“If assessments cannot be completed within the designated time frame and lead to further delays, the fines and penalties imposed will be limited to a 24-month period instead of multiplying them over 7 to 8 years.” PM.
In a recent statement during the Monthly Last Friday meet (MLFM) on May 26, the Executive Director (ED) of the Construction Association of Bhutan (CAB) voiced concerns of contractors in the country concerning tax deductions, delayed assessments, and discrepancies in advance payments.
According to the ED, these issues have been negatively impacting the construction industry and hindering its growth.
One of the primary issues highlighted by the ED, Tshering Yonten, was the deduction of 2% Tax Deducted at Source (TDS), which is to be collected by the conduction of annual assessments. However, the annual assessments seldom happen.
According to the ED, when contractors secure a project, annually, an assessment is conducted to verify the accuracy of the inputted amounts. If the expenditure declared by the contractors is deemed incorrect, additional taxes are imposed on their profits. However, if the expenditure is less, the contractors are entitled to a refund.
According to ED Tshering Yonten, “Unfortunately, the government has been withholding these refunds, promising to adjust them with future projects or in the following year.”
He also added that this practice has caused financial strain on the contractors, as they are unable to retrieve their rightful refunds.
Additionally, the ED said that while the government is supposed to assess the contractors’ work each year, a shortage of manpower has resulted in assessments occurring only once every 5 to 8 years.
“This significant delay leads to challenges in maintaining proper documentation, often resulting in misplaced or lost records over the extended duration,” he said, adding that consequently, the government penalizes the contractors for not producing the required documents, despite its failure to conduct timely assessments.
“This double standard has created an unjust situation for the contractors who bear the fines for lost documents due to the government’s late assessment practices”, he added.
Moreover, the contractors are dissatisfied with the government’s assessment criteria.
Tshering Yonten further shared that, certain expenses, such as vehicle purchases for construction purposes and costs related to food and lodging for workers, are not considered valid expenditures during the assessment process by custom and revenue officials.
Contractors argue that these expenses should be recognized and accounted for when calculating their taxes.
“Currently, they multiply the amount spent on food and lodging for workers by five years and imposes fines based on this calculation,” said the ED.
In this context, CAB had proposed either revising the assessment rules to include these expenses or conduction of assessment annually as per the rules and regulations; or “eliminate the assessment entirely and increase the overall tax from 2% to 3%”.
Tshering Yonten made this suggestion based on the fact that Indian contractors engaged in construction projects in Bhutan are currently liable to 3% TDS without assessment. Unlike their Bhutanese counterparts who undergo assessments and potential adjustments, Indian contractors are required to pay a fixed 3% tax without any assessment process.
The contractors also draw attention to rules for advance payments in various parts of Bhutan. The ED said, “Some contractors receive 20% of the total project cost as a work advance, while others receive 30% or 50%. This inconsistency creates an uneven playing field and raises concerns of favoritism within the industry.”
Additionally, one of the private sectors’ member also said; “It is not a willful act of violence or negligence. When the contractors categorize certain expenses as valid expenditures, but the revenue and customs authorities do not recognize them as such, it is seen as a misclassification of taxable items. Consequently, these expenses are multiplied over a period of 7-8 years, resulting in higher tax obligations.”
He also said that conducting annual or 24-month assessments would lead to reduced tax liabilities.
Acknowledging these issues, the Prime Minister (PM) agreed on issues like the need for more frequent assessments, stressing that the current delay of 7 to 8 years is unacceptable.
The PM recognized the validity of the ED’s suggestion to conduct annual assessments as a fair and professional approach that aligns with the contractors’ interests.
“However, increasing the TDS rate from 2% to 3% without assessments would lead to a disproportionate burden on contractors, particularly if their profits exceed the increased tax rate,” said the PM, adding that keeping the TDS rate at 2% while implementing annual assessments is professional based on what is actually gained.
To address the concerns raised, the PM said that discussions will be held regarding the duration of assessments, considering either a 24-month or 12-month assessment cycle.
“Additionally, if assessments cannot be completed within the designated time frame and experience further delays, the fines and penalties imposed will be limited to a 24-month period instead of multiplying them over 7 to 8 years,” the PM said.
Tshering Pelden from Thimphu
