Taxing Rental Income

If need be, the Ministry of Finance will be devising means to improve compliance in taxing of rental income

Except for business and commercial establishments, the practice of deducting Tax Deducted at Source (TDS) on rental payments for residential properties is virtually nonexistent in Bhutan. This could lead to possible manipulation of rental incomes by house owners while filing taxes, resulting in loss of revenue for the government.

Officials from the Ministry of Finance told Business Bhutan that the ministry would definitely consider if the tax on rental income requires interventions. “As far as the taxes on rental income is concerned, there is already legal authority to tax rental income as per the existing Income Tax Act, 2001 of chapter 3, section 6,” said a finance ministry official.

According to the Income Tax Act, rental income from real property would be taxed on an accrual basis. Allowable deductions on rental incomes include interest paid on borrowings for purchase or construction of the property, 20% of the rental income for the purpose of repair and maintenance cost, municipal taxes and urban house taxes and insurance premiums. In addition, one unit of the building, occupancy of the owner, is also exempted from income tax.

“The issues of rent and taxing of rental income will require detailed study and analysis. The taxation of rental income will require sound policies, detailed survey, data and information,” said the MoF official. “The government is conscious of any fiscal policy that will affect housing prices via subsidies, tax measures and its (wealth) effects on household’s disposable income.”

However, there are proponents who believe that strict enforcement of income tax rules on rental incomes would in fact plug the hole through which the government loses huge amount in tax revenue every year. Such measures would also stabilize the artificial inflation in house rents.

The finance ministry has however maintained that any shift in policy has to be based on detailed research and analysis. “Tax deductibility of interest payments and taxation of the imputed rental value of the house are just a few examples of how fiscal policy can dramatically impact on housing markets,” said the MoF official.

He also said that the ministry has no intention to complicate the implementation of Tenancy Act and create artificial inflation in the rental income business. “However, if required the ministry will definitely examine and devise ways and means to improve the compliance in taxing the rental income.”

Meanwhile, the house owners claim that they do not get any tax incentives during the construction and that income tax is immediately levied from the first rent collected. While on the other hand, a hotel during construction and furnishing get tax waiver on construction materials and import of furniture and a 10-year tax holiday.  Hotels are therefore accorded double tax relief incentives.

The finance ministry’ stand is that the fiscal incentives were provided to stimulate the key priority sectors that have the potential to promote private sector development, create employment opportunities and strengthen economic development in the country. “Hotels have huge value chain and trickle-down impact on tourism industry, employment, convertible currency and airline industry.” 

“If property assets, real estate business and rental income have similar potential to contribute towards the development of private sector, the government will definitely review and see how to redistribute the burden of taxes on rental income and ensure end-consumers are not burdened by taxes. This is ultimate vision of this government, narrowing the gap,” said the finance ministry official.

According to records with Thimphu Thromde, currently there are around 6,246 buildings, 5,768 residential units, and 1,126 commercial units in Thimphu Thromde.  Around 552 buildings are under constructions. The interest rates on commercial housing ranges from 8.93% to 12.90% and the tenure of the interest rate is 20 years.

Dechen Dolkar from Thimphu