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Thupten Sangpo
According to the World Bank’s recent Public Expenditure Review report, Bhutan faces challenges in raising sufficient domestic revenue due to its narrow tax base and complex tax structure.
The report notes that external grants and non-tax revenues currently account for more than 50% of total revenue, higher than the average of less than 25% for similar countries.
Non-tax revenue includes government agency revenue, dividends and profit transfers from state-owned enterprises.
The bank said this reliance caused significant volatility in revenue and hampered long-term financial sustainability.
A key problem identified was a narrow tax base and stagnant revenues.
The bank said personal income tax, sales tax, excise tax and customs duty are all lower than what would be expected given Bhutan’s GDP per capita.
A study found that Bhutan’s tax burden is 70% lower than other similar countries. A tax gap analysis study found that Bhutan’s total tax revenue could increase by 5.4% of GDP in the 2020-21 fiscal year.
The report also highlighted that the country’s personal income tax revenue will remain stagnant between 2015 and 2022.
To address these issues, the central bank suggested lowering the threshold for individual income tax. The central bank said that the current basic exemption threshold for individual income tax is 300,000 Ngultrums, which reduces the tax base to only about 65,000 individual taxpayers.
Lowering the threshold to 100,000 Ngultrums would reduce the top marginal tax rate to 25%. This would cover an additional 85,832 people and spread the tax burden over a larger base.
Currently, capital gains from the sale of immovable property such as land or buildings or movable property such as stocks or securities by individual taxpayers are not taxable. In addition, small and medium-sized enterprises are mostly excluded from the tax net due to various tax incentives.
The bank also said Bhutan could implement a comprehensive goods and services tax (GST).
GST could replace the current sales tax and excise tax, which is expected to eliminate cascading taxation on businesses, promote ease of doing business, and broaden the tax base.
There are many exemptions to sales taxes and duties on goods that are paid upon entry, but only a few are covered by sales taxes at the time of sale. These taxes paid upon entry can have a ripple effect on businesses if those goods are not covered by sales taxes paid upon sale.
The RBI’s assessment showed that the implementation of GST would increase India’s revenue by about 2% of GDP. However, the implementation of GST was delayed until the necessary software and information systems were ready.
The central bank said the government could simplify tax exemptions. The report said the government would review the tax benefits offered under the fiscal incentives bill. It also said that while some incentives may be justified, a large portion of revenue is currently lost to tax exemptions, especially for large businesses.
In 2020, tax expenditures accounted for 2.9% of GDP, mainly due to import tariffs (58%), sales taxes (42%) and green taxes (0.2%).
Since most domestically produced goods and services are not subject to sales tax, a significant portion of sales tax revenue is lost due to exemptions.
Sales tax exemptions accounted for 27% of total sales tax in 2019. The distribution of revenue exemptions due to direct business tax incentives in fiscal year 2020-21 shows that large and medium-sized companies in the manufacturing, financial and tourism sectors received most of the benefits.
The report also calls for simplifying tax administration for small businesses, where complex tax assessments can hinder compliance and divert resources from larger taxpayers.
Only 1% of the total number of registered enterprises contribute about 60% of corporate income tax revenue. Most companies and enterprises are small and do not contribute much to tax revenue, but the tax authorities still focus on assessing them.
The collection of BIT from small and micro enterprises in urban areas is carried out after complex estimation and evaluation.
At present, tax authorities make estimates through on-site visits, and different tax rates are applied to individual industrial and commercial households with different sources of income, which provides arbitrage opportunities and incentives for tax evasion.
The report also points out weaknesses in Bhutan’s tax compliance monitoring system. Recommended measures include setting up a dedicated large taxpayer unit, improving risk assessment and automating the detection of non-filers.
Merging various tax identification numbers into one taxpayer identification number will improve tax administration by facilitating taxpayer identification for administrative actions such as detecting non-filers, third-party information reporting and data matching such as that of bank deposit interest, dividends paid by listed companies, contract revenue and asset sales, as well as information sharing with other government agencies, it added.
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