Fiscal Incentives Act of Bhutan 2021

The Fiscal Incentives Act of Bhutan 2021 is a legislative instrument enacted on 29 November 2021 by the Parliament of Bhutan to provide targeted tax relief and investment incentives aimed at economic recovery in the wake of the COVID-19 pandemic. The Act replaced the Fiscal Incentives Act of 2017 and was introduced at a time when Bhutan's economy had contracted by 2.4 per cent in fiscal year 2019–20 and a further 3.7 per cent the following year, with tourism revenues collapsing and construction activity on hydropower projects slowing significantly. The legislation is administered by the Department of Revenue and Customs under the Ministry of Finance.^[1]

The Act forms part of a broader suite of fiscal and monetary measures deployed by the Royal Government to mitigate the economic fallout of the pandemic. Together with the National Resilience Fund established by Royal Command and the Druk Gyalpo's Relief Kidu income support programme, the Fiscal Incentives Act represents one of the principal policy instruments through which Bhutan sought to sustain economic activity, protect livelihoods, and lay the groundwork for post-pandemic recovery.^[2]

Key Provisions

The Act provides several categories of fiscal incentives designed to stimulate private sector investment and support vulnerable economic sectors. The most significant provisions include tax holidays, reduced tax rates, customs duty simplification, investment allowances, and capital goods exemptions.^[3]

Reduced Business Income Tax for Cottage and Small Industries (CSIs): The Act lowered the Business Income Tax (BIT) rate for cottage and small industries from the standard 30 per cent to 5 per cent for newly established businesses and 15 per cent for existing businesses, applicable for a period of five years. Rural businesses were granted full tax exemption. These concessions, initially set to expire at the end of 2026, reflect the government's recognition that CSIs—which include small-scale manufacturing, handicrafts, food processing, and local services—are critical to rural employment and economic diversification.^[4]

Customs Duty Simplification: Multiple customs duty rates were consolidated into a simplified structure at 10 per cent, reducing administrative complexity and lowering costs for importers. Additionally, all industries importing capital goods (machinery and equipment) from India or third countries are exempted from sales tax and customs duty, subject to recommendation from the relevant Department, to encourage capital investment and industrial upgrading.^[4]

Tax Holidays and Investment Allowances: The Act provides tax holidays for businesses operating in designated priority sectors and investment allowances for projects in high-priority areas, including research and development, energy efficiency improvement, and digital services development. These provisions are intended to channel private investment toward sectors aligned with the government's economic transformation goals.^[3]

Priority Sectors

The Act designates a range of economic sectors as eligible for fiscal incentives, reflecting the government's strategic priorities. These include agriculture and renewable natural resources (RNR), business infrastructure development, construction, the creative industries, cottage and small industries, education, energy, and health. The Department of Industry provides endorsements and certificates for locally manufactured products to support import substitution. A revised schedule of eligible items was published in November 2024 to update and expand the scope of incentives.^[5]

Implementation and Rules

The Rules on the Fiscal Incentives Act of Bhutan 2021, issued by the Department of Revenue and Customs, provide detailed operational guidance on eligibility criteria, application procedures, documentation requirements, and compliance obligations. Businesses seeking incentives must obtain recommendations from the relevant line ministry or department and comply with reporting requirements. Tour operators affected by the pandemic were granted time extensions to settle outstanding taxes without the imposition of the standard 24 per cent penal interest.^[6]

Context and Significance

The Fiscal Incentives Act sits within the broader context of Bhutan's aspiration to achieve high-income country status by 2034. The Asian Development Bank's Fiscal Sustainability and Green Recovery Program has supported the government's fiscal reform efforts, including the rationalisation of tax incentives and the strengthening of revenue administration. While the Act has been welcomed by the private sector, some businesses have called for clearer regulation and more transparent application processes. The balance between providing generous incentives to stimulate growth and maintaining fiscal discipline in a country with constrained revenues remains a central policy challenge, particularly as Bhutan approaches its graduation from least developed country status.^[7]

References

1. Fiscal Incentives Act of Bhutan 2021. Ministry of Finance (PDF).
2. "Bhutan's Fiscal and Monetary Measures Coming Out of COVID-19 Years." Friedrich Naumann Foundation.
3. "Bhutan Introduces New Fiscal Incentives." Orbitax.
4. Rules on the Fiscal Incentives Act of Bhutan 2021. Department of Revenue and Customs (PDF).
5. Recommendation for Fiscal Incentives. Department of Industry.
6. Fiscal Incentives Act of Bhutan. Department of Revenue and Customs.
7. Fiscal Sustainability and Green Recovery Program. ADB (PDF).