legal position on the issue.