In order to overhaul the existing sales tax regime, the government has proposed to introduce Goods and Services Tax (GST) with a standard single rate of 7% in place of multiple rates under the existing sales tax regime during the third session of the third parliament on Thursday.
Finance Minister Namgay Tshering said the GST implementation will be fully supported by an automation system. This proposed rate provides an ideal balance between impacts on revenue collection versus burden of tax on the taxpayers.
“It will strengthen tax administration, improve tax payer services, minimize leakages and enhance tax collection,” he said, adding upon full implementation of GST at standard rate of 7%, the additional annual revenue is estimated at Nu 3mn.
In addition to the GST, now luxury goods (car and motor bikes) and sin goods (alcohol and tobacco) are subjected to excise equalization tax ranging from 20% to 100%.
Lyonpo said as GST is consumption based tax, it is simple, smart, self- regulating and eliminates cascading effect of tax. “Under the GST regime, all essential goods and services related agriculture, education and health will be exempt and export will be zero rated.”
He added that all GST registered business entities will receive input tax credit. “GST is expected to have positive impact on the economy due to reduced tax burden and improved competitiveness.”
Lyonpo highlighted that GST is payable on most goods and services consumed in the country, apart from some exceptional categories of supplies such as residential rent and financial services, and exemptions that support the policy outcomes of the government.
He said GST has been adopted in over 166 countries. It is sometimes called value added tax. “Broad adoption of GST is because the tax is collected by businesses on the value added at each stage in the distribution chain. “However, as a consumption tax, the economic burden of the tax is borne by the consumer of the goods or services.”
Likewise, to minimize the burden of compliance and administrative cost, the small business with an annual sales turnover below GST registration threshold are not required to be registered for GST.
However, these businesses may opt to register voluntarily. Businesses that are not registered do not collect GST on the price of goods or services they supply to their customers, and they do not claim input tax credits for GST charged by their suppliers or that they have paid on their imports.
Unregistered businesses do not charge GST to their customers or pay GST to the Department of Revenue and Customs (DRC). “However, when they purchase stocks or other inputs from a registered business they will incur the cost of GST charged to them by the suppliers.”
Reforms on GST
The introduction of the GST, it imposed on supplies, which includes the provision of goods and services, along with most other transactions, such as sales and leases of land and building, hiring arrangement and granting and assignment of intellectual property and other rights.
The explanatory memorandum of GST stated that GST is also payable on imports of taxable goods at the same times as customs duty is payable or would be payable if the goods were subjects to customs duty.
Likewise, business entities or other economic activity are liable to pay GST on their sales and other supplies. “If their annual sales turnover is equal to or exceeds the registered thresholds of Nu 5mn.”
A person who imports goods into Bhutan is liable to pay GST on the import, whether or not they are in business and regardless of their sales turnover. “The supply is made through an electronic distribution platform; the liability to pay GST rests with the platform operator.”
Exemption and Zero-rating
While most supplies of goods and services, and imports of goods are subjected to GST, some are not. The exceptions that are not subject to GST are exempt supplies and import, and zero-rated supplies and imports.
The explanatory memorandum of GST stated that an exempt supply or import is not subject to GST. A business that makes exempt supplies is not entitled to claim input tax credits for the GST charged to them by their suppliers of the inputs relating to the exempt supplies, nor are they able to claim inputs tax credits for GST paid on any associated imports.
The most common categories of exempt supplies are rental supplies of residential housing and certain financial services, including lending money, taking bank deposits and financial investments, and life insurances.
Likewise, rental housing is exempted to provide equality between renters and homeowners. Financial supplies are exempted because it is not practicable to collect GST on financial services. “Rental housing and financial supplies are exempted in almost all GST systems.”
Zero-rated supplies are taxable supplies but they are taxed at the zero percent. “Zero rated supplies are not subject to GST.” Similarly, imports of goods that are zero rated are not subject to GST.
However, unlike businesses that make exempt supplies, businesses that make zero-rated supplies are entitled to inputs tax credits for GST charges to them by their supplies on inputs related to their zero rated supplies and for GST they pay on associated imports.
“Exports are zero-rated.” This means that businesses that only engage in exporting do not have any liability for GST on its sales. They are entitled to inputs tax credits for GST charged to them by their suppliers.
The explanatory memorandum of GST stated that exports are zero rated to ensure consistency with the destination principle. The credit offset mechanism allowing inputs tax credits for GST passed on to the exporter by suppliers that ensures there is no GST cost embedded in the price the exporter charges for its goods or services.
Finance Minister Namagay Tshering said the transition to the GST is facilitated by ending the imposition of sales tax. “Modification of the excise equalization tax system,” he said, adding that establishing tax administration provision is support of effective tax administration.
Kinley Yonten from Thimphu