The National Council (NC) recommended that Income Tax (Amendment) Bill 2020 could seriously impact the national goal of economic self-reliance and create more deficits at this time.
In this context, NC’s Economic Affairs Committee (EAC) proposed two options to the house, either not to pass the Bill in its entirety or to pass with amendments in the clauses.
The majority of the NC members supported
the second option since as per the provisions of law NC cannot revoke a money bill.
The NC adopted each recommendation proposed by the committee on the sections of the Income Tax (Amendment) Bill, 2020 with 17 ‘yes’ votes, five ‘abstain’ and one ‘no’ vote on February 5.
The Bill would be forwarded to the National Assembly (NA) for re-deliberation.
The house recommended the commencement date of the Bill in line with Section 46B of Public Finance (Amendment) Act of Bhutan 2012.
The Section 46B states, “The imposition or increase of any tax or abolition, reduction or remission of any existing tax once passed as law by Parliament, shall be applied retroactively from the date it was initially tabled in the National Assembly”.
The house adopted to have 30% of the net profit and not 25% as adopted by National Assembly (NA) as an income tax for companies other than state enterprise under full tax liability.
Similarly, NC adopted to retain the original clause of Income Tax Act, 2001 to tax 30% of the net profit for permanent establishment from the NA’s 25%.
The NC adopted Nu 200,000 per annum of net taxable amount from taxation as a basic exemption from NA’s Nu 300,000.
Additionally, NC adopted to exempt Nu 10,000 per annum from Personal Income Tax (PIT) as total dividend income from Bhutanese companies rather than Nu 30,000 as adopted by NA.
Moreover, the allowable deductions for education expenses for students increased to Nu 350,000 from NA’s Nu 250,000.
However, the upper house adopted the NA’s recommendation on the publicity and advertisement expenses which allows deductions on actual expenses incurred or 5% of assessed gross income, whichever is lower.
As per the house’s EAC, Nu 633.620mn per annum would be foregone from the Income Tax (Amendment) Bill 2020 and overall estimated revenue of Nu 826.03mn per annum from the tax revisions proposed by the government.
The committee recommended that the estimated revenue losses are expected to be recovered from imposition of sustainable development fee (SDF) on regional tourists of Nu 933.560mn, tax on lottery winning and surcharge on the PIT.
However, SDF revenue generation is subject to change as there is no assurance whether there would be a sustained number of regional tourists with the introduction of SDF fee of Nu 1,200 per person per day and tourism industry sensitiveness towards global economic situation and epidemics like the recent outbreak of Novel Corona virus.
Additionally, there is no actual timeframe for the cabinet’s proclamations for the Goods and Services Tax (GST) to come into force and it is not known when the revenue from the GST would be realized.
The committee also found out that it would be undesirable to adopt the Bill, highlighting that the country faces an estimated overall budget deficit of about Nu 29bn in the 12th FYP (2.4% of Gross Domestic Product (GDP)), which would have to be resourced either through borrowings or grant.
Besides, as per the fiscal framework for 12th Five Year Plan (FYP) period, fiscal deficit forecast for fiscal year, 2019-20 was Nu 5.809bn or 2.7% of GDP.
Additionally, within the third quarter of the fiscal year 2019-2020, the fiscal deficit has risen to Nu 7.476bn or 3.08% of GDP.
The committee also pointed out that the fiscal framework of 12th FYP takes into account of revenue to be generated from commissioning of hydropower projects like Mangdechhu Hydropower (MPH), Punatshangchhu Hydropower I, Punatshangchhu Hydropower II, and Nikachhu Hydropower.
While the revenue from MHP will wholly be absorbed by recent increase of pay and allowances for public servants, the timeline for commissioning of both PHPA-I and II are uncertain.
Meanwhile, as Bhutan graduates from Least Developed Country by 2023, the country would no longer be entitled to concessional loans and incoming of grants will be reduced substantially.
Further, these would lead to financing our development activities through domestic revenue, and the committee recommends broadening the domestic revenue collection as much as possible.
The committee also raised the issue of tax payers slab to be reduced by more than 50% and the income threshold revised from Nu 100,000 to Nu 200,000 in 2016. “Would it be justifiable for the government to revise it again within the span of just three years?”
Moreover, the committee also stated import driven Bhutanese economy resulting in trade and current account deficit.
According to Royal Monetary Authority’s report 2019, current account deficit in 2018-19 was Nu 39.677bn (23.7% of GDP), which increased from Nu 31.604bn (19.5% of GDP) in 2017-18.
The committee states that the prolonged existence of current account deficit is known to result in growing public debt, which may leave undue burden on the future generation.
Chair to the Economic Affairs Committee, Member of Parliament, Ugyen Tshering said the current reforms on the income tax was mainly on tax exemption on PIT and decrease in the company income tax from 30% to 25%.
However, he said that there are no changes made in the business income tax sharing his concerns on the impact of the tax reforms in the country’s economy, he submitted that the committee recommends to retain the company income tax at 30%.
Presenting the Bill on January 31, Finance Minister, Namgay Tshering said the objective of the tax reforms are intended to narrow the gap between the rich and poor, modernize and widen the existing system of taxation, and encourage people to work harder with the tax exemption among others.
Moreover, he said the tax reforms would bring greater impact on the economic growth of the country and government plans to move towards digital transformation. Additionally, Lyonpo said it would benefit over 21,000 tax payers, 377 private companies, 12, 571 business entities and 122 pensioners.
The bill was adopted by the National Assembly on January 30 and was forwarded to the NC for the review.
The bill is one of the six money bills proposed in NA, of which the Goods and Services Tax Bill of Bhutan 2020 and Property Tax Bill of Bhutan 2020 are new bills and rest are amendments.
Thukten Zangpo from Thimphu