Bhutan’s domestic revenue for the Fiscal Year (FY) 2025–26 is projected to hit Nu 73.2 billion, marking an increase of nearly Nu 11 billion compared to the FY 2024–25 estimate of Nu 62.2 billion. The figures are drawn from the Ministry of Finance’s (MoF) Fourth Quarter Macroeconomic Situation Report.
The upward revision reflects deferred inflows of dividends and profit transfers from the Punatsangchhu-II Hydropower Project (PHPA-II), which are expected to materialize in FY 2025–26 after delays in the previous fiscal year.
While revenue collection is projected to rise steadily in the medium term, estimates remain slightly lower than earlier forecasts due to ongoing tax reforms.
Meanwhile there has been key changes in the tax structure, such as merger of Business Income Tax (BIT) and Personal Income Tax (PIT), reduction of Corporate Income Tax (CIT) to a uniform 22% from the previous 30% for state-owned enterprises and 25% for private firms and exemption of inter-corporate dividend tax to reduce double taxation and encourage reinvestment.
These measures will initially weigh on revenues. For instance, Druk Holding and Investments (DHI) contributions are expected to fall from Nu 3.2B to about Nu 1B once the exemption takes effect. Similarly, the elimination of BIT from FY 2026–27 will reduce revenues by an estimated Nu 2B. The lower CIT rate will further moderate growth.
However, the upcoming implementation of the Goods and Services Tax (GST) is projected to offset much of this decline. The GST, scheduled to take effect in 2026 with partial impact in FY 2025–26, is expected to generate around Nu 14B in revenue initially. Though estimates remain conservative due to potential rollout challenges, the MoF anticipates efficiency gains over time will make GST a more reliable and buoyant source of revenue than the current sales tax regime.
The MoF projects a structural shift in Bhutan’s revenue profile beginning FY 2026–27. Direct taxes will decline, largely due to the dividend tax exemption and BIT-PIT merger. Indirect taxes and non-tax revenues are expected to rise, supported by GST collections. Temporary reliance on higher DHI dividend payouts will cushion revenue shortfalls until GST stabilizes.
According to the ministry, this transition from income-based to consumption-based taxation represents a strategic shift in Bhutan’s fiscal architecture. The move is designed to broaden the tax base, ensuring that revenue collection is not overly dependent on a narrow set of taxpayers, such as corporations and state-owned enterprises. By shifting the emphasis toward consumption, the government can capture revenue more equitably across the economy, as taxes are applied when goods and services are purchased rather than only when profits are declared.
The ministry also highlighted that consumption-based taxation tends to be less distortionary than income taxation. Lowering Corporate Income Tax (CIT) rates and exempting inter-corporate dividend taxes are expected to reduce the tax burden on businesses, thereby encouraging reinvestment, improving competitiveness, and attracting foreign investment. At the same time, the introduction of the Goods and Services Tax (GST) is expected to simplify the tax system by replacing multiple sales and indirect taxes with a unified structure, improving compliance and reducing administrative costs.
Efficiency gains are another critical goal. A GST framework, supported by digital systems, will enhance transparency, reduce opportunities for tax evasion, and make collection more predictable. Over time, this will contribute to a more stable and buoyant revenue stream, even as traditional income tax revenues taper off.
The ministry further noted that the reforms are aligned with international best practices, where many economies—both developed and developing—have moved toward consumption-based taxation as a way of strengthening fiscal resilience. For Bhutan, this shift is also intended to create a more investment-friendly environment by lowering income tax rates while ensuring that public revenues remain sustainable through broader consumption-based contributions.
Ultimately, the government views the reforms not only as a fiscal necessity but also as an economic growth strategy. By reducing distortions in the tax system and aligning with global norms, Bhutan aims to build a framework that is fairer, more efficient, and better suited to support its long-term development goals.
Taxes remain the largest source of government income. In FY 2023–24, tax revenue was estimated at Nu 35.04B. It rose to Nu 44B in FY 2024–25 and is budgeted at Nu 46.94B in FY 2025–26 (slightly revised to Nu 46.91B). Projections for FY 2026–27 and FY 2027–28 show collections at Nu 42.25B and Nu 45.26B, respectively.
Within this: property tax is estimated at Nu 936M in FY 2025–26 and taxes on goods and services projected at Nu 13.81B. International trade taxes are expected to contribute Nu 866M, up from Nu 929M in 2024–25 and Nu 640M in 2023–24.
Meanwhile, non-tax revenues are estimated at around Nu 23B in FY 2025–26, rising slightly to Nu 24B in FY 2026–27.
The MoF acknowledged that in the short term, delays in dividends and profit transfers will constrain fiscal space, limiting resources for public investments. However, in the medium to long term, the reforms—particularly GST—are expected to enhance revenue sustainability, reduce distortions, and improve the business environment.
“The shift from income to consumption taxes is designed to increase productivity and create a less distortionary system,” the report noted. “While short-term collections may face pressure, these reforms will strengthen fiscal resilience and support long-term growth.”
Bhutan’s revenue trajectory shows steady growth despite transitional challenges, underscoring the government’s commitment to long-term fiscal sustainability. While short-term collections are constrained by delays in hydropower dividends and the initial revenue dip from tax reforms, the underlying strategy is clear: restructure the tax system to make it more efficient, equitable, and growth-oriented.
A central pillar of this strategy is the government’s reliance on structural tax reforms. The merger of Business Income Tax (BIT) and Personal Income Tax (PIT), reduction of Corporate Income Tax (CIT) to a uniform 22 percent, and the exemption of inter-corporate dividend taxes are not simply revenue measures—they are designed to modernize the tax framework. By reducing double taxation, the reforms allow companies, particularly those under Druk Holding and Investments (DHI), to retain more earnings for reinvestment, strengthening the productive base of the economy.
This signals a policy shift from viewing taxation purely as a revenue tool toward using it as an instrument for economic development. Encouraging reinvestment should, over time, stimulate private sector growth, attract foreign direct investment (FDI), and diversify Bhutan’s economic base beyond its traditional dependence on hydropower.
At the same time, the introduction of the GST represents an effort to broaden the tax base by capturing revenue more evenly across consumption. Unlike profit-based taxes, which are heavily concentrated among a small group of corporations, consumption-based taxes distribute the burden more widely, ensuring stability even when corporate earnings fluctuate.
Taken together, these measures reflect a deliberate attempt to build fiscal resilience—a capacity to withstand external shocks, stabilize revenues, and create a more predictable environment for both government planning and private investment. While the transition period will test Bhutan’s ability to manage short-term fiscal pressures, the reforms signal a forward-looking approach: one that seeks to balance revenue generation with economic competitiveness and investor confidence.
With domestic revenue projected to cross Nu 73 billion in FY 2025–26, Bhutan is not only strengthening its fiscal capacity but also laying the groundwork for a more sustainable and business-friendly revenue system. The reforms underway reflect a dual strategy: addressing short-term fiscal pressures while setting the foundation for long-term economic resilience.
Sherab Dorji from Thimphu
