The Bhutanese Leading the way.
Vehicle dealers across Bhutan have reduced prices under the new Goods and Services Tax (GST) regime, as the combined GST and Excise Tax is lower than the previous Sales Tax and Green Tax. Price reductions were expected to range from 9 to 21 percent depending on the vehicle model and engine size. However, while prices have fallen, the drop has not met expectations.
Dealers attribute this partly to what they describe as a form of double taxation in how GST is applied. In the earlier system, when a vehicle was imported from a third country, it had to pay Green Tax and Customs Duty at the entry point in Phuentsholing, and once the car was sold, it paid the applicable Sales Tax.
However, dealers say that under the new system, GST is not charged only on the value of the car, but on the value of the car after all taxes, like Customs Duty and Excise Tax, are added.
Customs Duty (CD) is levied on the ex-factory price of the vehicle plus transportation and insurance costs, known as the CIF value. After that, Excise Tax is levied on the ex-factory price. The 5 percent GST is then applied on the total, including these taxes.
For example, if the FOB price of a car is Nu 500,000, Customs adds 20 percent as transportation cost and 1.25 percent as insurance cost, totaling Nu 107,500. This brings the CIF value to Nu 607,500, similar to the previous system. The CIF of Nu 607,500 attracts a CD of 55 percent, or Nu 334,125. Then the ex-factory price of Nu 500,000 gets an Excise Tax of 77 percent, or Nu 385,000.
The car is now priced at CIF of Nu 607,500 + CD of Nu 334,125 + Excise Tax of Nu 385,000, totaling Nu 1.326 million. The new 5 percent GST is then applied to this amount, which is Nu 66,331. Dealers note that GST would have been roughly half if it did not include CD and Excise Tax. An import permit of Nu 1,000 per vehicle is also added, since a vehicle is an excise item.
Even if the car is not from a third country and is imported from India there will be double taxation as the GST at the point of entry will be derived on the CIF value of the car with the Excise Tax added.
During consultations with businesses, some vehicle dealers described this as a “tax on tax,” but Department of Revenue and Customs (DRC) officials said it is a value-added tax.
A vehicle dealer said that if this tax on tax were not applied, dealers would be able to pass more benefits to customers. After paying GST at the entry point, the dealer brings the car to Thimphu, adds additional costs and profit margin, and sells it to the buyer charging 5 percent GST. The dealer then deducts the GST already paid at the point of entry and deposits the difference with DRC, which represents the GST on the profit margin.
The implications of how GST is applied at the entry point extend beyond vehicles to all products that attract CD and Excise Tax.
CD is for third-country imports, while Excise Tax applies to vehicles, carbonated drinks, alcohol, pan masala, and tobacco. For example, a carbonated drink imported from a third country will attract CD and Excise Tax, and then 5 percent GST will again be levied on the total. A TV imported from a third country will attract CD, and GST will be applied to the total.
An official said that while some people may view this as double taxation, GST is a value-added tax, and Bhutan is no exception. The GST Act under Section 23 (Value of Import) specifies that the taxable amount includes CD, Excise Tax, and any other tax or fee.
An official explained that GST is a value-added tax. This means that if a vehicle dealer sets a high profit margin, the GST on that profit will also be higher. As a result, the total price of the car will increase, making it less competitive compared to other dealers who charge lower profit margins. In this way, GST can indirectly help control prices in the market.
