NA: Exempting taxes on the interest earned from fixed deposits, albeit with good intention, might expunge the tax-paying culture among the citizens, according to the Opposition Party during deliberation on the amendment of the Income Tax Act.
The proposed amendment will do away with taxes on interest earned from fixed deposits held with financial institutions. The existing provision allows exemption on interest income not exceeding Nu10,000 per annum.
The Opposition Leader Pema Gyamtsho said that tax is sustainable revenue for the country. While capital expenditure like construction of road and bridges could be sought from donors, he said that tax revenue is an important source of current expenditure to mantain the infrastructures put in place.
“Once an exemption on tax is granted, it is very difficult for the political parties in power to reinstate it,” he said.
Even the tax exemption on rural businesses, albeit small, has created disparity in the society, he said. Some shops with millions worth of investment, he said, are granted exemption while small shops falling out of the rural zone are levied taxes.
The finance minister Namgay Dorji said tax exemption on fixed deposits is one of the means to encourage a saving culture and to strengthen the banking system at the same time.
When banks receive more deposits, its capacity to lend also increases. It is the lending that will promote investment, the finance minister said, arguing that as a consequence the economy will grow and create jobs.
Supporting this, Sonam Dondup Dorjee, a member of the finance committee, said that tax revenue generated from interest on fixed deposits is just Nu 13M, which is not even one percent of Personal Income Tax (Nu 1.77B).
He said that should the banks get more deposits translating into more investment, the returns from other forms of taxes will be worth more.
The finance minister also acknowledged that the biggest challenge confronting the economy is the widening trade deficit. In 2014-15 the country exported goods valued at Nu 32B and import value was Nu 57B, resulting in a deficit of Nu 24B. In the following year, the deficit widened to Nu 33B as the import value shot to Nu 70B and exports stagnated.
The Bartsham-Shongphu representative, Wangdi Norbu, said that doing away with taxes on interest from fixed deposit could strengthen the banks because banks are heavily reliant on short-term corporate deposits. But given an option, he said that people will chose to invest their money from where higher returns could be had instead of fixed deposits. “Government must be cautious in waiving the taxes as it would set a precedence,” he said.
But on the trade deficit, Wangdi Norbu said the government on the one hand is acknowledging the issues with trade deficit and on the other hand its initiatives are import focused.
Citing an example of how trade fairs are encouraging imports, he said this situation is intensified with the lifting of import bans the former government placed.
The Panbang representative, Dorji Wangdi, argued that waiving taxes would amplify the disparity between the rich and the poor. “Regardless of whether you save Nu 10,000 or Nu 10M, exemptions are granted for all,” he said.
He also recommended that a limit be set on the amount of deposits for exemption and introducing tax slabs thereafter, just like the PIT.
However, the finance minister said it is the salaried employees who prefer fixed deposit sas a means of saving and doing away with taxes would benefit commoners.
The education minister also said that bringing down the tax and casting the rate based on the amount of deposit would not serve the purpose. The fact that there is some amount of tax levied on fixed deposit would discourage saving, Lyonpo Norbu Wangchuk said.
The Drametse-Ngatshang MP, Ugyen Wangdi said that the same section of the Act also allows a levy on income from cash crops. A country with the majority of its people involved in the agriculture sector should do away with this tax too, he said.
“If tax paying culture is not important, then it is logical to waive off the tax on income from agriculture too,” the Opposition Leader said adding otherwise instead of doing away with tax on fixed deposits in its entirety, it should be lowered.
The House endorsed the committee’s proposal to do away with tax on interest from the fixed deposits. A motion to pass the Bill will be moved today.
Similarly, after extensive debate on the status and policies of the employment, the supplementary budget and appropriation Bill was endorsed in the afternoon session. The government proposed an additional Nu 262M to implement employment programmes.