The system of taxation in every country receives a good number of appreciations and criticisms from everyone and the Bhutanese taxation system has no exception. In accordance to my course requirement it is mandatory for me to learn and understand the macroeconomic functions of the nation. In this light we were made to analyze the Bhutanese economy, the taxation system, the faults in the Bhutanese public administration, bureaucracy in Bhutan, etc.... Here, I would like to talk something about the pros and cons of the Bhutanese taxation. I will be discussing the definition of tax in the Bhutanese context, whether it is good or bad and later with some analysis of it. I am sharing this as I have done it in my Public Financial Management unit as an assignment and I would love to share it to my readers...
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Introduction of tax and its definition in the Bhutanese context
According to Bhatia, (2006) tax is
defined to be as a compulsory levy which should be paid by economic unit to the
government without any corresponding entitlement to receive a definite and
direct quid pro quo from the government. Rationally, people always expect
something for something they have given to someone. Tax is something people
give to the government and in return people may expect something. However,
people are limited to indirect benefits rather than direct and definite entitlements.
Gans et al, (2012) quotes American Statesman Benjamin Franklin to have said
that ‘in this world nothing is certain but death and taxes.’ Certainty of death
inflicts fear to the people, so does the certainty of taxes. People of less or
no income, when they are imposed tax it appears to be like death penalty. In
this light, can we generalize that taxes are bad? The answer is obviously no
because a tax besides its negative impact has its own silver lining. Mere
perception will not adequately justify whether it is good or bad but with analysis
of affects of tax to the tax payers, role of tax in generation of state
revenue, its cyclical mechanism, and redistribution functions may help us decide
the fate of taxation in Bhutanese economy.
History of taxation in Bhutan can
be traced back to 17th century. During those time taxes were paid in
kind to the number of petty rulers. There was no proper system of taxation.
People were persuaded very much to get as much as possible. The second king
realizing the irregularities in the tax system centralized the tax collection
authority and ensured that the revenue was used for enhancing the living
conditions of the people (Bhutan 2008, 2008). In a way, the tax was not fairly
exercised to the people. The need for the formal taxation system was felt in
1960s when Bhutan steered towards first ever five year development plan. They
felt the need of budget in order to bring about socioeconomic development in the
country. People were levied taxes in the form of compulsory labor contribution
in building public structures and in equivalent kind. Later in 1970s when
Bhutan started printing her currency (ngultrum) the taxes were to be paid in
money. By weighing the level of compulsion; failure to pay tax were said to be
punishable by law and by the amount of administrative burden in collecting the
tax, tax was questionable if it really served its purpose. People were
compelled from no or very less means and collectors had to go the remotest of
villages to collect tax.
Are
Taxes good or bad to the economy?
When
government of any country imposes tax and when taxes are collected, it involves
good number of responses from the tax-payers and the economy. Such responses
can be of great variety and they can profoundly influence the working of the
economy in terms of production, growth, saving, investment, choice of
techniques of production, regional imbalances, inequalities of income and
wealth, etc (Bhatia, 2006). Besides having very good taxation system of a
country, the taxation has got both beneficial and harmful effects.
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When
a taxation system exhibits a harmful effect to the society and the economy, it
can be termed as the burden of that tax. The reduction in the disposable income
of the tax payer may be referred as the money burden (Bhatia, 2006). Looking at
the tax slab of Personal Income Tax (PIT), Business Income Tax (BIT) and Corporate
Income Tax (CIT), it is evident that there are some drawbacks though they have
not been revised for a long time. Despite the general increase in the personal
disposable income as well as the cost of living in Bhutan over the last couple
of years, the rates remained unchanged for a long time. For instance, when PIT
was first introduced in Bhutan in 2001, taxes were exempted for those earning
salary less than Nu.100, 000 in a year. India then provided tax exemption to
those earning below Nu. 70,000. Today, while Bhutan’s PIT rate remains as it
is, India has increased the minimum income qualified for tax exemption to
Nu.150, 000. Dividing the exemption rate of 100,000 by 12 months, people with
just more than Nu.8000 per month are liable for personal income tax imposing
money burden. This de-incentivizes civil servants to work hard or work at all.
In this light, government should increase the exemption rate to reasonable
amount so that tax will become progressive and citizens will pay without a
word.
Note: To be continued in later parts.......
