The government is attempting to rationalize the present taxes for around 5,000 goods listed in the revenue department’s ‘tax bible’
The objective of rationalization is first to have uniform or similar taxation rates for similar goods under different trade classifications. Secondly, it aims to prevent wrong declaration by importers and incidences of revenue leakage by removing multiple tax rates for the same item. Thirdly, it paves the way for a single sales tax rate by covering most commodities into fewer tax slabs.
In the absence of rationalization there is a lot of confusion and ambiguity leaving a great deal of discretion in the hands of tax officials and opportunity for importers to mis-declare.
The 66th session of the cabinet on March 19 endorsed the rationalization of sales tax and custom duties.
All consumer goods imported into the country have to pay sales tax at the point of entry. There is an additional customs duty tax if the import is from any other country than India like Thailand or Nepal etc since Bhutan has a free trade agreement with only India whose products are exempt from customs duty.
These imported items are 5,000 different commodities and are listed down in the voluminous Bhutan Trade Classification Head Code book, the bible by which the Department of Revenue and Custom imposes its sales taxes and customs duty.
Each item is given a separate four digit code. For example the code for kitchenware is 44.19.
However, according to the finance ministry, the revenue department book is too complicated and also has a lot of loop holes leading at times to genuine confusion. But at other times it is also misused by businessmen to get away with lower taxes.
For example, an item like a car will have different four digit codes and taxes based on its engine capacity and size. But an importer to get away with lower taxes may declare his bigger car as a smaller car and get away with lower taxes. Customs officials say that in case of a car it would be easy to catch, but not with 5,000 items with each item having different sub division and taxes.
Another problem is that there is a list of similar products with different tax rates in the same book. For example table ware and kitchenware of wood under head code 44.19 has a custom duty rate of 10% but under wooden articles of furniture under head code 44.20 the custom duty rate is 50% for the same item.
So, to avoid these problems, the rationalization exercise will see more similar products having similar taxes instead of different taxes each. As a result sales tax levies for 154 commodities and customs duty levy for 1,050 commodities having varied rates for similar items under different trade classification have been converged to relevant uniform rates.
The number of chapters with multiple rates has been reduced from 29 to 22 for customs duty and 38 to 34 for sales tax. The number of tax slabs has been reduced from 8 to 6 under sale tax with the 15% and 50% tax slab being eliminated.
The rationalization of sales and custom duty taxes is expected to increase the revenue of the government, reduce collusion and tax evasion for imported products and make trade and its administration far simpler.
Rationalization also takes into account the policy aims of the government like EDP, social policy like tax on alcohol, environmental policy like tax on plastic products and GNH as a whole.
Interestingly, during the rationalization exercise, the so called ‘bound’ import tax rates mentioned to the WTO during the WTO accession negotiations have not been considered as some of those rates are lower than existing rates of other similar goods.
For example the WTO bound rate or tax rate for fats of bovine animals under BTC head code 15.02 is 20% but the existing duty rate for similar other products under Chapter 15 is 30%.
In such cases, it is difficult to achieve the objective of rationalization of duty rates. According to the finance ministry, if Bhutan accede to the WTO these can be harmonized.