The Royal Audit Authority (RAA) has completed a performance audit to check the Business Income Tax Administration from 2009 to 2013.
While noting certain positives, the report highlights several issues and shortcomings that have an impact on revenue assessment and collection of Business Income Tax (BIT).
BIT increased over the years from Nu 707.29 mn in 2009 to Nu 1.783 bn in 2013 which at the time was 11.02 percent of the total revenue. From 2009 to 2013 Nu 6.590 bn was collected as total BIT.
Income assessment and under declaration of income
The RAA noted instances where not all information had been used to determine the tax amount of clients.
As a sample study the RAA studied the two cable companies in Thimphu, Norling cable services and Etho Metho cable services who jointly declared 7,500 subscribers and declared an income of Nu 112 mn in between 2009-2013.
However, the Bhutan Living Standards and Survey (BLSSR) 2012 published by the National Statistics Bureau (NSB) said there are 14,000 families in Thimphu using cable services. The RAA said that the potential income of the two cable companies should be more than double at around Nu 252 mn for this four year period.
RAA said in addition to the families there are also hotels that subscribe for cable connections with a monthly fee of Nu 300 per connection.
The RAA said upon review of the files of both the companies there were enough systems to assess the expenditure of the businesses but it was also evident that the potential under declaration of income has not been actually assessed by RRCO.
The Department of Revenue and Customs (DRC) agreed there could be income under declaration by the cable providers and other businesses and so it will be more vigilant and address those issues during the BIT assessment.
The RAA also pointed out that the DRC does not have a Revenue or Tax Intelligence System in place to monitor and investigate tax fraud and evasion cases including cross border activities.
It was pointed out that such a system is the need of the hour with growing business activities as well as the international dimensions of the business activities.
The RAA said this may also need special legislative authority and powers. The Institution of the Tax Intelligence System would strengthen the assessment process by providing additional information on tax payer’s business activities. Without such a system the DRC would have to rely on information provided by business entities which may not always be representative of their activities and many illicit businesses will not be uncovered.
The RAA also pointed out that many shops near the vegetable vendors market in Thimphu sold Chinese products that were imported neither from Phuntsholing or Paro. The report said that given Bhutan’s porous border with India and also a few accessible areas from China there are possibilities of smuggling and illegal practices.
It was observed that there were cases where some business units were declared as non-operational but they still made huge imports. The RAA said that while it acknowledged some of the imports could be for construction of the business entity and so does not fall under BIT there were also instances where such imports were made by trading units for the purpose of trade.
The report said that tax assessment without proper scrutiny of these details will lead to a huge loss in revenue to the government. Imports worth Nu 164.75 mn were made in 2013 by business units declared as non-operational.
The report said that there are many informal businesses that are currently on the rise but they are not under the ambit of the tax system except for paying customs duty and sales tax at the point of entry of goods. The RAA said while these provide individuals opportunities to increase their household income there are no legal stipulations on informal trading.
It says since BIT does not cover such businesses there are risks of formal businesses suffering due to lack of controls on informal trade and moreover the government will be deprived of tax revenue if informal trading not brought under the purview of BIT.
There was also no systematic approach on the prioritization of BIT assessment and so without it the Regional Revenue and Customs Offices (RRCO) would face risks of non assessment of some prominent and large business entities.
The government in 2010 issued Nu 2.688 bn in fiscal incentives for a period between 2010-2015 with the view to further stimulate private sector growth and employment generation.
Currently 88 businesses availed these fiscal incentives with 39 hotels being the highest beneficiaries.
The RAA said as a result the government has foregone Nu 1.546 bn in sales tax exemptions, Nu 963.79 mn in customs duty exemptions and Nu 167.48 mn in tax holidays making up the total Nu 2.688 bn.
Currently 39 high end hotels reap the maximum benefits of the fiscal incentives, followed by 15 cottage and small industries and 11 educational entities.
With high end hotels being the highest recipients the intent of providing tax incentives to star rated hotels throughout the country was to improve accommodation facilities for tourists to increase tourist inflow. So while nine hotels were upgraded around 30 new hotels came up since the introduction of the incentives.
However, from 2010 onwards the growth in tourist arrival dropped below the 2010 level. It also said that the tourist feedback indicated lack of proper roads and facilities alongside roads rather than standard hotels as their main concern.
A review of the feedback from tourists showed that they were quite satisfied with the accommodation facilities even before the introduction of fiscal incentives.
The study showed disproportionate distribution of fiscal incentives in the favour of high end hotels.
The RAA in the report is of the opinion that fiscal incentives were not properly assessed and provided to the most pressing areas of development and growth or in areas likely to have profound and positive impact.
The introduction of the incentives was intended also towards balanced regional development particularly with better incentive packages in undertaking development activities in underdeveloped regions and sectors. However, the majority of fiscal incentives were availed by business entities located in Thimphu and Paro regions.
The RAA said that a study on the impact of fiscal incentives carried out by the DRC and the World Bank had already pointed out a lot of risks like unequal distribution of wealth, un-balanced regional development, loss of revenue, loss of tax-paying culture among others.
Assessing single individuals with multiple licenses
The report found many individuals with multiple business licenses in their names. Though the Income Tax Act says that each business will be treated as a different entity there is no clarity in the Income Tax Act or its rules on how different businesses are identified for taxation purposes.
The RAA said there are many business establishments with more than one business license against their names but many file tax returns as a single business taxable entity.
The Regional Revenue and Customs Offices segregates different business units based on the outlets for trading units although there is no clarity on how individual business units are to be identified for filing their tax returns. The report says that without such clarity trading units could also be off-setting the losses of one license against the profits of other licenses.
Inadequate coordination and information sharing between agencies
The Regional Trade and Industry Officers (RTIOs) are responsible for issuing, transferring and cancelling licenses while the RRCOs are responsible for collecting taxes from them.
The report says that currently there is no practice to ensure that information relating to issuance of new license, cancellation and transfer is shared between licensing agencies and the RRCOs in order to curb the possibility of non filing of business tax.
A coordination meeting was held on 26th September 2014 and as per the minutes RTIOs and Bhutan InfoComm and Media Authority (BICMA) were to direct business license holders for registration with the respective RRCOs within the stipulated timeline of 3 months from the issue of license.
RAA observed that as of 31st December 2014 there were still 15,609 licenses issued during 2009-2013 that were not registered. It says the non registration shows that directives by the licensing authority had very little impact.
The report points out that there is lack of adequate monitoring, supervision and control mechanism in place with RTIOs to ensure registration requirements are adhered to by license holders.
The DRC acknowledged the need to integrated RAMIS with the licensing system of the RTIOs but without a centralized database with RTIOs it is virtually impossible.
In this regard the RAA says that while businesses are supposed to register for taxes within three months from formation there is no penalty clause for not doing so. The RAA has recommended a penalty clause. The RRCOs believes that adequate awareness among the business community will solve the problem rather incorporating penalty clauses which would be lengthy and time consuming process.
It was pointed out that due to lack of coordination between RTIOs and RRCOs they even had different information on the number of non-operational licenses. In 2013 DRC reported 6,732 licenses to be non-operational as opposed to 1,368 by RTIOs. Even the information between RRCOs and DRC does not match as RRCOs reported 4,673 licenses to be non operational.
Institutional and other issues
The report says that absence of a comprehensive assessment of staffing needs and Human Resource Development Master Plan would impede effective BIT administration. The DRC on its part has said it has submitted a staffing proposal to the Ministry of Finance towards the end of 2015.
It also says the current staff strength of DRC may not be adequate to meet the demand of increasing business units, as during 2009-13 there was a 48.7 percent increase in business units. The report also said that while certain positions exceeded its numbers other fell short and there was also an unequal share of the workload among RRCOs.
RAMIS or Revenue Administration and Management Information system is for making taxation systematic and strengthening monitoring mechanism. The report pointed out that since it was in the developmental phase the RRCO’s and DRC currently does not have access to the system for preparing reports. With the database outside the country and consultants being able to generate reports there is an issue of confidentiality despite any confidentiality clause. There was overdependence on external consultants though DRC said access has now been provided to IT personnel.