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Income Tax in Bhutan



Personal Income Tax:

Liability to tax:

Liability to tax under this part shall be on:-

a) Citizens: and
b) Residents

Taxation of married couples under minors:

1.      Each spouse shall be taxed separately.
2.      Minors shall be taxed together with one of the parent’s income.
3.      Where a minor has a guardian appointed by the Court, the minor’s income shall be taxed separately.
4.      Where a minor has inherited by will, the income from the inheritance shall be taxed separately.

Taxable income:

Income on which tax is chargeable under this Part of the Act shall be income in respect of:

a) Salary including non-licensed consultant fee for an employer in Bhutan or of work performed in Bhutan for an employer abroad;
b) Income from Real property in Bhutan;
c) Divided from sources in Bhutan;
d) Interest from sources in Bhutan;
e) Income from cash crops in Bhutan; and
f) Income from other sources in Bhutan.

Income from salary:

1.      Income from salary shall include everything received in money or monies worth from the employer in accordance with the rules prescribed by the Ministry but excluding leave travel concession, traveling allowance and daily allowance.

2.      Salaries shall be taxed on an accrual basis.

Income from real property:

1.      The term “real property” means land, building and houses.

2.      Rental income from real property shall be taxed on an accrual basis.

3.      Allowable deductions for rental income shall be follows:

a)   Interest paid on borrowings provided that the loan is taken for the purpose of purchase or construction of the real property generating rental income and is from a recognized financial institution;
b)     20 per cent of the rental income for the purpose of repair and maintenance cost;
c)     Municipal taxes and urban house taxes paid; and
d)     Insurance premium paid to a recognized insurance company.



Exemption from tax:

1.      One dwelling unit for an individual or family used for self-occupation shall be exempt from tax.

2.      Property remaining vacant shall be exempt from tax on the fulfillment of the following conditions:

a)     The property has remained vacant;
b)     Tax Authorities have been informed in writing of the property remaining vacant; and
c)     Documentary proof to let out the said property is furnishes.

3.      Property remaining vacant, and not covered under section 7.2 shall be taxed on the fair market rent.

Income from dividends:

1.   Dividend means everything that a legal entity registered under the Companies Act of Bhutan distributes to the shareholders excluding bonus shares and distribution of proceeds from the winding up of a company in the year of its liquidation.

2.      Dividend shall be taxed in the year it is distributed.

3.      Total dividend income from Bhutanese companies not exceeding Nu.10,000 per annum shall be exempt from tax.

4.    Interest paid on borrowings shall be allowed as a deduction provided that the loan is taken for the purchase of shares from a recognised financial institution.

Income from interest:

1.    Interest for the purpose of this Act shall mean interest earned from fixed deposits held with financial institutions in Bhutan.

2.      Interest income shall be taxed in the year it is received or credited.

3.      Total interest income not exceeding Nu. 10,000 per annum shall be exempt from tax.

Income from cash crops:

1.     For the purpose of this Act, income from cash crops shall mean income from apple, orange and cardamom. The government may include other cash crops from time to time.

2.      Income from cash crop shall be taxed on an accrual basis.

3.   30 per cent of the cash crop income shall be allowed as a deduction to meet the cost incurred to secure the income.

Income from other sources:

1.      For the purpose of this Act, income from other sources shall mean income from hire of privately owned vehicles, plant and machinery, and from intellectual property rights.

2.    Intellectual property for the purpose of this Act shall mean income from copyright, patent, trademark, design, model or any artistic or scientific work.

3.      The income from other sources shall be taxed on an accrual basis.

4.    30 per cent of the income from other sources shall be allowed as a deduction to meet the cost incurred to earn such income.

General Deductions:

1.      Donations are allowed to be deducted from taxable income within limits and procedures prescribed by the Ministry provided that the donation is made for one of the following purposes:
a)     Relief fund for natural calamities in Bhutan;
b)     Preservation and promotion of religion and culture in Bhutan; or
c)     Promotion of sporting, education, educational and scientific activities in Bhutan.

2.      Actual cost of education or Nu. 50,000 whichever is lower.

Net taxable income:

1.      Net taxable income for the purpose of this Act shall mean total income derived from sources under sections 5, 6, 8, 9, 10 and 11 excluding allowable deductions.

2.      Net taxable income shall be taxed as per the tax rates under Section 14.

Tax Rate:

Taxable Income
Tax Rate
Where the total income does not exceed Nu.100,000
Nill
Where the total taxable income exceed Nu.100,000 but does not exceed Nu.250,000
10 percent of the amount by which  the total taxable income exceeds Nu.100,000
Where the total taxable income exceeds Nu.250,000 but does not exceed Nu.500,000
Nu.15,000 plus 15 percent of the amount by which total taxable income exceeds Nu.250,000
Where the total taxable income exceeds Nu.500,000 but does not exceed Nu.1,000,000
Nu.52, 500 plus 20 percent of the amount by which total taxable income exceeds Nu.250,000
Where the total taxable income exceeds Nu. 1,000,000
Nu.152,500 plus 25 percent of the amount by which total taxable income exceeds Nu.1,000,000

Set off and carry forward:

1.      Taxes prepaid or deducted at source shall be adjusted against the final tax unless otherwise specified.

2.      Deficit from one source of income shall not be offset against another source of income. Deficit for the purpose of this Act shall mean amount of deductions exceeding the income.

3.      Carry forward of deficit from one income year to the following year shall not be allowed.

Tax Administration:

Registration:

Persons liable to tax under the provisions of this Part of the Act shall register with the concerned Regional Office in accordance with rules prescribed by the Ministry.

Filling of tax return:

1.    Persons liable for tax shall file their tax return before 1st March of the year following the income year with the Regional Office where registered.

2.      Tax on self-assessed basis shall be paid at the time of filling the tax return.

3.      Persons whose tax deducted at source is final shall be exempt from filling the tax return.

Corporate Income Tax:

All Companies registered under the Companies Act of the Kingdom of Bhutan shall be subject to full tax liability on all sources of income under the provisions of this Part of the Act.

Limited tax liability:

1.      Companies or legal entities resident abroad in which none of the participants are personally liable for the company’s liabilities, and in which the surplus is distributed according to the ratio of investment from the participants or legal entities resident abroad are liable to corporation tax, if they: -

a)     Conduct business in Bhutan through a permanent establishment or participate in business activities conducted through a permanent establishment. The tax liability shall include income from letting such business, payments for consultant services, technical assistance or similar activities, and dividends, royalties or interest that are effectively connected with the permanent establishment. Activities in connection with preliminary survey, exploration or extraction of mineral resources shall be deemed to be conducted through a permanent establishment from the first day;
b)     In the capacity of owner, co-owner or user receives income from immovable property in Bhutan;
c)     Receive income as contractor from sources in Bhutan;
d)     Receive income as consultant, technical adviser, or similar activities from sources in Bhutan;
e)     Receive dividend from sources in Bhutan;
f)      Receive royalties from sources in Bhutan; or
g)     Receive interest from sources in Bhutan.

2.      All income including income received either directly or through agencies in Bhutan from bi-lateral/multi-lateral agencies by way of grants or loans shall be deemed to have its source in Bhutan. Where, however, a person, not being a resident of this country, has a permanent establishment in Bhutan, the following income shall be deemed to have its source in Bhutan: -

a) Interest paid or home on indebtedness in connection with the permanent establishment in Bhutan;
b) Royalties paid by the permanent establishment in Bhutan for its own use;
c) Technical services or consultant fees paid by the permanent establishment for services rendered; or
d) Income from immovable property in Bhutan.

Income to be Taxable:

Taxable income for companies under full tax liability shall include all types of income be it in money or monies worth.

Taxable income for companies with limited tax liability shall include only income with source in Bhutan under Section 2.1.




Allowable Deductions:

General Principle:

1.      For ascertaining the taxable income, deductions for expenses incurred wholly and solely for the purpose of the business shall be allowed from the gross income in accordance with the provisions of this Chapter.

2.      For the purpose of allowable deduction, the following general principles shall apply: -

a)       Proper books of accounts are maintained;
b)    Expenses are incurred for the purpose of the business or company, and must be supported by documentary evidence, such as purchase invoices, money receipts, or other legally valid documents;
c)     Where only part of an expense has been incurred for the purpose of the business or company, then only a proportion of that expense shall be allowed as a deduction in the calculation of taxable income; and;
d)     Expenses incurred on transactions not done on an arm’s length basis shall not be allowed.

3.      The Ministry shall prescribe rules for allowable deductions in accordance with provisions under this Chapter.

Direct Cost:

Direct costs associated with the operation of the business that may be directly attributed to the generation of income shall be allowed as deductions.

Employment Expenses:

1.      Wage, salary, and bonus paid to the employees shall be deductible as per the limits and rules prescribed by the Ministry.
2.    Contributions made to a Provident and/or Gratuity Fund for the benefit of the employees shall be allowed as deductions provided the contributions are invested with a recognized financial institution in a separate account not accessible to the company. Such contributions are subject to limits and regulations as may be framed by the Government.
3.      Medical expenses for treatment outside Bhutan shall be allowed as deductions provided prior recommendation is obtained from the Referral Committee of the Ministry of Health as per the rules prescribed by the Ministry.
4.      Staff Welfare expenses within the limits prescribed bye the Ministry shall be allowed as deductions.

Overhead Expenses:

1.      Preliminary expenses shall be allowed as deduction on the fulfillment of the following conditions:-

a)     Incurred prior to commencement of the business and directly related to the business; and
b)     Contributed to the actual commencement of the business.

2.      Deduction under Section 13.1 shall only be allowed in equal installments over a period of first 3 years after the commencement of the business.

3.      Costs incurred for Research and Development in connection with the business shall be allowed as deductions or depreciated in accordance with limits and rules prescribed by the Ministry.

4.      The following general expenditure for the business shall be allowed as deductions:-

a)     Printing and stationary expenses;
b)     Postage and telegram expenses;
c)     Telephone, trunk calls and telex charges;
d)     User charges;
e)     Administrative fees and charges; or
f)      Any other expenses of similar nature.

5.      Insurance premium relating to any asset owned by and used for the purpose of the business shall be allowed as deductions if not specified under Section 29.3

6.      Allowable deductions for maintenance and repair costs shall include:-
a)     Current repair costs relating to any asset owned by and used for the business provided that the asset is shown in the balance sheet and fixed asset register;
b)     “Current repair cost” shall refer to any cost incurred to maintain the asset in a consistent working condition, without modifying the nature of the asset; and
c)     Major repair and enhancement work that may modify or significantly improve the asset so that the original nature of the asset is altered shall be treated as capital expenditure and depreciated.

7.      Expenses incurred for hire of plant, machinery and vehicle shall be allowed as deductions provided that the expense is incurred for the purpose of business.

8.      Rental expenses incurred on property used for business purpose shall be allowed as deductions.

9.      Municipal and Motor Vehicle tax shall be allowed as deductions provided the asset is owned by and used for the purpose of the business.

10. Trade license registration and renewal fees shall be allowed as deductions.

11. Fees and expenses related to legal or professional work carried out on behalf of the business shall be allowed as deductions.

12. Annual membership fees and subscriptions paid for the purpose of the business shall be allowed as deductions.

13. Interest paid on loans shall be allowed as deductions provided that the loan is:-

a)     taken from a recognized financial institution;
b)     used for the purpose of the business; and
c)     within the debt equity ratio 3:1 including working capital.

14. Interest paid on legally recognised negotiable instruments shall be allowed as deductions provided that it is in keeping with the Company’s Act of the Kingdom of Bhutan.

Sales and Marketing Expenses:

1.      Commission on business transactions supported by documentary evidence shall be allowed as deductions.

2.    Entertainment expenses directly related to sales promotion of the business shall be allowed as deductions on actual expenses incurred or 2 per cent of assessed net profit, whichever is lower.

3.      Publicity and advertisement expenses shall be allowed as deductions on actual expenses incurred or 2 per cent of assessed gross income, whichever is lower.

Bad debts:

1.      Bad debts less than Nu.25,000 per debtor shall be allowed as deductions on the fulfillment of the following conditions:-

a)     Tax has been paid on such debts in the relevant previous years;
b)     The debt is not less than 5 years old; and
c)     Bad debt would be incorporated as income if recovered in the subsequent years; or,
d)     Where the debtor is declared bankrupt under the Bankruptcy Act of the Kingdom of Bhutan; or,
e)     Scheme of arrangement has been made under the supervision of a Judge.

2.      Bad debts exceeding Nu.25,000 per debtor shall be allowed as deductions on the fulfillment of the following conditions :-

a)     Tax has been paid on such debts in the relevant previous year;
b)     Judicial recourse has been exhausted in respect of the debt;
c)     Bad debt would be incorporated as income if recovered in the subsequent years; or
d)     Where the debtor is declared bankrupt under the Bankruptcy Act of the Kingdom of Bhutan; or,
e)     Scheme of arrangement has been made under the supervision of a judge.

Miscellaneous/ General Expenses:

1.      Revenue losses due to theft, fire, and natural calamities shall be allowed as deductions.

2.    Bhutan Sales Tax, Customs, Excise Duty and royalty paid on goods for use in the business shall be allowed as deductions provided it is not capitalized under Section 29.3.

3.   Carriage and freight expenses in incurred wholly for the purpose of business shall be allowed as deductions. Where such charges are incurred for the transportation of fixed assets to their place of use, this shall be treated as part of the capital cost of acquiring the assets and shall be depreciated as prescribed under Chapter 6 of this Part.

4.    Donations shall be allowed as deductions within limits prescribed by the Ministry provided that the donation is made for one of the following purposes:-

a.      Domestic fund for natural calamities in Bhutan;
b.      Preservation and Promotion of religious and cultured purpose in Bhutan; or
c.      Promotion of sporting, education and scientific activities in Bhutan.

Carry forward and offset of losses:

Losses sustained in an the income year may be carried forward and adjusted in the subsequent 3 income year as prescribed under rules thereto.

Deductions not allowed for tax purposes:

The following expenses shall not be allowed as deductions:-

a) Domestic and private expenses on food, clothing, marriage etc.;
b) Personal administrative fees of employees;
c) Payment of dividend or profit distributions to shareholders, partners and properties before tax;
d) Creation of or adjustments to reserves, except in the specific cases that may be prescribed under this Act;
e) Life and Health insurance premium excepts schemes that may be approved by the Government;
f) Business, Corporate and Personal income Tax;
g) Penalties, fines, penal interest, forfeiture, etc.;
h) Donations other than those authorized under this Act;
i) Bad debts not fulfilling the conditions under this Act;
j) Any sum, by whatever name called, payable for the use of license or permit through public auction or tender;
k) Any other expenses not related to the business.



Rate and Calculation of Income Tax:

Tax Rates

1.      The rate of income tax for companies under full tax liability shall be 30 per cent on the net profit.

2.      The rates of income tax for companies under limited liability shall be as follows:-

a.      Permanent establishment at the rate of 30 per cent of the net profit;
b.      Contractors and consultants at the rate of 3 per cent of the contract value;
c.      Income from interest and royalty at the rate of 5 per cent of the gross amount ; and
d.      Income from divided at the rate of 10 per cent of the gross amount.

Registration of taxpayers and Filling of Tax Return:

Tax Registration:

All companies shall register with Department within 3 months from the date of establishment as per rules prescribed by the Ministry.

Filling of Income tax return:

All companies shall file an income tax return for the income year within 31st of March of the succeeding year in accordance with the rules prescribed by the Ministry.

Payment of taxes:

All companies shall pay tax on the basis of the tax return at the time of filing with the Regional Office where registered as a taxpayer.

Exemption from filling:

Companies, whose tax is final, in accordance with Section 2.1 Sub-sections (c) to (g), shall be exemption from filling a tax return.

Correction of tax return and postponement of filling:

1.      A taxpayer may correct a tax return within fifteen days from the date of submission of tax return on grounds and reasons acceptable to the Department.

2.   The time limit for filling a tax return may extend on written request in accordance with rules prescribed by the Ministry.

3.      Postponement of filling shall not postpone the payment of tax. In such case, the amount payable within 31st March shall correspond to tax paid for the previous year or the self-assessed tax whichever is the higher.


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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.

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This blog is Created by CA Anil Kumar Jain.