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The elephant in the room

By this time next week, it will be clear who will form the new government. The third democratically elected government will implement the ambitious 12th Plan with an estimated budget size of Nu 336 Billion.

Without clear-cut ideologies, both Druk Nyamrup Tshogpa and Druk Phuensum Tshogpa are running for government on promises. There are many. From salary revisions to tax cuts, improved vehicle import quotas to subsidies, from employment to improved roads. The list is long.

Translating the pledges and the 12th Plan activities will cost the government and the country dear. Realities of running a government on promises will dawn after the Khadar ceremony – when activities start rolling and people wait with expectations.

The question on most minds is where will the money come from to fund the Plan and the massive pledges? The new government will start mobilising fund soon after it takes over the reign. Planned developments cannot be derailed. Its success will depend on how successful the new government will be in fund raising. From experience, the people give a year’s time for the government to settle. The pressure will then start building.

What the people did not realise is that there is a huge scope of raising fund within the country if there is political will.

Improved internal revenue benefits a government and the people. Internal revenue comes in the form of tax, non-tax and other sources like royalty, income, dividends, interests, fees etc. From the revenue reports, net revenue in the fiscal year 2016-2017 was more than good to cover the current expenditure. That year, the share of net revenue was 18.7 percent to the GDP. It also covered 21 percent of the government’s capital expenditure.

Perhaps, our politicians are encouraged by the projected domestic revenue, which the Gross National Happiness Commission in its 12th Plan Guideline projected to double to Nu 251B and external grants to decline from Nu 68B to Nu 54B. Coverage of current expenditure by domestic revenue is projected to be 135 per cent, a 10.2 per cent increase over the 11th Plan. Similarly, coverage of total expenditure including capital expenditure by domestic revenue is expected to increase to 83.5 percent, a 37.6 percent increase over the 11th plan.

But the projections are conditional. The improved revenue is projected assuming three new hydroelectricity projects will be commissioned. When it comes to mega hydroelectric projects, we have learnt the lessons of not counting the chickens before they hatch. In our case, even before the eggs are laid! So where do we turn to?

A sure source for domestic revenue is from taxes, both direct and indirect. But for that we need the political will. Critics say Bhutan’s taxation policy is rich centric. Economists are already concerned about the dwindling revenue from the various tax reforms in the recent past.  If Bhutan’s tax base was already narrow, the increasing amount of revenue foregone through incentives is eroding the tax base and creating considerable challenge in mobilising domestic revenue (DRC 2016). Total revenue foregone through tax exemptions and tax holiday in the 2016-17 fiscal year constituted about 14.8 percent of the total domestic revenue.

With the introduction of Goods and Service tax (GST) in India, the government will not receive excise duty refund from this year. Excise duty refund from India constitutes about 10 percent of the total revenue. All these call for bold policies to bridge the resource gap and compensate the revenue loss. The irony is that the two political parties are running for government on populist policies that would encourage people to depend on the government to spoon-feed.

In the game of politics, not many would dare to campaign on revising taxation policy. That would scare away jindas (supporters) with money. This would be a political suicide. But reasoned discourse and the consideration for long-term plans, call for better taxation reforms.

Do the political parties have it?

Unless the government changes its mind, forced by circumstances, there is not much in the manifestos of the two parties. The Druk Phuensum Tshogpa wants to examine the Personal Income Tax rates for equitable income distribution without … encouraging tax avoidance. It will improve the efficiency of revenue collection. The section on taxation and fiscal polices are very mindful of what voters would think.

The Druk Nyamrup Tshogpa, perhaps driven by their slogan – “Narrowing the Gap” is bolder. It wants to recover Nu 10B by streamlining and strengthening tax collection. It will monitor income and taxes by developing linkages between financial sector and services to enable transparent information sharing and ensuring everyone pays their fair share.

DNT will also monitor tax evaders and institute penalties besides reviewing prevailing taxes and tax bands to ensure the wealthiest do not pay less than the middle class to “bridge the gap.” Although, DNT candidates hesitated in their answers, when questioned during the public debates to convince the people how they would secure the fund, their promises on taxation policy is what many would appreciate.

Bhutan is preparing to graduate from a least developed to a middle-income country status. This means, aid will cease and development partners would focus their priority on other countries. There will also be obligations for Bhutan including making monetary contributions to international organisations, our benefactors so far.

Domestic revenue collection is receiving growing attention in recent years. For instance, the Organisation for Economic Co-operation and Development (OECD), the World Bank and many more are calling for more determined action to combat tax evasion and avoidance. Developing countries are urged to increase their own tax collection. The pressure is going to increase as political factors are determining tax collection in many developing countries.

The more important reason, close to Bhutanese is the rising inequalities. There are many factors leading to the growing inequalities in a nation striving for “a just and harmonious society.” Taxation is one. Experts have estimated that the inequality is so stark that one Bhutanese in the mining sector is earning as much as 16,824 other Bhutanese. The salaried civil servant is also wondering why they pay income tax when the proprietor of rich luxury hotels, started with the grandest proposal, are coming in their flashy Prados to declare their loss, year after year. When the tax base is narrow, some are wondering why there are tax holidays and concessions on the already rich businesses and companies.

How we ensure that every Bhutanese enjoy the fruits of progress can be only addressed through policy intervention. Critics are convinced that the transition to democracy has benefited only a handful of people and that the government should start imposing new taxes like wealth tax, inheritance tax or even capital gains tax.

If Bhutan is to progress into a just and harmonious society and achieve self-sufficiency, our resources should be used judiciously to not enrich just one section of the society and our promises should not be fulfilled with borrowed money.

 

Contributed by 

Ugyen Penjor

Publication Editor

Kuensel

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