As public anxiety grows over rising prices following the rollout of the Goods and Services Tax (GST), tax authorities are pushing back against claims that the new system encourages double taxation. Instead, they argue, GST is fundamentally designed to eliminate the long-standing problem of “tax on tax” and ensure fair, transparent pricing—through a built-in mechanism known as Input Tax Credit (ITC).
According to officials from the Department of Revenue and Customs (DRC) and the Ministry of Finance (MoF), GST represents a decisive shift away from Bhutan’s fragmented and distortionary indirect tax regime. At its core, they say, GST is a value-added tax system that ensures the government ultimately collects only a single 5 percent tax on the final consumer price, regardless of how many stages a product passes through before reaching the market.
“GST is not a compounding tax. It is a value-added tax,” a senior DRC official said. “The Input Tax Credit mechanism ensures there is no cascading of taxes. There is no ‘tax on tax’. What the government collects in total is exactly five percent of what the consumer pays.”
The Problem GST Was Meant to Fix
Before GST, Bhutan’s indirect tax system consisted of multiple levies applied at different stages, often at varying rates. Some goods were taxed lightly, others heavily—ranging from zero percent to as high as 100 percent in certain cases. These taxes were frequently applied on top of each other, leading to cascading effects where tax was charged on already-taxed values.
This system, officials admit, distorted prices, encouraged underreporting, and made compliance complex and opaque.
“Under the old regime, taxes were embedded invisibly into prices at multiple stages,” the DRC official explained. “Consumers rarely knew how much tax they were actually paying, and businesses often struggled to comply.”
GST, authorities argue, was introduced precisely to correct these flaws by replacing multiple taxes with one uniform rate of five percent and a transparent credit mechanism that prevents tax accumulation.
“GST does not pile up. It flows through the system and rests only with the final consumer. The tax paid at earlier stages is fully credited.”
DRC official
How Input Tax Credit Really Works
To counter public confusion, officials offered a step-by-step illustration of how ITC functions across the value chain—from production to final sale.
Consider a product manufactured and sold by a factory for Nu 100. Under GST, the factory charges 5 percent GST, or Nu 5, and remits that amount to the government.
Next, the wholesaler purchases the product for Nu 105 (including GST) and sells it onward for Nu 150, charging 5 percent GST amounting to Nu 7.50. Crucially, the wholesaler does not pay the full Nu 7.50 to the government. Instead, it claims credit for the Nu 5 GST already paid at purchase and remits only the balance of Nu 2.50.
The same process repeats at the retail stage. If the retailer sells the product to the final consumer for Nu 200, it charges Nu 10 as GST. Having already paid Nu 7.50 in GST to the wholesaler, the retailer offsets that amount and remits only Nu 2.50.
In total, the government collects Nu 10—exactly five percent of the final price—while the consumer pays Nu 210, inclusive of GST.
“This example shows clearly that GST does not pile up,” the official said. “It flows through the system and rests only with the final consumer. The tax paid at earlier stages is fully credited.”
“One of the main sources of public confusion is that GST appears on every invoice, leading many consumers to believe they are being taxed repeatedly. Authorities insist this perception misunderstands how ITC works.”
Why GST Appears Everywhere—But Doesn’t Add Up
One of the main sources of public confusion is that GST appears on every invoice, leading many consumers to believe they are being taxed repeatedly. Authorities insist this perception misunderstands how ITC works.
“Yes, GST is charged at every stage,” the DRC official said. “But the tax paid earlier is refunded through credits. What looks like multiple taxes is actually one tax moving through the system.”
In contrast, under the old system, taxes paid at one stage often became part of the cost base for the next stage—resulting in genuine “tax on tax” and inflated final prices.
“With GST, that cascading effect is eliminated by design,” the official added.
Digital Trail, Stronger Governance
Officials also emphasize that GST is not just a tax reform, but a governance reform—backed by digital systems that improve traceability, accountability, and enforcement.
A senior official from the Ministry of Finance said the digital invoicing and reporting framework under GST creates a complete audit trail across the supply chain.
“Every transaction leaves a digital footprint,” the official said. “This reduces discretion, limits manipulation, and strengthens transparency.”
The government believes this digital backbone will significantly reduce tax evasion, improve revenue predictability, and level the playing field between compliant and non-compliant businesses.
No More Leniency on Tax Evasion
Authorities have issued a strong warning to businesses attempting to game the new system. Under the GST law, tax evasion is no longer treated as a civil matter but as a criminal offence, carrying stiff penalties.
“The days of casual non-compliance are over,” a senior official said. “GST enforcement will be firm, coordinated, and uncompromising.”
The DRC is working closely with the Competition and Consumer Affairs Authority (CCAA) under the Ministry of Industry, Commerce and Employment (MoICE) to monitor pricing behaviour and prevent profiteering.
Officials say any attempt to misuse GST—such as unjustified price hikes, false invoicing, or failure to pass on tax benefits—will be dealt with strictly.
Higher prices
Despite these assurances, authorities acknowledge that the transition phase has created discomfort. Pre-GST stocks, on which taxes were already paid under the old system, are now being sold in a GST environment. Because there is no mechanism to retrospectively credit old taxes, these costs are embedded into prices.
“This is a temporary issue,” officials insist. “Once old stocks are exhausted and fresh goods are imported fully under GST, the system will function as intended.”
They also point to confusion among businesses about compliance, input credits, and pricing adjustments—factors that may be contributing to short-term price volatility.
A Call for Compliance and Patience
Authorities are urging businesses to familiarize themselves fully with GST provisions and comply proactively. According to the DRC, honest compliance benefits everyone—businesses gain predictability, consumers enjoy fair pricing, and the state secures stable revenue.
“GST rewards transparency,” the DRC official said. “Those who comply properly will not be disadvantaged. In fact, they will gain credibility and trust.”
For consumers, officials emphasize that GST’s promise lies not in the first few weeks, but in the system’s long-term impact.
“With a single rate, input tax credits, and digital oversight, GST is designed to create a fairer, cleaner, and more efficient market,” the MoF official said. “Short-term discomfort should not overshadow long-term gains.”
The Bigger Picture
As Bhutan adjusts to its biggest tax reform in decades, GST remains under intense public scrutiny. While perceptions of rising prices dominate early conversations, authorities insist that the architecture of GST is fundamentally anti-inflationary over time—precisely because it eliminates cascading taxes.
“The idea that GST creates ‘tax on tax’ is a misconception,” the DRC official said. “In reality, GST was created to end that very problem.”
Whether public confidence catches up with policy design will depend on enforcement, communication, and how quickly the transition stabilizes. For now, the government’s message is clear: GST is not the problem—it is the solution, if implemented and complied with as intended.
Tashi Namgyal
From Thimphu
