Bhutan’s Goods and Services Tax (GST) was introduced as a landmark reform, intended to modernise the country’s tax system, strengthen domestic revenue mobilisation, and reduce long-term dependence on hydropower income and external grants. Framed as a technical adjustment to improve efficiency and transparency, GST has instead become one of the most debated economic policies in recent years. Its implementation has exposed not only administrative weaknesses, but also deeper structural tensions in Bhutan’s transition toward a more self-reliant, tax-based economy.
In principle, GST is a well-established and widely used consumption tax. By taxing value addition at each stage of production and distribution, it reduces cascading taxes and is meant to be neutral across sectors. For Bhutan, the reform carried particular importance. As hydropower revenues fluctuate and concessional financing becomes tighter, the government needs a stable and predictable revenue base to fund social services, infrastructure, and development priorities. GST was meant to provide that foundation.
In practice, however, the rollout is out to become uneven. While GST would improve revenue performance in aggregate terms, it has already generated confusion, compliance challenges, and growing dissatisfaction among businesses and consumers. These issues are not simply the result of resistance to taxation, but reflect deeper constraints in administrative capacity, business readiness, and public communication.
One of the most significant challenges has been the readiness of tax administration systems. GST is heavily reliant on digital infrastructure, accurate invoicing, timely filing, and efficient refund mechanisms. Bhutan’s tax administration has made progress in recent years, but the scale and complexity of GST placed immediate pressure on systems that were still evolving.
These administrative frictions will continue to be felt most acutely by small and medium enterprises. Bhutan’s private sector is dominated by micro and small businesses, many of which lack formal accounting systems, trained staff, or the resources to hire professional tax advisors. GST compliance requires regular filing, systematic record-keeping, and familiarity with digital platforms. For many small operators, this represents a sharp departure from past practices. What was intended as a neutral consumption tax could come to be seen by some entrepreneurs as an additional administrative burden that raises costs without clear benefits.
As a result, compliance will become uneven. Some businesses have sought to remain below registration thresholds, underreport turnover, or continue operating informally. This undermines the objective of broadening the tax base and risks creating an uneven playing field where compliant firms bear a disproportionate burden. Over time, such dynamics can weaken the private sector rather than strengthen it.
Public perception has further complicated GST’s acceptance. Since its introduction, GST has been widely blamed for rising prices, particularly at a time when households are already under pressure from higher food and fuel costs. While some price increases reflect legitimate tax pass-through, others appear linked to opportunistic pricing and weak enforcement. The lack of clear, accessible communication on GST rates and coverage has allowed misinformation to spread, reinforcing the belief that GST is a primary driver of inflation. Once a tax becomes associated with cost-of-living pressures, public resistance hardens, making compliance as much a political issue as an economic one.
Policy design choices have also played a role. Bhutan’s GST framework includes multiple exemptions and zero-rated items, often introduced to shield vulnerable groups or protect sensitive sectors. While these measures are understandable, they narrow the tax base and complicate administration. A narrow base requires higher rates on remaining items, increasing distortions and incentives for avoidance. It also opens space for lobbying, as sectors compete for preferential treatment. International experience suggests that GST functions best when it is broad-based, with social protection delivered through targeted spending rather than tax exemptions. Bhutan’s challenge lies in balancing equity concerns with the need for a simpler, more efficient system.
Perhaps the most fundamental issue, however, lies beyond GST mechanics. For many Bhutanese, the link between taxes paid and public services delivered remains weak. When infrastructure gaps persist, service quality is uneven, and unemployment—especially among youth—remains high, taxpayers question the value of greater compliance. This perception undermines the social contract that underpins any effective tax system. GST, in this sense, will become a mirror reflecting broader concerns about governance, accountability, and development outcomes.
From a policy perspective, the way forward is less about abandoning GST and more about fixing it. Simplification should be a priority. Frequent changes to rules, unclear guidance, and inconsistent enforcement create uncertainty and discourage voluntary compliance. Clear, stable regulations, supported by plain-language guidance and sector-specific communication, can reduce confusion and build trust. Predictable timelines for refunds and audits are equally important.
Investment in tax administration is unavoidable. Digital platforms must function reliably before enforcement is tightened. Strengthening IT systems, expanding helpdesk support, and training tax officials are foundational steps, not optional add-ons. A risk-based approach to audits, focusing on high-risk cases rather than blanket scrutiny, would reduce the compliance burden on small and compliant businesses.
Targeted support for SMEs is also critical. Many compliance failures reflect capacity constraints rather than deliberate evasion. Simplified filing regimes, free or subsidised accounting tools, and structured training programmes can ease the transition. Over time, as businesses formalise and scale up, compliance requirements can be gradually strengthened without stifling entrepreneurship.
On the policy side, broadening the GST base while protecting vulnerable households through direct transfers or targeted subsidies would improve both efficiency and fairness. Using GST exemptions as a social policy tool is costly and opaque. Direct spending is more transparent and allows tax policy to focus on revenue mobilisation rather than redistribution.
Transparency will ultimately determine GST’s long-term legitimacy. Clear reporting on how GST revenues are used—whether to fund health, education, infrastructure, or employment programmes—can help rebuild public confidence. When taxpayers see tangible outcomes, compliance becomes easier to sustain.
Responsibility, however, does not rest solely with the government. Businesses must recognise that taxation is a collective obligation, not a discretionary cost. Widespread evasion raises the burden on compliant firms and weakens the system for everyone. Consumers, too, play a role by demanding proper invoices and distinguishing between genuine tax costs and unjustified price increases.
Bhutan’s experience with GST underscores the complexity of fiscal reform in a small, transitioning economy. The discomfort surrounding GST is real, but it reflects a deeper shift away from a development model reliant on grants and state-led investment toward one grounded in domestic revenue and private sector participation. The choice is not between GST and no GST, but between a system that breeds resentment and one that supports sustainable growth.
Handled poorly, GST risks eroding trust and weakening the social contract. Handled well, it can become a cornerstone of fiscal resilience at a time when Bhutan’s economic margins for error are narrowing. The outcome will depend less on the tax itself than on the institutions, policies, and shared responsibility that surround it.
Tandin Wangchu
Chamgang Thimphu
