Refund withdrawal could be a blessing?

Word that the Indian government could discontinue or change the modality of the present procedure of excise duty refund to Bhutan would benefit the government and the private sector, rather than be a setback for the economy’s revenue, say representatives of the business community.

Excise duty is an inland tax imposed only on a commodity consumed within a country. If the commodity is exported, the excise duty is waived off.

“Excise duties are basically fiscal (government) tools to control, monitor or discourage consumption of certain goods by its own population, but not the population of another country,” a business representative explained. “The present system of excise refund is because of the close economic integration between the two countries, and to avoid deflection of goods back to India.” (See history)

The agreement on trade, commerce and transit between the two countries, which was renewed in 2006, says the two governments will make appropriate refund of excise duties on goods of its origin exported to the other.

Article eight of the agreement states: “Each government agrees to provide appropriate refund to be mutually decided annually in respect of its excise duties on goods of its origin exported to the other.” The trade agreement is valid until 2016. The agreement also says that, for goods bought from the open market, the refund will be calculated on the total value of the goods downsized by 40 percent. For goods bought from dealers, the specific excise rates will apply. Excise duty in India ranges from 4 to 20 percent.
Since discontinuation of refund is out of question, the most likely scenario, according to private sector representatives, is the modality of refund procedure could change.
This would lead to improved documentation of trade between the two countries, improved revenue contribution to the government, encourage wholesale business, decrease price of goods imported from India, and improve quality and fiscal policy programs of the government.

graph18As of now, any commodity imported from India has excise duty included in the price. At a later date, on average, a year and a half later, the government claims the refund from the Indian government. Bhutan recently received Rs 3B from the Indian government as excise duty refund for 2010 and 2011.

But this procedure has several disadvantages, which was highlighted by the Bhutan Chamber of Commerce and Industry (BCCI) earlier this year.

In 2010, Bhutan imported goods worth Nu 29.3B from India inclusive of excise duties paid. With hydropower-related imports discounted from excise, the total value of goods on which excise refund could be made was Nu 23B. Therefore, the total value of excise computed, after adjusting for hydropower-related imports, stood at Rs 2.3B.

As against this, Bhutan received only Rs 3B as excise duty refund for 2010 and 2011, while the actual amount could have been more than that, according to the chamber’s presentation to the PSDC. The refund was received only after two years, leading to loss of value due to time delay.

If the modality changes, the government will not receive the refund, but exemption will be at source or from the Indian manufacturer to the Bhutanese importer.

Once the goods reach Bhutan, Bhutanese customs will record the product and this record will be produced to the Indian manufacturer that will give the refund to the Bhutanese importer.

This would encourage Bhutanese to make imports from the factory, because they now get a refund and encourage wholesale import. This would also encourage wholesale importers to declare their products because of the refund. The government could make its revenue by instituting a tax for imports at a rate lower than the excise in India, and collect it as an imported product enters the country.

The chamber had recommended an average 5.2 percent tax on goods imported from India during its presentation last year. This fiscal tool can be used to encourage or discourage the inflow of goods from India.

In this way, both the private sector and the government gain.

Businesses in the bordering Indian towns could drop if Bhutanese wholesalers procure directly from the Indian manufacturers, because of the new incentive.

This is because the new modality will not cover goods imported from the open market, like across the border.

A change in the modality would require setting up new customs offices and human resources at the entry ports to handle the increase in documentation work.

There are as of today 18 entry ports to Bhutan from India, including the major ports of Phuentsholing, Samdrupjongkhar and Gelephu.

“Today, many don’t declare because it’s not the importer but the government that claims the entire refund,” a business representative said.

The livelihood of small retailers, who do not have the money to buy in bulk from Indian manufacturers and pay for transportation charges could be affected, since they generally source goods from the open market in India, which would not be entitled to a refund in the new modality.

In 1983, Bhutan signed a free trade agreement with India and, consequently, the duty refund procedure was also put in place to avoid deflection of goods back to the Indian market.

Deflection means goods entering back to one’s own country, after being sold to another country. This was highly possible, since Indian buyers are required to pay the excise duty, while Bhutan was exempted from it.

And since the two countries shared many porous borders, it was likely that Bhutan could enjoy tax differentials and sell back the goods bought from India at a cheaper rate than those sold by the Indian producers.

Therefore to avoid this situation, the two governments agreed that the refund will be settled at the government level and not between producers of the two countries.

As of 2010, Bhutan and Nepal were the only two countries subject to the duty refund procedure and, in 2009, Nepal negotiated a new treaty with the government of India to change the modality of the refund procedure.

By January last year, the negotiation was through, which allowed exemption at source for any goods imported by Nepal from India.

The Bhutanese private sector today also wants the government of Bhutan to follow the Nepal model.

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