BIT collection drops to Nu 1.08bn in FY 2020-21

It has dropped by 5.30% compared to FY 2019-2020

The Business Income Tax (BIT) has further declined to Nu 1.08bn (net amount) during the FY 2020-2021.

It has not only dropped by 5.30% compared to the FY 2019-2020, but also contributed only 3% to the total revenue.

According to Finance Minister Namgay Tshering, the decline in the BIT is due to the overall performance of the businesses which were affected by the Covid-19 pandemic.

The minister shared that when there is a reduction in indirect tax (Sales tax and Customs Duty), it is assumed that there will be a reduction in prices charged to the consumers, considering that all other factors remain constant.

“Indirect tax is only one factor to price change amongst others like the cost of production, transportation charges, other expenses and profit margin of the sellers,” Lyonpo said.

The minister explained that if all other factors remain constant, the reduction in indirect tax will translate to a reduced price. But if there is an upward change in other factors then the reduction in indirect tax may not result in a reduced price as the reduction will be nullified by an increase in the cost of other factors.

However, the reduction will just stabilize and maintain the price, according to the Finance Minister.

Lyonpo said that the recent rationalization of Customs Duty to 10% couldn’t result in a reduced price for third-country origin goods because of an increase in the cost of production and supply chain disruption.

“The increase in transportation charges for both international and domestic is due to the increase in international crude oil prices after 2020,” Lyonpo said, adding that the increase in other expenses such as loading and unloading charges, transshipments, the requirement to follow the COVID protocols, and demurrage charges if any. 

Meanwhile, the tax rate reduction by the government for any business is aimed at improving consumer demand, but the tax reduction has to be translated into a reduction in price charged to the customers.

An economist, Dr. Damber S. Kharka said that if the tax reduction has to be translated into a reduction in prices charged to the customers, tax rate deduction benefits consumers. Otherwise, it will be an added profit to the sellers.

“The government on the other hand shall have lesser tax collection,” he said.

He shared that the 30% BIT for the small, cottage and micro-businesses has been ineffective and meaningless in the past since the practice of annual tax collection was based on negotiation and bargaining like in the fish market as hardly any transparent accounts are maintained by the small business and micro business firms.

“Even if they have accounts, the field level tax assessment team hardly believes in the accounts.  In such a situation whether it is 5% or 30% BIT, it does not matter,” he said. 

In addition, he said in the market, the actual tax is proposed by the assessment team based on some other criteria than taxable profit, and negotiation starts thereafter and an equilibrium point is arrived at after a long bargain.

“My recommendation on the BIT is firstly we should have the computerized purchases, sales, and expense records of the business firms that are linked to the DRC data system,” he said.

gAccording to the Department of Revenue and Customs, during the FY 2019-20 the BIT collected was Nu 11.38mn with a decline of 24.9% as compared to the previous fiscal year. The BIT contributed 4.1% to the total revenue composition.

The decline in the collection was due to the deferment of payment of the BIT for the income year 2019 for tourism and allied sectors up to June 2021 and the facilitation provided to the other sectors to pay the BIT on an installment basis by September 2020 had adversely affected the collection.

Tax revenue decreased by 16% as compared to the previous year and represented 12.7% of the GDP.

This was due to the deferment of the Corporate Income Tax and the BIT till June 2020 as part of the fiscal measure to counter the Covid-19 pandemic.

Further, the tax measures passed by the Parliament during the last winter session have been timely to respond to the COVID-19 pandemic as it provided tax relief to lower-income brackets to sustain their livelihood.

An official said that the exemption of 5% sales tax on telecom services will aid e-learning with additional data, and similarly, the revision in the Personal Income Tax slab is expected to boost disposable income and consumption.

“The fiscal incentives including the cut in the Corporate Income Tax to the micro and small businesses have enabled them to sustain their business. The enactment of the Goods and Services (GST) Act 2020 lays a strong foundation for a sustainable fiscal path.” (Acknowledge the source here)

An official added that domestic revenue is expected to further decline in the FY 2020-2021 with sectors like construction, manufacturing, and service taking a major hit by the pandemic.

Kinley Yonten from Thimphu