Everyone is talking about the Pay Commission’s report. And I too will gradually join the conversation. To start, I wish to discuss the Commission’s recommendation to increase fuel taxes.

Everyone would remember 2013.

The country was experiencing an economic crisis. In its efforts to address the critical shortage of Indian rupees, the central bank imposed a series of policies including restricting the supply of rupees; rationing rupees to Bhutanese traveling to India for business, studies, medical treatment or pilgrimage; closing bank accounts of Indian citizens; and suspending loans in several sectors. These policies did little to solve the rupee crisis. Instead, they fueled panic, prompting citizens to hoard Indian currency. The government also added to the panic by curtailing construction, banning the import of vehicles and furniture, and selling hundreds of millions of dollars from the country’s reserves.

The result was that Bhutanese were buying rupees at a premium, paying Nu 110 for every Rs 100 when in fact the two currencies were pegged at equal value. More importantly, the entire economy took a big hit, growing at just 2.14% in 2013, the lowest GDP growth in decades.

So, soon after assuming office in 2013, I worked closely with RMA and successfully addressed the rupee crisis. In addition, we gradually improved the economy by injecting liquidity in the banking system, investing in infrastructure (notably in widening the East-West Highway, building central schools, improving airports, blacktopping gewog roads, constructing farm roads, and expanding the electricity and telecom network), reducing interest rates, improving ease of doing business, waiving taxes for small businesses, establishing REDC, and providing unprecedented support to hydropower, tourism, agriculture, livestock and CSIs.

Our hard work paid off. GDP growth rates increased from a low of 2.15% in 2013 to 5.4% in 2014, 6.6% in 2015 and 8% in 2016. Additionally, GDP was forecast to grow by 8.4% in 2017 and 9.2% in 2018.

Table by The Bhutanese

And to ensure that the economy continued to grow, fuel prices were reduced drastically in November of 2017. The idea was that lower fuel prices would drive down the cost of construction, traded goods and some other services. The idea was also to allow truck drivers and taxi drivers, most of whom own the vehicles they drive, to earn more money. And finally, the idea was to make travel cheaper in rural Bhutan where farmers are required to drive much longer distances to get to neighboring villages, gewog centers and dzongkhag headquarters.

That’s why I was alarmed to read the Pay Commission’s recommendation to increase taxes on fuel. Specifically, they recommended that “In order to promote the Polluter Pays Principle, it is timely to revise the green tax on fuel. For example, if the green tax is revised by 5%, there is opportunity to generate additional revenue of Nu.450 million per annum.”

If increased consumption of fuel is leading to increased pollution, I would support an increased “green tax”. But I would do so on condition that revenue from green tax should be used for climate change mitigation and adaptation measures, not to finance increases in salaries.

Otherwise, the so-called green tax must not be misused. In fact, the price of fuel should not be increased so soon after they were deliberately reduced. Doing so would affect the incomes of truck drivers, taxi drivers and farmers. But, and more importantly, raising taxes on fuel would risk undoing all the hard-earned gains we have made in the economy since 2013.

In this context, the government should remember 2013.

The National Assembly passed the Tax Revision Bill last week. The Bill is now with the National Council. The Council will discuss the Bill, but, because it is a “money bill”, the Council can only make suggestions and recommendations that the National Assembly may, or may not, chose to accept.

(Last year, the Assembly did not accept any of the Council’s recommendations on the budget and tax revision bills. In fact, the Assembly just skimmed through the recommendations, barely discussing them.)

The National Assembly has passed the Tax Revision Bill. But, we didn’t discuss it properly. After the Bill was introduced, the members made general comments. But the specifics of the Bill, including the individual taxes were not discussed, and just one item – Green Taxes on vehicles – was put to the vote.

I’m happy that the National Assembly didn’t approve most of the taxation measures. In fact, in my humble opinion, even the reduced green tax should not have been approved, given that the government failed to make a strong enough argument justifying the tax.

Still, we should have discussed the bill properly. The government should have justified each and every tax raise that they had proposed. And the Assembly should have debated the proposals thoroughly before deciding to approve or reject them.

Here are some of the issues I’d hoped to raise:

Justification to raise taxes. The Tax Revision Bill proposed introducing a Green Tax (for vehicles, fuels, lubricants, kerosene, LPG, refrigerators, freezers and air conditioners); raising the Excise Duty (on alcohol, domestic and imported); and raising the Sales Tax (on meat, fish and eggs, silk fabrics, furniture, and power chainsaws).

The government informed the Assembly that the proposed taxes would help address the ongoing rupee shortage. But we didn’t get to discuss how, and by how much, the taxes would reduce imports from India, or enhance overall exports.

I’m all for raising taxes. But only if the government can justify, with numbers, why the taxes need to be raised and how the increased revenue will be spent. The government would also have to prove that the increased taxes would not overburden the people, directly or indirectly, and that they would not make doing business any more difficult.

In this case – if taxes are being raised to address the rupee shortage – I also wanted to know that the government would not spend the extra revenue generated. Spending that money would just add to the rupee problem, not solve it, as almost all of the government’s expenditure ultimately goes to finance imports of goods and services, mostly from India.

Green tax. All taxes must have a legal basis. The Income Tax Act authorizes the imposition of PIT, BIT and CIT. The Sales Tax, Customs and Excise Act authorizes sales tax, customs duty and excise. The Land Act legitimizes land tax. The Local Government Act authorizes the collection of land tax, building, cattle, grazing, entertainment, advertisement and other taxes. And so on…

The so-called “green tax” is a new tax. As such, the Parliament should have first discussed the need for this tax, and then amended the relevant laws to permit the government to impose this new tax. Then, and only then, either as part of an amended law or as part of the Tax Revision Bill, should the government have proposed to levy the tax.

But I had several other questions on the Green Tax. One, why levy a green tax if the real objective is to reduce the rupee deficit? The purpose of a green tax should be to protect the environment, not to reduce the rupee deficit, and the proceeds from tax should go to programs that solve environmental problems.

But, two, do we have major environmental problems, and, more importantly, would the proposed green tax result in positive and meaningful contributions to the environment?

Three, wouldn’t taxing kerosene increase the cost of living for our poor? They are the ones who are the most dependent on kerosene for cooking and lighting. And wouldn’t taxing fuel increase the cost of transport, and therefore, the cost of goods? Would the general population be able to afford the resulting increase in the price of goods and services?

And four, do we really want to tax refrigerators and air conditioners? Would the taxes result in a decrease in the number of refrigerators, and if so, would that make a meaningful contribution to the environment? On the other hand, shouldn’t we be encouraging our people to enjoy the immediate health benefits and the conveniences of refrigerators?

Excise on alcohol. Alcohol is a real and growing menace in Bhutan. We need to act now, before we lose more people, especially our youth, to this scourge. But taxes alone will not prevent our people from drinking excessively. We need a holistic strategy, which includes taxes, but only as a part of bigger, more comprehensive action plan.

If the government must tax alcohol, tax those products that are the most dangerous. Last year’s tax increase avoided them; ditto this year.

Meat, fish and eggs. Taxing these items will, supposedly, lead to lower consumption, which, in turn, will lead to lower imports. Good. But what about domestic production? Wouldn’t the increased taxes also hinder domestic production of meat, fish and eggs?

Furniture. Tax imported furniture. But please, please, don’t make domestic production any more difficult than it already is.

Silk fabric. I have no idea how imposing a 10% sales tax and 50% customs duty on silk fabric will improve the rupee situation. But if it does, I’m for it. Otherwise, we need to rethink our strategy.

Power chainsaw. What’s the big idea of slapping a 20% sales tax and 30% customs on power chainsaws? If it is the environment, strengthen and enforce existing regulations. But, please, let’s not arbitrarily increase the price of labour saving devices.

The rupee crisis. The government must apply fiscal policy to address on-going and growing rupee shortage. One way is to increase taxes. But I’m not convinced that the proposed taxes would have had a meaningful effect, especially if the government were to spend the increased revenue from the increased taxes.

A better and more effective way to control the rupee crisis would be to reign in government expenditure. But that’s not what’s been happening. The government’s current expenditure for 2010-11 was Nu 17, 735 million. It jumped to Nu 17, 185 million in 2011-12. And just last week, the Assembly approved a current budget of Nu 18,262 million for 2012-13.

Games people play

The government was caught off guard when the National Assembly passed the Tax Revision Bill last Wednesday. The Assembly threw out all but one of the proposed taxes. And before the government realized it, their proposals to raise taxes on petrol, diesel, kerosene and LPG; refrigerators, freezers and air conditioners; meat, fish and eggs; silk fabric, furniture and power chainsaws; and alcohol were emphatically rejected by the National Assembly.

The only tax to get through was the “green tax” on new vehicles. But that too suffered a huge setback: the proposed 40% green tax on vehicles (with engines equal to or bigger than 1800 cc) was reduced by half, to 20%; and a 5% green tax, which the government had not proposed, was slapped on small vehicles.

On Thursday, the day after the Bill was passed, the government informed the Assembly that, when they voted on the Bill, they had understood that their proposal to increase taxes on alcohol had been accepted. They were wrong. The only tax that the Assembly approved, it turns out, was the green tax on vehicles.

The government should be ashamed. They should be ashamed for not paying attention in the National Assembly. I had, in fact, tried to notify the Assembly that we had not discussed the Tax Revision Bill properly, in detail, and that, more importantly, we were not clear on what we were voting on. But the government, at that time, chose to remain silent. They chose to take the Assembly for granted. And they should be ashamed.

But the government should be ashamed for a bigger and much more important reason. They should be ashamed that the Assembly rejected almost every proposal in the Tax Revision Bill. Of the government’s many proposals, the Assembly passed just one – to levy a green tax on vehicles – and that too was watered down drastically.

The government has failed to persuade the National Assembly that the proposed taxes are necessary. And the government has failed to convince the Assembly that the proposed taxes are good for our country and good for our people. In other words, the government does not enjoy the confidence of the National Assembly. And that, for a government that commands an overwhelming majority in the National Assembly, is just shameful.

Photo credit: Kuensel