As the Indian government embarks on a new goods and services tax (GST) regime from July 1, Bhutan will experience two-edged implication. Imports may become cheaper, but exports could become dearer.
The GST, in the Indian context, is designed to boost export and limit import while stimulating their domestic industries. Under the integrated GST Act of India, no taxes will be levied on exports while imports to India will be treated equivalent to inter-state trading unlike in the past where inter-state taxes are levied.
This means GST will subsume 17 different taxes within India and imported goods in India will no longer enjoy the same preferences. Because of inter-state taxes in India, Bhutanese goods enjoyed an upper edge in terms of competitiveness in Indian market. Now, whether Bihar imports goods from Bengal or Bhutan, it will be treated the same.
The good news is that retailers in Phuentsholing will be able to sell goods at a cheaper rate than Jaigoan, provided the Bhutanese retailer pass the benefit down to consumers. This is because exports from India will not be levied GST. For domestic market in India, there is Central GST (CGST) and state GST (SGST) levied separately.
As per the presentation made to the Bhutan Chamber of Commerce and Industry (BCCI) by Naman Sidarth, a consultant with ImsTaxoserivce in India, Bhutan is the only country in Asia Pacific with the sales tax regime. All others have value added tax (VAT) or GST.
“But GST is the modified version of VAT,” he said.
Should Bhutan opt for GST regime, Ethiopia or New Zealand’s model is the best, he said.
While it is obvious that Bhutanese products will lose the competitive edge with the same production cost, the question some industrialists raise is how can Bhutan promote the local industry. In fact, the country has already injected Nu 5B into the economy to enhance export, substitute import and to generate employment.
The greatest barrier in India currently is the non-tariff barrier among the states. However, the Indian government is also going to implement a law stating goods can only be inspected once in one state and any state cannot hold the goods in transit for more than three days, thus reducing the transportation cost.
Bhutan, for instance, exports mineral water bottles to India and it enters India without any duty. For a retailer in India, due to inter-state taxes and non-tariff barriers, it is cheaper to import from Bhutan than the neighbouring states. VAT too is levied at point of sales. Now, the importer in India will have to pay the GST at source and it cannot cascade down to the consumers be it the water from Bhutan or any other parts of India.