NA passed the money bill on 28th November to make Fixed Deposits in banks tax free with 39 yes votes against two no votes and one abstaining vote.
The Ministry of Finance introduce the Income Tax Act on 14 November 2016 as a money Bill. The bill proposed amendments to the Income Tax Act, 2001, by repealing the existing provisions on the levy of tax on the interest income earned on the fixed deposit under the personal income tax.
The ministry proposed for the amendment with the objective to promote and encourage the saving habits of the Bhutanese people through fixed deposit and to encourage inward remittances of foreign currency of Bhutanese living abroad through the recently launched Remit Bhutan platform by the government.
In addition, it will also help financial institutions to mobilize funds that can be allocated for the productive and priority sector lending and to facilitate and complement the recently launched monetary policy on Minimum Lending Rate (MLR) that would enhance the economic growth, as well as to generate higher revenue for the government in the long-run.
The Finance Committee of NA said that, it had studies how the Bill would benefit the individual, the bank and the overall economy of the country.
The Committee, during their observation found that, the fixed deposit account encourages saving habits and investing in a fixed deposit account earns higher interest rate than depositing the money in the saving account and it is assured that the account holder get returns for his/her investment. The term of the investment of fixed deposit ranges from 30 days to 10 years.
The committee found that, the number of fixed deposit account holders from 2011 to 2013 was within the range of 406 to 432. However, in 2014, the account holder increased to 512 and in 2015 to 1,331.
The income tax from fixed deposit in 2015 amounted to Nu.13.67 million, which is just 0.77 percent of the total PIT revenue.
This indicated that majority of the Bhutanese people lack a saving culture.
In addition, the committee has also looked into the tax exemption on fixed deposit account of SAARC countries and other middle-income countries. They established that, in some countries, income in the form of interest from the fixed deposit account is liable for taxation depending on the amount of interest earned.
However, the experts suggested that, imposition of tax at source on interest earned from fixed deposit had discouraged the people to deposit their money in the banks leading to lower investments in the country and affecting the country’s overall economy negatively.
Further, for some countries, the account holders are exempted to pay taxes on interest earned from fixed deposit primarily to encourage savings and investment that would generate reliable returns.
Meanwhile, in Bhutan’s case, given the size of the fixed deposit account holders and amount contributing to PIT which is very minimal, no terms and conditions will be applied to any individual on the fixed deposit.
With benefits to individual account holders, banks and the economy, the committee submitted to the house for complete exemption of Tax on the interest income earned from the fixed deposit as proposed by the MoF.
It benefits the individual account holder in a way that, one can start investing with as little as Nu.100 and add to their savings.
In terms of benefit to deposit taking banks, it is a reliable source of funds for investment, is a stable fund and helps in managing Asset Liability Mismatch and availability of long-term funds for financing purpose.
Finally, in terms of benefit to economy, tax exemption on fixed deposit will increase the amount of deposits, which will ultimately lead to higher investment in the country thereby contributing to the country’s overall economy positively.
In addition, higher investments lead to employment creation and accelerate the country’s overall socio-economic growth as well as generate higher revenue for the government in the long-run.
With all the discussions on objectives, observation and benefits, the house (NA) agreed to pass the bill, on complete exemption of tax on the interest income earned from the fixed deposits.