The Bhutanese Leading the way.
As Bhutan gears up for the long-delayed implementation of the Goods and Services Tax (GST), the upcoming Parliamentary Session is set to introduce significant tax reforms. These include proposed reductions and changes to the Personal Income Tax (PIT), Business Income Tax (BIT), and Corporate Income Tax (CIT)—all aimed at easing the transition into the GST regime and aligning the country’s tax system with international standards.
The main aim of the reduction is to offset the 7% Goods and Services Tax that will be coming in on most goods and services replacing the 5% Sales Tax.
There will be some PIT relief expected as currently income up to Nu 300,000 has zero tax, Nu 300,001 to Nu 400,000 is taxed 10%, Nu 400,0001 to Nu 650,000 with 15%, Nu 650,001 to Nu 1 million with 20%. Nu 1 mn to Nu 1.5 mn with 25% and Nu 1.5001 mn and above is taxed with 30%.
While the Nu 300,000 slab may not be increased, there could be some percentage reductions above that.
One frequent complaint after the 50% pay hike for public servants is that their PIT tax burden has increased.
There may also be some possible reductions and adjustments in the Business Income Tax (BIT) and the Corporate Income Tax (CIT) which will be motivated in part to offset the impact of the 7% GST and the other aim being to align Bhutan’s tax system to international standards so that Bhutan becomes competitive for investments.
The GST tax, after much delay, was targeted for implementation by July 2025 after the Act was initially passed in 2020 but the online BITS system was not ready and an extension was given till July 2022 which also could not be met due to technical issues.
However, it is not that simple, as the firstly, the GST Act, itself, is scheduled to undergo major changes and amendments in the upcoming session. Once it undergoes the amendments and the Act is ready by June, then after that, around 4 months will be given for the companies to be ready along with some final touches to the GST system, as well as registration starting.
It is then likely that GST filing may well come into force from 2026 onwards with registration and other preparatory works happening in 2025.
GST will replace Sales Tax and Excise Duty and it will have a 7% single tax for all goods and services, generally making goods cheaper and services a little more expensive. It will avoid double and triple taxation as the taxes charged in the earlier part of production or import will not be passed down.
GST will be a consumption tax with the idea that those who consume goods and services are responsible for paying the associated taxes. GST with its system where people can claim input credit to lessen their tax burden aims to broaden the tax base and also make it simpler.
The main change in the GST Act will be lessening the exemptions list. It will reduce the exemptions list under Part 4 Schedule A and B, completely eliminate Schedule C and also considerably shrink the Excise Equalization Tax Rates under Schedule 6.
Simply put, it is felt that there are too many exemptions under the current GST Act which would create distortions in the system.
Part 4 Schedule A includes services which are difficult to quantify or apply GST and normally exempt like financial services, health services, educational services, leasing residential premises, telecom services, etc. Schedule A has 12 exemptions which will be slimmed down.
Schedule B are goods which are exempt due to diplomatic relations, transshipment, re-import of goods not subject to any process of manufacturing or adaptation or change of ownership, donation for natural disaster, import of goods exempt under Fiscal Incentives, free baggage allowance, etc. There are 9 exemptions which will also be reduced.
Schedule C with 216 exempt items will be completely removed, and these were goods which have no taxes under the current regime like rice, oil, salt, seeds, livestock, medicines, fertilizers, books, sportswear shoes, agricultural machinery, mobile phones, LED lamps, transport vehicles, bicycles, spectacles, electric vehicles, medical devices, gym equipment, etc.
An official said that there are other ways for the government to provide support for the the items but not through GST exemption. In the case of medical equipment and medicines imported by the Ministry of Health the tax will still have to be paid, but it will be treated as a transfer from one pocket of the government to the other.
The most important amendment of the above will be reducing the 157 items on the Excise Equalization Tax (EET) rates to 62 items by removing 95 items.
With the GST doing away with the Sales Tax, a dilemma was on what to do with the items with high sales tax like vehicles, alcohol, tobacco, aerated drinks and betel nuts. This was why the EET was created which would prescribe an additional tax on top of which the GST would be applied.
However, during the time of the former Parliament, the EET was misunderstood and it was instead treated like a sin tax for items with sugar, plastic, chocolate, pasta, fruit juices, ice cream, mineral water, vinegar, chocolate too.
The problem here is that such a high EET would make the domestic manufacturers of all items using the above items like sugar, plastic, etc., uncompetitive compared to foreign imports who would not face the same level of EET taxes and GST on it. The amended EET list will only keep vehicles, alcohol, tobacco, aerated drinks and betel nuts, and remove the rest.
Currently, there are only around 600 companies and agencies that pay sales tax but under the GST there will be 3,500 companies who will collect GST and pay it to the government. Companies at or above Nu 5 million (mn) turnover will be automatically be registered under the GST as GST collection agents while companies with Nu 2.5 mn or plus turnover can also join.
The GST taxes is expected to lead to some short term inflation and also some reduction in demand and this is why the government wants to amend the PIT, BIT and CIT to reduce them to allow people and companies to absorb the impact.
The whole idea behind GST is that you can collect more indirect taxes from more people by reducing tax, simplifying it, giving an incentive for them to keep proper records and declare the right numbers and then having a robust online system to track the defaulters. GST will also ensure that other taxes like BIT and CIT are also not underdeclared.
Under the GST system noncompliance will be dealt with more strictly.
An official said that the GST tax would make the economy more competitive as it will not tax income or productivity but will only tax consumption. This also means that those consuming more, who are richer, will end up paying more GST.
One calculation shows that the top 10 percent of income earners will be paying around 32% of GST.
GST will also encourage efficiency in the economy and allow in new players who can bring about efficiency.
Currently, big industries are exempt any taxes on raw materials imports when the end product is for export.
Under GST, a 7% GST will be charged during import of the raw materials which will be refunded when the finished product is imported. This means that a factory cannot simply just import raw materials and keep it idle, but will have to work hard and in an efficient manner to process and get it out of the country.
In the four months of preparation period, there will be training provided for the 3,500 companies relevant staff on how to keep documents and file GST online. The system will be kept very simple and avoids documentation.
A GST business would be given an online account and password to file GST.
By July 2025 the GST system will be ready with core functions like registration, return filing, payment reporting, etc.
One projection shows that GST could go as high as Nu 7.6 bn a year, but figures are subject to change.
How GST works
An example of how GST will work can be given through import of clothes into the country.
So, a wholesaler in Phuentsholing imports cloth worth Nu 100,000 and he pays GST of 7 percent or Nu 7,000.
He might want a profit margin of 15 percent or Nu 15,000 on the Nu 100,000 and sell it to a retailer in Thimphu at Nu 115,000.
Here, under GST, since the Nu 7,000 tax has already been paid on Nu 100,000, the retailer is charged 7% GST only on the Nu 15,000 profit which is Nu 1,050.
In the current system, the entire Nu 115,000 would have been charged with sales tax again.
The retailer in Thimphu who is also GST registered gets his clothes at Nu 115,000 with Nu 1,050 GST.
He decides to sell the cloth to a customer with 15 percent profit or Nu 17,250 on Nu 115,000 at the total of Nu 132,250.
Under the current system he would be charged tax on the whole 132,250 but under GST he can offset this by showing the GST was paid on the Nu 100,000 and Nu 15,000 and so he is liable to pay GST only the profit margin of Nu 17,250.
The GST system in avoiding double and triple taxation gives a huge incentive to businesses to register under GST and give the correct sales figures.
If the wholesaler is not GST compliant, he cannot pass on the benefits making him uncompetitive to somebody who is GST compliant. Also, with GST the businesses become the enforcers as everybody is registered and filing GST which enables tax officials to catch anyone in between not filing GST or proper taxes.
Under the current system, since there is tax on tax at every stage, both wholesalers and retailers indulge in undervaluing their imports or purchases to avoid high taxes. They also undervalue their sales to avoid paying higher taxes.
The additional advantage of the being a GST business is the retailer in Thimphu can make additional claims to get even more tax breaks. For example, if he buys a Nu 1 mn truck for his business which has 7 percent GST at Nu 70,000. He can offset this by showing that the 7 percent GST has already been paid by the truck importer saving him Nu 70,000.
A non GST business would not get such benefits.
Currently, if a company makes a loss in one year, then it can carry forward the loss only for three years to offset future taxes but under GST that loss can be carried forward for an unlimited number of years.
While the GST system will give advantages to GST compliant businesses, it will also seek to protect small producers like a farmer with some cows supplying milk to a milk factory. The factory buying milk from the farmer will get a reverse charge which means the factory can file for GST input credit like from a GST compliant firm.
The GST and the system will also encourage businesses with their supply and value chain in Bhutan.
