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10. INCENTIVES AND SPECIAL REGIMES

Bhutan’s Department of Revenue and Customs published the new Fiscal Incentives Act of Bhutan 2021, replacing the Fiscal Incentives Act of Bhutan 2017 and all related circulars, notifications, rules, etc.

The new Fiscal Incentives Act provides for:

  • Tax exemptions and concessionary tax rates for approved businesses in high priority sectors;
  • Investment allowances for investments in high priority sector projects, research & development projects, energy efficiency improvement projects, and digital services development and improvement projects; and
  • Other direct and indirect tax incentives.

However, existing businesses enjoying the tax holiday shall continue to benefit for the remaining period of the tax holiday granted, subject to conditions imposed under the Fiscal Incentives Act of Bhutan 2017.

Incentives for High Priority Sectors

The qualifying income derived by approved businesses from any qualifying activity in the following “High Priority Sectors” conducted in Bhutan can avail the following benefits, subject to conditions mentioned in the rules:

  • Tax exemption for a qualifying period of 10 years, regardless of the date of commencement of business operations. The following are categorized as high priority sectors:
    • agriculture and renewable natural resources;
    • business infrastructure development;
    • cooperatives;
    • creative industry;
    • education, applicable to educational institutions with international accreditation;
    • energy, excluding hydroelectric projects; and
    • tourism, applicable to hotels only.
  • Reduced tax rate of 5% for newly established businesses and 15% for existing businesses for a period of 5 years, (can be extended for a period of 5 years) on the qualifying income derived from any of the following qualifying activities, regardless of the date of commencement of business operations:
    • cottage and small industries;
    • education, applicable to technical and vocational education and training (TVET) schools and higher secondary schools with science, technology, engineering, and mathematics (STEM) subjects;
    • information and communication technology; and
    • waste management and recycling industries.

Investment Allowances

An investment allowance may be granted to a business (regardless of its date of commencement of commercial operations) by the Ministry at a specified percentage not exceeding 100% of the amount of the fixed capital expenditure incurred for an approved project. However, no investment allowance shall be granted in respect of any project which is part of a business that has been granted the tax exemption of concessionary tax rate incentive as mentioned above.

The investment allowance can be applied for between 1 January 2022 and 31 December 2026 for projects in the following sectors:

  • Agriculture and renewable natural resources;
  • Business infrastructure development;
  • Construction;
  • Cooperatives;
  • Creative industry;
  • Cottage and small industries;
  • Education;
  • Energy, excluding hydroelectric projects;
  • Health;
  • Information and communication technology, excluding telecommunications;
  • Manufacturing;
  • Mining;
  • Tourism;
  • Transport;
  • Waste management and recycling industries;
  • A project for research and development (R&D);
  • Projects on improving energy efficiency; and
  • Developing and improving domestic and international digital services, excluding telecommunications.

The full amount of any investment allowance granted is allowed as a deductible expenditure in the year in which the capital expenditure is incurred after deduction of all expenses, depreciation, and loss carry forwards allowed under the Income Tax Act. In case the investment allowance is not deducted in any tax year due to insufficient profits, then it can be carried forward as a loss and deducted in the subsequent tax years. The general rules of limitation on the carry forward of losses do not apply for losses arising from the investment allowance.

Lastly, any asset in respect of which an investment allowance has been granted shall not be disposed of within a period of 7 years from the commencement of its qualifying period, unless the business has obtained the written approval of the Ministry. If the approval is not obtained, then recapture rules apply.

Other Incentives

Subject to Ministry approval and certain conditions, other incentives include:

  • Tax exemption on all income earned by small and micro businesses located in rural areas until 31 December 2024;
  • Tax exemption on the interest income derived from preferential lending by financial institutions until 31 December 2026;
  • Reduced corporate tax rate of 10% for the tax year 2021 for entities with businesses located in the border towns of Gelephu, Phuentsholing, Samtse, and Samdrup Jongkhar;
  • Additional 30% deduction for locally manufactured construction materials acquired for construction projects until 31 December 2026; and
  • Exemption from 3% withholding tax on aircraft lease payments for domestic airline companies.

Certain sales tax and customs duty incentives and exemptions are also provided subject to Ministry approval and fulfillment of conditions. Other indirect tax incentives include:

  • Concessionary customs duty rate of 3% on permissible raw material and primary packaging material;
  • Sales tax and customs duty exemption on electronic cash registers and point of sale (PoS) machines for business entities and automated teller machines (ATMs) for financial institutions;
  • Sales tax and customs duty exemption on research and development equipment for government recommended research and development proposals;
  • Sales tax and customs duty exemption on games and sports equipment; and
  • Sales tax and customs duty exemption on plant and machinery for the service industry.

The sales tax and customs duty incentives are available until 31 December 2026. However, the sales tax incentives will expire from the date the Goods and Services Tax (GST) Act of Bhutan 2020 is implemented. The incentives granted under the earlier Fiscal Incentives Act of Bhutan 2017 are as under:

Following are few general tax incentives which were applicable to all the sectors:

  • Income tax exemption of 10 years on convertible currency earnings from export by newly established manufacturing and Information Technology service industries;
  • Reinvestment Allowance of 25% of capital expenditure to Manufacturing and Service industries;
  • Tax rebate of up to 15% of the up-gradation expenses for adopting modern environmentally-friendly technologies;
  • Tax rebate of 10% on assessed tax amount to businesses employing Bhutanese nationals (minimum 20 employees); and
  • Income tax holiday of 5 years for companies offering shares to the public.

Sector Specific Incentives

Mining Sector

  • Exemption from income tax for a period of 10 years for newly established and 5 years for existing, domestically sourced mineral based, industries subject to value addition criteria prescribed by competent authority; and
  • Sales Tax & Custom Duty exemption for one equipment & machineries for mining industry.

Tourism Sector

  • Exemption from income tax for a period of 10 years to newly established tourist standard hotel and 5 years to existing hotel upgraded to tourist standard hotel;
  • Exemption from income tax for a period of 5 years to Farm House and Home Stay established as hospitality unit; and
  • Sales Tax & Custom Duty exemption on buses, outdoor or adventure equipment for tour operator, standard tourist hotels.

Health Sector

  • Exemption from income tax for a period of 5 years to newly established selective private health services approved by the Government; and
  • Sales Tax & Custom Duty exemption on medicines and medical supplies, equipment used for medical diagnostic, curative, rehabilitative and palliative services.

Information and Communication Technology Sector

  • Exemption from income tax for a period of 5 years to newly established IT or ITES business operating from within or outside the IT Park;
  • Exemption from income tax for a period of 5 years to newly established business engaged in production of films, documentaries and serials for public broadcasting;
  • Exemption from income tax for a period of 5 years on animated films produced by newly established business;
  • Exemption from income tax for a period of 5 years to newly established media service providers, namely print media and broadcasting entities;
  • Sales Tax & Custom Duty exemption on computers and related hardware and software, to IT park developer, on specific professional equipment required by media service providers; and
  • Exemption of 30% Sales Tax on Bhutanese cinema.

Transport Sector

  • TDS Exemption of 3% on lease payments by domestic airline companies;
  • Exemption from income tax for a period of 5 years to taxi or car- hire service providers; and
  • Sales Tax & Custom Duty exemption for buses and trucks used by passenger transport entities.

Business Infrastructure Developer

  • Exemption from income tax for a period of 10 years to newly established infrastructure developer as per the list approved by the Government.

There are few other specific incentives available for sectors like CSI and cooperative sector, agriculture and RNR sector, education sector, waste management & recycling industries.