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The Goods and Services Tax (GST) is a value-added consumption tax adopted by Bhutan to modernise its indirect-tax system. It was created by the Goods and Services Tax Act of Bhutan 2020, enacted in February 2020, which is designed to replace the country's sales tax and excise duty with a single, broad-based tax collected at each stage of supply.^[1]

After six years of postponement, the GST came into force on 1 January 2026 at a flat rate of 5 per cent, replacing the Bhutan Sales Tax, whose rates had ranged from zero to 100 per cent depending on the item. The reform is the most significant overhaul of Bhutanese taxation in decades, intended to widen the tax base, reduce cascading taxes and simplify compliance. Its passage and rollout were protracted: the GST Bill was passed amid legal and procedural controversy, implementation was deferred several times, and the first months of operation produced a public backlash over prices that forced a legislative course-correction within half a year.^[2]

Design

The Act establishes a uniform GST applied to most goods and services, replacing the differentiated sales-tax and excise regime. The headline rate was originally set at 7 per cent, and later policy discussion moved toward a standard rate of 5 per cent. Subsequent amendments adjusted the scope of the tax — for example bringing items such as smartphones and telecommunications services within its coverage.^[3]

Delayed implementation

Although enacted in 2020, the GST could not be brought into force on schedule. The National Assembly first deferred implementation from 1 July 2021 to 1 July 2022, and it was subsequently pushed back again to 1 July 2024.^[4] The repeated postponements were attributed chiefly to the unreadiness of the Bhutan Integrated Taxation System (BITS), the IT platform on which the tax depends, together with the disruption of the COVID-19 pandemic. The much-postponed launch was ultimately targeted for January 2026.^[3]

The long delay illustrates the practical challenge of building the administrative and digital infrastructure required for a modern value-added tax in a small economy, and the GST's eventual introduction is expected to reshape both government revenue and consumer prices in Bhutan.

Implementation from January 2026

The GST (Amendment) Act passed in the summer 2025 parliamentary session settled the standard rate at 5 per cent — down from the 7 per cent in the 2020 Act — and set commencement for 1 January 2026.^[5] Parliament launched the tax deliberately "clean": of 234 essential items proposed for exemption, lawmakers struck out 225, leaving nine (chiefly rice, cooking oil and salt), on the reasoning that exemptions distort the system and invite evasion.^[6] Businesses with turnover above Nu 5 million in twelve months must register and collect the tax; the filer base grew roughly sixfold to about 4,000 registered collection agents in the first months.^[7]

Because the 5 per cent rate replaced sales-tax rates both above and below it, launch effects varied by item. Goods previously taxed at higher rates — mineral water and furniture at 20 per cent, hotel and restaurant services at 10 — became cheaper on paper, a group the Department of Revenue and Customs put at roughly 1,600 items. Around 1,700 items previously taxed at about 5 per cent were unchanged, while goods that had been zero-rated under the sales tax — milk powder among them — picked up the full 5 per cent at the till.^[8]

Transition problems and price backlash

The transition produced a period of documented double taxation. Wholesalers and retailers had paid Bhutan Sales Tax on stock purchased before 1 January; GST was then charged again on the same goods at the point of sale. The DRC's Sales Tax Commissioner acknowledged that consumers would "bear double taxation for a few months until pre-GST stocks are cleared", and the department declined to grant tax adjustments to hardware shops holding years-old inventory, judging them administratively impractical.^[8]

Consumer prices rose sharply in the same period. Year-on-year inflation, 3.37 per cent in December 2025, reached 5.75 per cent in January, 6.07 per cent by March and 7.72 per cent by May 2026, with food inflation near 8 per cent — figures widely attributed by the public to the new tax. The DRC argued the attribution was only partly fair, pointing to imported inflation from India, fuel costs and simultaneous excise increases on alcohol and tobacco; GST is also charged on inputs such as animal feed, which shopkeepers linked to rising dairy and egg prices.^[9]^[6] The opposition demanded government action on the double-taxation issue in mid-January, and Kuensel's editorial page argued the burden fell disproportionately on low-income households.^[10]

Revenue performance

The GST collected more than Nu 3 billion in its first four months. The FY 2026-27 national budget projects Nu 14.18 billion from the tax in its first full year — roughly 47 per cent more than the sales tax it replaced raised — making it the centrepiece of the government's domestic-revenue strategy.^[11] Penalties for non-compliance were waived during the initial months in favour of awareness programmes; enforcement began from July 2026.^[7]

Regional context

Bhutan's 5 per cent standard rate is the lowest consumption-tax rate in South Asia: Nepal levies 13 per cent VAT, Bangladesh 15, Sri Lanka 18, the Maldives 8 per cent general and 16 per cent on tourism, while India operates a multi-slab GST with most goods at 5 or 18 per cent. The World Bank's April 2025 South Asia Development Update estimated Bhutan's tax take at several points of GDP below potential, with the shortfall concentrated in consumption taxes — the gap the GST is designed to close — and the IMF's 2025 Article IV consultation called the reform package "important progress towards a more efficient tax system."^[12]

2026 amendment: expanded exemptions

Five months into the tax's operation, the government reversed part of the original "clean" design. Finance Minister Lekey Dorji tabled the Goods and Services Tax (Amendment) Bill 2026 in the National Assembly on 18 May 2026, and on 30 May the Assembly passed it unanimously (45–0), adding 22 items to the exemption schedule with an explicit cost-of-living intent. The largest category was basic foodstuffs — around 19 types of edible cooking oil and locally sourced butter — together with additional rice varieties (husked brown rice and red rice, or yeechum) and, for the first time, motorised wheelchairs for persons with disabilities, which had previously been taxed while manual wheelchairs were exempt. Nine items were already exempt under the original Act. Following Royal Assent, the Ministry of Finance notified the exemptions on 25 June 2026 with retroactive effect from the bill's tabling date, as provided for Money Bills under the Public Finance Act.^[13] The DRC cautioned that each exemption re-opens administrative distortions the design had closed, and that exempt sellers lose input-tax credits on costs such as transport and rent — meaning exemptions do not necessarily lower retail prices.^[6] (Sources: BBS; The Bhutanese, 30 May 2026.)

Goods and Services Tax (Bhutan)