With the implementation of the goods and services tax (GST) in India beginning July 2017, the adoption of a GST in Bhutan has become a top priority, according to the International Monetary Fund’s (IMF) article IV consultation report.
To this effect, Bhutan will receive extensive IMF support for implementing the GST. A project office has already been created and GST implementation plan has also been drawn. By July 2020, Bhutan will adopt a broad based GST regime.
“The ability of the revenue authority to develop and implement an IT system that can underpin GST processing is considered one of the potential stumbling blocks that could delay the adoption of the GST,” the Article IV consultation report stated.
It was highlighted that the country will need to strengthen its fiscal position and reduce external imbalances particularly the current account deficit.
To consolidate the fiscal position, the IMF stated that, the country should enhance its domestic revenue to maintain macroeconomic stability.The GST project remains a key ingredient to enhance domestic revenue.
The tax-to-GDP ratio is also expected to decline in coming years. “To boost the domestic revenue base, the authorities should implement their plans for a broad-based GST without delay,” the report states.
Indirect taxes such as sales tax, customs duty, green tax and excise duty constitutes around 5.5 percent of the GDP. Sales taxes account for 2.5 percent of GDP, while around 2 percent of GDP is raised from the excise duty refund (EDR), which reflects excises levied by India on exports to Bhutan. The remainder is raised from domestic excises, a green tax, and customs duties.
The report also stated that EDR would effectively cease in 2020, leaving a large revenue gap to be filled. This is because of India adopting GST wherein all exports going out of India will be zero taxed.
While Bhutan has identified a set of primarily sales tax-related measures that could potentially make up for the loss of EDR revenue, the IMF report stated that a broad-based GST would help to cover the revenue gap in a sustainable and more efficient manner.
Bhutan’s potential to increase indirect tax revenues from other sources, such as customs duties, is severely limited by Bhutan’s free trade agreement with India (which covers 90 percent of imports), as well as South Asian Association for Regional Cooperation preferences and the preferential trade agreement with Bangladesh. Thus, indirect tax revenues will rely heavily on GST implementation.
While the project is subject to final approval by the new Cabinet, the IMF underscored that early endorsement of the project by the new government and passage of the associated legislation will be critical to meet the implementation timeline.
In terms of design, the IMF recommended that GST should be broad-based including services and it must have a simple rate structure.
IMF also stated that the Bhutanese authorities should seek to rationalise and gradually curtail the use of tax exemptions, which accounts for more than 2 percent of the GDP.
Effective input tax credit, refund management and administrative simplicity, according to the IMF, are must. The GST under consideration presently in Bhutan resembles a standard value added tax (VAT) system with input tax crediting and a mandatory registration based on turnover of business entities.