The Bhutanese Leading the way.
A major tax change that is being proposed in the upcoming Parliamentary session is doing away with the Business Income Tax (BIT) entirely, and instead replacing it with the Personal Income Tax (PIT).
Currently, companies that are not incorporated or are single proprietor-owned, like grocery shops, restaurants, etc., come under BIT tax where any profit is taxed a flat 30 %. For example, a company that makes Nu 500,000 profit in a year pays Nu 150,000 as BIT.
However, under the PIT system the Nu 500,000 profit of the small business will not be taxed directly. There is a Nu 300,000 exemption, which means that Nu 300,000 is not taxed. Then the income from Nu 300,001 to Nu 400,000 is taxed at 10% which is Nu 10,000 and the remaining Nu 100,000 is taxed at 15 % which is 15,000 which means a total PIT of Nu 25,000 as opposed to paying Nu 150,000 under BIT.
This tax reform will come as a huge blessing to small businesses and lower income groups that currently make small profits in a year, but have to end up paying a 30 % tax under BIT. With the switch from BIT to PIT, the business can get various exemption categories just like a salaried person paying PIT.
In short, the business is already a legal person and so this legal person instead of filing a flat 30 % BIT like before with no exemptions will now file PIT and get the various exemptions depending on the income level.
In the current PIT system 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 (mn) with 20%. Nu 1 mn to Nu 1.5 mn with 25% and Nu 1.5001 mn and above is taxed with 30%.
Apart from saving money for businesses, especially small businesses, the move will also reduce the filing burden for businesses who only need file a PIT for their business.
This, however, does not mean that PIT for the employees is done away with as they will continue to file their own PITs if they are within the PIT tax bracket of any income above Nu 300,000 a year.
This is a long pending reform that had also been recommended by the International Monetary Fund (IMF) and others, but it was not implemented.
For example, even in India, sole proprietor companies do not pay BIT but only pay PIT.
The reform is a larger move to modernizing Bhutan’s overall tax system, and bringing it more in line with international norms.
The government is expected to lose some money on BIT, but the hope is that such a system will improve tax compliance.
In the 2023-24 financial year, the BIT collected was Nu 1.930 billion (bn) compared to Nu 11.990 bn Corporate Income tax and Nu 2.854 bn PIT.
The move is also being done in light of the upcoming Goods and Services Tax of 7 % on all items.
A source said that doing away with BIT and replacing it with PIT will mean that businesses and people will have more money on their hands, and this money will go back into the economy as disposable income.
It will also result in tax administration efficiency, freeing up the tax officials to better focus on the bigger players that pay the majority of the tax.
One major impact of the move from BIT to PIT for businesses will mean that many micro and small businesses will not even have to pay anymore tax as their profit is already under Nu 300,000 a year.
The tax reforms will not just benefit small businesses, but also larger companies.
Currently, while calculating BIT or CIT the Department of Revenue and Customs places limits on deductible expenditure like salaries, entertainment, advertising that a company can do. Now, provided that it is genuine and can be proven then the caps will now be removed.
An example, here, is that a company may pay a manager well but the DRC currently does not allow the entire salary to be deducted as expenses by placing a salary cap. This cap will no longer be there under the new reforms. The same will apply for entertainment and advertising, etc.
With BIT being replaced by a more friendly PIT, the question may now be if smaller incorporated companies paying CIT of 25 percent are tempted to become sole proprietorships. However, a source said that the CIT, itself, is being reformed too, and there will be incentives to not only keep the current CIT companies under it but also encourage BIT paying companies to incorporate and pay CIT.
In the income year 2024 there were 45,657 listed under BIT. Of these 15,652 small businesses in rural areas are exempt of paying BIT which will continue.
This means 30,005 businesses paid BIT. Of this 25,317 did not file books of accounts but were taxed based on the transactions in their CD accounts, and the Industrial Average Ratio which is an average ratio of the tax ratio to the total revenue for those similar businesses that file books of accounts. 4,688 businesses filed books of accounts for BIT.
There are 73,602 people listed under PIT and 527 companies under CIT.
A source said the aim is to also simplify the tax system in Bhutan and promote compliance. The aim is also to make the tax system pro-growth, fair, transformative and provide a good economic foundation.
In some aspects, this is in line with the Diamond Strategy outlined by His Majesty The King, where the rest of Bhutan also carries out important reforms so that one day the whole country, including the Gelephu Mindfulness City, can come under one progressive and internationally competitive system.
Earlier, this paper already reported that as a part of the move to GST and broader tax reforms, there will be changes in PIT, BIT and CIT with the main aim to reduce the tax burden, and even simplify it as the GST comes in.
