Current Problems and Challenges vis-à-vis Taxation by Estimate in Bhutan: an urge for Re-structuring

1. Current Problems and Challenges vis-à-vis Taxation by Estimate in Bhutan: an urge for Re-structuring By: Gyeltshen Department of Revenue& Customs Ministry of Finance Bhutan

2. Current Problems & challenges vis-à-vis Taxation by Estimate in Bhutan: an urge for re-structuring Synopsis • Objective of the paper • Brief History on Bhutanese Tax System • Overview on Estimated Assessment Procedure in Bhutan • Strategies proposed • Revenue Implications • Fairness and Efficiency • Merits and Demerits of the strategies proposed • Conclusion

3. Current Problems & challenges vis-à-vis Taxation by Estimate in Bhutan: an urge for re-structuring • Objective of the paper “The main objective of the paper is to propose for alternative strategies to facilitate estimated assessment of small and micro taxpayers in Bhutan who do not have the capacity to maintain accounts”. • Policy changes • Impracticability of estimation criteria • Other drawbacks inherent in the existing system or method

4. Current Problems & challenges vis-à-vis Taxation by Estimate in Bhutan: an urge for re-structuring • Brief history on Bhutanese Tax System • Taxes levied in form of kind and labor contribution • Taxes monetized only after 1961 i.e. 1st FYP • Types of direct Taxes: CIT and BIT at 30% on NP and PIT at progressive rate with maximum tax rate of 25% and minimum of 10% • Fiscal objective : In short run to continue meeting the recurrent expenditure and in long run to meet the capital expenditure and achieve self sufficiency • Almost 80% of the total BIT payers are under EA

5. Current Problems & challenges vis-à-vis Taxation by Estimate in Bhutan: an urge for re-structuring • Overview of current estimated assessment in Bhutan • Size of business: Small, medium and large • Authority to estimate tax: General Provisions of the IT Act. • Circumstances under which EA is adopted • Tax return not submitted in time • Tax Return rejected • Failure to maintain proper records as required by the statute

6. Current Problems & challenges vis-à-vis Taxation by Estimate in Bhutan: an urge for re-structuring • Estimation Criteria: • Tax paid in the previous year plus an appropriate increase; • Export data and Import data (Purchases) with the Department; • Tax paid by similar units; • Third Party information; • Information available with taxpayer.

7. Does the unit maintain proper records as required under rule ? Yes No Reliability of the accounting records Availability of import /export data from the Customs Division Purchase/Expenditure Income OK Estimate based on sales Information No Yes Yes Estimate based on Prior year tax, tax paid By similar unit or Other information Estimate based On purchase information Assessment based on accounting records

8. Current Problems & challenges vis-à-vis Taxation by Estimate in Bhutan: an urge for re-structuring • Policy Problems with Criteria prescribed in the statute: • Application of appropriate increase on previous tax payment, • Tax paid by similar units, • Determination of taxable profits. • Drawbacks in Estimated Assessment: • Reliability of available information, • Estimation Approach, • Room for Discretionary power. • International experience

9. Current Problems & challenges vis-à-vis Taxation by Estimate in Bhutan: an urge for re-structuring • Strategies proposed • Percentage on turnover: Eg. 2% on turnover as fixed tax liability, Fixed amount of MV tax depending on horse power • Income estimation instead of tax estimation • Merger of PIT & BIT • Exempt micro taxpayers from income tax • Fixed minimum income tax: Nu. 3000 per taxpayer with turnover below Nu. 1 million

10. Current Problems & challenges vis-à-vis Taxation by Estimate in Bhutan: an urge for re-structuring • Expected Revenue Implications • Assumptions: • Business units paying tax of Nu.20000 are assumed to have turnover less than 1 million. • Non-operational entities are excluded • Units affected by de-licensing are selected • Annual growth of taxpayers is assumed at 5.5%

11. (i) Income year 2004 (base year) No. of active taxpayers who paid tax 9444 taxpayers Actual collection Nu. 32.151 Million Expected No. of taxpayers with 5.5% growth 9963.42 taxpayers Expected collection in 2005 Nu. 33.915 Million (ii) Revenue impact in 2005 by exempting annual income tax i.e. Zero tax Expected No. of taxpayers with 5.5% growth 9963.42 taxpayers Expected revenue 0 Expected revenue impact Nu. (33.915 million) (iii) Revenue impact in 2005 by proposing a flat tax amount of Nu.3000 per annum per taxpayer with turnover below 1 million Expected No. of taxpayers with 5.5% growth 9963.42 taxpayers Expected revenue Nu. 29.890 million Expected revenue impact Nu. (4.025 million)

12. Current Problems & challenges vis-à-vis Taxation by Estimate in Bhutan: an urge for re-structuring • Fairness and Efficiency of the proposed strategies: • EA is fair if has fairly drawn tax laws. • A tax system is considered fair it imposes equal liabilities on people who has the same ability to pay. • Ideally, a Tax system is considered efficient if the administration cost is less, compliance cost is negligible and excess burden is relatively smaller. • Taxation by estimate is economical and efficient. • Strategies proposed do not guarantee efficiency and fairness simultaneously.

13. Current Problems & challenges vis-à-vis Taxation by Estimate in Bhutan: an urge for re-structuring • Equity/Efficiency analysis: • Consider two small business units with turnover of 1 million each. Horizontal equity: Same tax for same turnover Fixed minimum tax of Nu. 3000 would qualify it. However, if the income level is different but within 1 million, then the above proposal do not meet the equity aspect as one of them will pay more tax for less income compared to the other.

14. Current Problems & challenges vis-à-vis Taxation by Estimate in Bhutan: an urge for re-structuring • Evaluation of proposed strategies from Theory & Practice • Inherent simplicity and efficiency in the EA system. • Policy to reduce administrative burden as well as voluntary compliance cost. • Avoid complicated book keeping system which may be redundant to run a small business. • Fixed minimum tax involves less enforcement costs and compliance costs and can achieve efficiency.

15. Current Problems & challenges vis-à-vis Taxation by Estimate in Bhutan: an urge for re-structuring • Less accurate and fair as the same tax is levied on different income levels. • Fairness can be achieved only if taxpayers maintain proper books. • Fairness & efficiency cannot be achieved simultaneously. Either of the two has to be compromised to make EA functional with minimum cost. • Efficiency might become a cause for unfairness if it is overly emphasized.

16. Current Problems & challenges vis-à-vis Taxation by Estimate in Bhutan: an urge for re-structuring • Merits & Demerits of Proposed strategies • Merits • Straight forward lump sum tax, • Opportunity for taxpayer to declare, • Curtail un-necessary arbitration with taxpayers, • Cost benefit to tax authority and convenient to taxpayers.

17. Current Problems & challenges vis-à-vis Taxation by Estimate in Bhutan: an urge for re-structuring • Demerits of Proposed strategies • Not equitable, • Difficult to determine turnover, • Not pro-revenue, • Conclusion • EA should be applied temporarily with ultimate aim of making taxpayers maintain books of accounts. • EA should be implemented not only to realize revenue but also to facilitate better tax compliance.

18. Current Problems & challenges vis-à-vis Taxation by Estimate in Bhutan: an urge for re-structuring THANK YOU FOR YOUR KIND ATTENTION