Tax System of Bhutan

The tax system of Bhutan has evolved considerably from a historically low-tax economy reliant on hydropower revenues and foreign aid to a more structured fiscal framework aimed at broadening the domestic revenue base. Tax reform has been driven by several factors: the anticipated loss of concessional financing following Bhutan's graduation from Least Developed Country (LDC) status, the need to reduce dependence on volatile hydropower revenues, and the imperative of financing expanding public services for a growing and increasingly urbanised population.^[1]

The principal tax instruments are personal income tax (PIT), business income tax (BIT), sales tax (transitioning to Goods and Services Tax from January 2026), customs duties, and various other levies including property transfer tax and green tax. Tax administration is managed by the Department of Revenue and Customs (DRC) under the Ministry of Finance. The tax system has undergone two major reforms in recent years: the Fiscal Incentives Act of 2021, which consolidated and rationalised tax exemptions, and the Income Tax Act of 2025, effective from January 2026, which comprehensively overhauls the personal and business income tax framework.^[2]

Personal Income Tax (PIT)

Personal income tax in Bhutan is levied on citizens, residents, and any other persons earning gross income exceeding Nu 300,000 per annum from one or more of four sources: salary income, rental income, dividend income, and income from other sources. The tax-free threshold of Nu 300,000 (approximately USD 3,600) means that a significant proportion of the workforce, particularly in rural areas, falls below the taxable threshold.

Personal Income Tax Rate Schedule (Current through 2025)

Annual Taxable Income (Nu)	Tax Rate
Up to 300,000	0% (exempt)
300,001 — 400,000	10%
400,001 — 650,000	15%
650,001 — 1,000,000	20%
1,000,001 — 1,500,000	25%
Above 1,500,000	30%

Note: An additional 10% surcharge applies on income exceeding Nu 1,000,000.

Income Tax Act 2025 Reforms (Effective January 2026)

The National Assembly adopted the Income Tax Act of 2025, effective from 1 January 2026, which brings major changes designed to simplify the tax system and align it with international standards. Key changes include:

Revised PIT Brackets Under Income Tax Act 2025
Annual Taxable Income (Nu)	Tax Rate
Up to 300,000	0% (exempt)
300,001 — 500,000	5%
500,001 — 750,000	10%
750,001 — 1,500,000	15%
1,500,001 — 3,500,000	20%
Above 3,500,000	30%

A major feature of the 2025 reform is a standard deduction of 15 per cent from an employee's gross monthly salary before tax is calculated. This effectively excludes a portion of income from taxation, resulting in higher take-home pay for salaried workers. The reform also introduces broader deductions and simplifies compliance requirements.^[3]

Business Income Tax (BIT)

Business income tax is levied on the profits of companies, partnerships, and other business entities operating in Bhutan. Under the Income Tax Act 2025, the standard corporate tax rate is 22 per cent for companies, bodies of persons, and entities with significant economic presence in Bhutan. This replaced the previous standard rate of 30 per cent for most businesses and 25 per cent for export-oriented companies.^[4]

Special rates and incentives apply to certain categories:

Cottage and Small Industries (CSIs): CSIs, particularly those in remote or underdeveloped regions, may qualify for full tax exemptions to support local economic development.
Special Economic Zones (SEZs): Companies operating in designated SEZs may benefit from reduced rates, such as 15 per cent for eligible enterprises.
Export-oriented companies: Reduced rates apply to companies that export goods or services from Bhutan.

Fiscal Incentives Act 2021

The Fiscal Incentives Act of 2021 consolidated various tax incentives and exemptions into a single legislative framework. It provides targeted tax holidays, reduced rates, and exemptions for priority sectors aligned with national development objectives, including manufacturing, information technology, agriculture, and tourism. The Act was designed to reduce ad hoc incentive granting and create a transparent, rules-based framework for fiscal support to the private sector. Business income tax exemptions under the Act were scheduled to expire on 31 December 2024.^[5]

Goods and Services Tax (GST)

Bhutan's most significant indirect tax reform is the transition from the existing sales tax and customs duty system to a Goods and Services Tax (GST), scheduled for implementation on 1 January 2026. The GST will apply at a single standard rate of 5 per cent on taxable supplies and imports of goods and services. This rate was reduced from an originally planned 7 per cent. The GST will replace the current sales tax and excise tax systems, introducing a value-added tax mechanism with input tax deduction rights for businesses.^[6]

Key features of the GST include:

Mandatory registration: Businesses with annual turnover exceeding Nu 5 million must register; voluntary registration is available from Nu 2.5 million.
Exemptions: Three essential food items (rice, cooking oil, and salt), sanitary pads, and electronic wheelchairs for persons with disabilities are exempt.
Digital services: Foreign digital service providers must register and charge GST on services supplied to Bhutanese consumers.
Exports: Exports and certain supplies are zero-rated.
Removal of exemptions: Hundreds of existing sales tax exemptions will be withdrawn, broadening the tax base significantly.

Customs Duties

Customs duties are levied on imported goods under the Sales Tax, Customs and Excise Act of 2000 and its amendments. Bhutan's customs regime is influenced by its free trade agreement with India, which provides for duty-free movement of goods between the two countries. Customs duties are primarily applied to goods imported from third countries (i.e., non-Indian sources) and vary by product category. The customs tariff schedule broadly follows the Harmonised System (HS) classification.

Other Taxes and Levies

Property Transfer Tax: Levied on the transfer of immovable property, governed by the Property Ownership Transfer Act.
Green Tax: The Green Tax Rules and Regulations of Bhutan 2024 introduced environmental levies aligned with Bhutan's commitment to carbon neutrality and environmental sustainability.
Tourism Levies: The Sustainable Development Fee (SDF), set at USD 100 per person per night for international tourists (as of 2024), functions as a de facto tourism tax.

Tax Administration and Compliance

The Department of Revenue and Customs (DRC) is the central tax administration body, responsible for assessment, collection, and enforcement of all national taxes. The DRC has invested in digitalisation of tax administration, including online filing systems for PIT and BIT. Bhutan's relatively small formal economy and limited tax base remain challenges for revenue mobilisation, with a significant proportion of economic activity in the informal sector, particularly in agriculture and small-scale trade.^[7]