Huge tax reforms: big cars, liquor, chocolates, plastics to be dearer; no increase in duties for essential items
The cabinet has agreed to increase the taxes on vehicles (detailed story on pg 3), plastic items, junk food, imported printed material, and alcohol, among others. But sales tax and custom duties on essential items like food have either been reduced or kept the same.
The finance minister, Lyonpo Wangdi Norbu is expected to announce the new taxes during his budget presentation in parliament next month.
This is part of a larger exercise of the finance ministry for the rationalization of sales tax and customs duty (What is rationalization: see detailed story on pg 2) so that tax administration is simpler and better.
The move will also bring taxes in line with GNH aspirations, the Economic Development Policy, environmental and guidelines etc.
“Though the cabinet had endorsed the tax rationalization in its 66th session on March 19 this year, the cabinet in April asked the MoF to further consider some issues for improvement like taxes on vehicle, alcohol, junk food etc,” said a finance ministry official.
Accordingly, the Department of Revenue and Customs has come up with an improved list mentioned below and presented it to the finance ministry.
With alcohol related deaths and illness becoming a major social problem the government will increase the sales tax on alcohol from 50% to 100%. The custom duty for alcohol will increase from 100% to 150%.
Sales tax is charged on all important consumer and household items while custom duty is an additional tax that applies to all imports other than from India with which Bhutan has a free trade agreement.
In the same line, though sale of tobacco is banned, all tobacco related products will see a custom duty increase from 100% to 150%.
Though currently only plastic bags are banned people will now have to pay more for other plastic products especially imported from third countries. The customs duty rates for primary plastic products will increase from 5% to 30% and other finished plastic products from 30% to 50%. The sales-tax on finished plastic products will increase from 20% to 30%.
To ensure that junk food is more expensive, the customs duty rates for various junk food items like chocolates, chips etc mentioned in five chapters of Bhutan Trade Classification will see an increase from 30% to 50%. The sales tax has also been increased to the next higher level except in the case of essential goods. For example sales tax for sweets and candies has been increased from 15% to 30% but will remain zero for those coming under the essential commodities nature. Customs duty for aerated water has been increased from 50% to 100%.
For promoting local arts and crafts, the customs duty rates for imported statues will be increased from the existing rate of 20% to 30% and sales tax from 10% to 20% respectively.
There are also provisions to protect domestic industries like the printing industry which is suffering due to printing jobs illegally done in India. So there will be a sales tax of 10% and customs duty of 20% on all imported printed items.
However educational institutions will be exempt from these taxes from importing printed materials like text books which cannot be developed within the country due to shortage of international content.
There have been instances of the tax free import policy for machinery parts being misused to import even normal vehicle motor parts. To avoid this misuse the government will now be taxing all such machine parts.
The sales tax and customs duty on essential commodities like food items, medicines, fuel for household consumption, health and general welfare have been brought down. These commodities comprise 20% of the items under the sales tax category and 3.4% of items under the customs duty. The items that have gone into the higher brackets are mainly those consumed by the higher income group.
From the commodities moving to the higher bracket, only 3.5% of the items under the sales tax category and 1.5% of the items under the customs category pertain to essential commodities. Since these commodities have been shifted to a higher category to protect domestic production like printing and wood based industries, there would be no significant impact on general prices.
According to the finance ministry, the impact on the cost of production by manufacturers should be neutral as industries already enjoy sales tax and customs duty exemption on import of plant and machinery and raw materials.
The ministry also says that the new tax system may help with the balance of payments and reserves situation. It could also lead to the conservation of the convertible currency.
The news taxes is also not expected to affect government expenditure as most imported government items fall under the existing 10% or 15% sales tax rates.
All donor-financed government expenditures are exempted from taxes by agreements. A big part of the government expenditure is on construction and the taxes on construction materials will not change.
Keeping in touch with the Economic Development Policy, either zero or very low rates are maintained in the areas of health, education, agriculture, transport industry, domestic appliances, IT hardware, timber, heavy earth moving equipment, aircrafts, and unprocessed primary or crude products.
A few additions and minor changes are expected in the new tax laws before it is tabled in July.