GST : Zero-rated Supply?

       The recent introduction of Goods and Services Tax (GST) by Government of India (GOI) makes the whole country unified common market. GST is a single tax on supply of goods and services, from manufacturer to consumer. The input taxes paid (e.g. on raw materials) at each stage are reimbursed in the subsequent stage of value addition. Therefore final consumer bears only the GST charged by the last dealer in the supply chain, with set-off benefits of previous stages. The GST details are at CBEC Website.

       The GST is an all India indirect tax. Indirect taxes are either origin-based or destination-based. Origin-based tax (also known as production tax) is levied where goods or services are produced. Destination-based tax (consumption tax) are levied where goods and services are consumed. In longer-term destination-based taxation benefits less developed states who consume more (so more tax revenue) than what they produce. The disadvantage being that the goods producing states are likely to try to put restrictions on interstate sales to avoid flow of revenue outside their states. This may sometimes hamper the progress of inter-sate trade within the country and affect overall growth.

       Since GST is the destination-based tax, Indian exports are considered as zero-rated supply (meaning no GST charged on export) but Indian imports are levied the same taxes as domestic goods and services adhering to the destination principle in addition to customs duty which is not subsumed in GST. So all exports of goods and services from India to Bhutan from 1 July 2017 are GST-free.

       With my short experience of importing goods from India under GST, I have briefly reviewed here only one aspect, the import of goods (service import and goods and services export aside). The GST for goods is charged at 0%, 0.25%, 3%, 5%, 12%, 18% or 28%. The GST Rate Finder app for both goods and services is available to help find GST rates for all the items.    

       For GST-free export, procedure in GOI Circular No. 26/2017-Customs dated 1 July 2017 gives following two options:

(a)    supplier may supply goods or services or both under bond or Letter of Undertaking (LOU), subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilized input tax credit; or

(b)   supplier may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 (Refunds) of the Central Goods and Services Tax Act, 2017.

       In short, suppliers either provide bond or LOU to GOI with bank guarantees (so GST could be charged by GOI to suppliers later should the suppliers not export or divert goods for consumption within India) for GST-free export to Bhutan or pay full GST prior to export and claim refund following appropriate provisions and procedures. In either case Bhutanese importers will need to provide Exemption Certificate for every import from the Department of Revenue and Customs for submission to Indian tax authorities by suppliers to liquidate outstanding GSTs against their names. Once the Exemption Certificate is given for an import, Bhutanese buyer MUST get GST-free goods or GST refund. There are Indian retailers going around trying to take GST advantage on their side. For instance, they offer 10% or 15% discount on maximum retail price (MRP) (which  already includes GST) for items with 28% GST, and also want Exemption Certificates (but do not talk of GST refund because their bills/invoices do not show GST separately). So when Exemption Certificate is given, they profit (28-10)18% or (28-15)13% from GST alone on Bhutanese buyers account.

       Therefore for export, Indian suppliers need to (i) register and obtain GST registration no., (ii) provide bond or LOU to GOI for GST-free supply or export GST-paid goods and claim refund, and (iii) supply goods under Export Tax Invoice, where GST forgone or charged has to be clearly indicated. The GOI Land Customs Stations at Indo-Bhutan borders rigorously check these documents. 

       Only manufacturers and major dealers/suppliers will take the pain to go through the process (also involves in many cases their own operational system modification) for GST-free export to Bhutan. In some cases Bhutanese buyers may need to push the sellers for GST-free export or GST refund claim. It is difficult for normal retailers to go through the GST-free export or refund claim processes. They would rather treat small purchases by Bhutanese as over-the-counter local sales and charge GST which will eventually be passed onto the Bhutanese consumers. So bulk of the personal and consumer items is likely to be subjected to double taxation, GST in India plus Bhutan Sales Tax (BST). The Bhutanese are too used to local procurement of personal and consumer items from places like Jaigaon, which will mostly be  GST-paid and BST-evaded (most likely) purchases. The reports that all purchases in India will be cheaper because of GST-free provision is misleading.

       The GST is not only an Excise Duty. So the rationale for GOI charging Excise Duty for export to Bhutan and reimbursing the Excise amounts at regular intervals to Royal Government of Bhutan (RGOB) earlier is different. Let us take a look:

        The GST is indirect tax that subsumes Central Excise Duty, Additional Excise Duty, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, and Special Additional Duty of Customs (at central level); and (ii) State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the centre and collected by the states), Octroi and Entry tax, Purchase Tax, Luxury tax, and Taxes on lottery, betting and gambling (at the state level). 

       A tax is a mandatory finance charge or levy imposed by the state following the due process to fund public expenditures. Non-payment or evasion of taxes is dealt with in accordance with the law. 

       The Excise Duty is an origin-based tax levied on manufactured goods and is levied on some types of goods (such as alcohol, cigarettes, or petrol) that are deemed harmful to society in one way or other. The excise duty is eventually passed on to the final consumer. So the Excise Duty refund earlier for import from India was mainly because the imported goods that had excise duty tags were consumed in Bhutan and RGOB had to incur expenditures to counter those harmful effects. But the option of levying GST by GOI to Bhutanese consumers and reimbursing it to RGOB is an issue that, in my view, has serious implications. I am neither a lawyer nor constitutional expert. Let them examine if the option is within the purview of our law(s).

       In addition RGOB looking into levy of GST on limited items that are GST-free looks against GOI's zero-rated supply principle, and not farsighted considering cost/benefit pattern of our overall import from India. The Bhutanese consumers will benefit from GST-free import of high GST rated (12%, 18% or 28%) items but that will be offset by the double tax jeopardy mentioned above. The RGOB and the Bhutanese private sector may rather focus on how best to take advantage of Indian zero-rated exports to our best advantage without too much inflationary pressures and on ensuring that the item-specific GST-free advantages get passed onto the final consumers!

The Doklam dispute over undisputed call

The Siliguri Corridor, or Chicken's Neck, is a narrow stretch of land in West Bengal that connects India’s 45 million northeastern people in seven states with rest of India. Nepal and Bangladesh lie on either side of the corridor, and at the narrowest point the corridor is less than 27 km. Bhutan and Indian state of Sikkim are on north of corridor and in between there exists a slice of Chinese territory constituting a tri-junction at one spot. The Indian land stretching from tri-junction to Bangladesh border is at crow-flight distance of about 130 km and the tri-junction is at about 500 km from narrow Chicken’s Neck. The Doklam plateau (Chinese name of same area is Donglang) is the area around tri-junction and portions of Ha (Bhutan), Sikkim (India) and Yadong (China). 

Therefore slightest disturbance in Doklam area is security and geo-strategic sensitivities of highest order for India. India has rushed additional troops in the area where its soldiers have been locked in a standoff with Chinese People's Liberation Army (PLA) for almost a month, longest impasse between the two armies since 1962. No surprise on army reinforcement, not even to the Chinese. For China it is more like pressing a nerve at India’s strategic space to make their point. For Bhutan Doklam is about boundary talks that is 33 years old and 24 rounds wide diplomatic lifeline. 

The first boundary talk between Bhutan and China was held in April 1984 and last one in August 2016. Each talk discussed how best to resolve the disputed areas including Doklam. I am quite certain that our purpose for the boundary talks was to resolve boundary disputes but wonder if their purpose was the same. If the purpose is same, solution, I tend to think, would converge sooner than anticipated. If not, the end objectives differ. When destinations are different, ‘big boys’ only pretend that they walk the talk along with you. And they do not play zero-sum game when it comes to pursuing their geo-strategic interests.

The 24 rounds of border talks would have always included Doklam as one of the disputed areas. The two governments also conducted Joint Technical Field Survey (JTFS). The JTFS teams have visited Doklam (confirmed by Prime Minister's report below).

The Prime Minister visited disputed areas and presented to the parliament as part of the State of the Nation report, as per  25 August 2015 Kuensel, the following:

“In the western sector, it was reported by the Prime Minister in the State of the Nation report delivered to parliament in June, that the first phase of a joint technical field survey had also been completed.

The disputed areas in the western section are Dramana, Shakhatoe, Sinchulung, and Doklam, in the dzongkhags of Haa and Paro. The areas comprise of 269 sq km of disputed areas. The Prime Minister had also reported that he had been personally visiting these areas. The two countries have agreed to settle the border demarcation issue at the earliest. The talks are based on the guiding principles agreed to in 1998 by the two countries and the agreement on the maintenance of peace and tranquillity in the Bhutan-China areas signed in 1998.”

The findings and recommendations of JTFS teams were endorsed by 22nd boundary talks as reported through 26 November  2016 Kuensel:

“To understand the dispute, a Joint Technical Field Survey was also conducted and the team had visited the field thrice. The report of the team was endorsed during the 22nd round of border talks. This, Lyonpo Damcho Dorji said has been helpful in reducing the differences in claims between the two countries. The country’s basis for claims, Lyonpo said is on the age-old practise of land usage and administrative authority.” 

        We do not know how helpful the JTFS report was “in reducing the differences in claims between the two countries” and what exactly was meant by “The country’s basis for claims is on the age-old practise of land usage and administrative authority.” The fact remains that JTFS teams visited all disputed areas and their report was endorsed by the representatives of the two governments.

Having come to the point of “The two countries have agreed to settle the border demarcation issue at the earliest” in 2015, some events seem to have taken centerstage from mid-June 2017 undermining progress made so far. On 16th June 2017, PLA started constructing a motorable road from Dokola in the Doklam area towards the Bhutan Army camp at Zompelri. Bhutan conveyed to the Chinese side that the construction of the road inside Bhutanese territory was a direct violation of the agreements and affected the process of demarcating the boundary between our two countries. The Indian army was deployed to the area and blocked PLA from constructing the road.

On 29 June 2017 Chinese foreign ministry spokesperson Lu Kang told in his regular conference that Doklam area belonged to China, not Bhutan and India, which had been proven by history and legal principle. China's road construction in Doklam area, which is their territory, was legitimate, and any other party had no right to interfere.

The Chinese media  Global Times  reemphasized that Donglang (Doklam) area belonged to China, not Bhutan and India, which had been proven by history and law. China's road construction in the Donglang area, which is their territory, was legitimate, and any other party had no right to interfere.

Then China released a map to back the above claim accusing Indian troops of "transgressing" into Doklam area of Sikkim sector, to prevent PLA from building a road there. China cited a Britain-China treaty called Convention between Great Britain and China relating to Sikkim and Tibet signed by British viceroy Lord Lansdowne and lieutenant governor Sheng Tai in 1890 to back its claim on Doklam.

The exact location of the tri-junction is the main issue. While Beijing believes tri-junction is located 2.5 km south of Dokola Pass at Gyamochen/Mt Gimpoche. Bhutan is of the view that the tri-junction is at Batangla, 4 km north of Dokola. So the road construction south of Batangla for us is encroachment in disputed territory. The Chinese consider now up to Gyamochen/Mt Gimpoche is their territory.  And they have said that their territorial sovereignty is unwavering and asked for withdrawal of Indian troops who have overstepped and trespassed into Chinese border. Without the withdrawal they say there will be no boundary talks between India and China. And so on...the statements from Beijing trickle almost every day.

         The Chinese contention that Doklam area (south of Batangla) is in Chinese territory and not under disputed area falls flat from their own perspective having discussed/deliberated last 33 years and visited by JTFS teams for field survey. I am quite certain that the map and the Convention between Great Britain and China of 1890 are not new. The boundary teams would have seen/discussed those before. The boundary talks between Bhutan and China are still ongoing. So reintroduction of old map and Convention at this stage does not make disputed area undisputed, and certainly does not authorize one party to declare so on unilateral basis. It looks more like an attempt to disturb status quo by trying to build a strategic road south of Dokola to make the statement of a neighbour. How serious? If the standoff is not de-escalated early, it can get very serious. Time is the variable.

         If it is really an effort to change status quo, what happens to the earlier written agreements stating that the two sides agreed to maintain peace and tranquility in their border areas pending a final settlement on the boundary question, and to maintain status quo on the boundary as before March 1959? The agreements also stated that the two sides will refrain from taking unilateral action, or use of force, to change the status quo of the boundary. 

So what is new and what has changed now? I just cannot believe that our boundary teams missed something so drastic that Doklam could be declared by other party an undisputed territory unilaterally. And also that China wants to carry a big bully stigma internationally and that they ignore all previous agreements/endorsements that have taken 33 years of negotiations. We are in 2017, not 1962. Every corner of the world is interconnected, gets informed and forms opinion in few seconds. It may be possible that our teams goofed a bit that they did not grasp in depth the Chinese diplomacy and their geo-strategy in the region. This is our internal issue. What is it then? Is our neighbour tired of seeking diplomatic relation with us the formal way? Are they perturbed with stagnant geo-politics of the region and looking for dynamism? Can anyone decode the Chinese statements above and those trickling almost every day and confirm these? 

One thing seems more certain that the Chinese have their strategy in line and they also know who they are dealing every time with -- directly, semi-directly and sometimes indirectly. They may even make Bhutan centerpiece of the India-China standoff as a means to achieve their objective. And the objective is.....that everyone knows but do not know. We can afford neither diplomatic indifference of past nor brinkmanship in future. The call is also for us to think (not only blurt out reactive narratives), and think hard! May be we can find diplomatic compromise that will ease tension at Doklam.

As I said in October 2012 “The challenge lies in coming out from dormant attitude on relationship of gratitude and gratefulness to understanding the merger of nationalism with new geopolitical thinking to carve out a comfortable geopolitical space. How many will properly understand the nationalism trends, including reading signs of an advancement towards so called "geopolitik nationalism"? Can we think in terms of the possibility of being an instrument of confidence building?” It may sound asking for too much too soon, but time is not a luxury commodity! And in-between gap is far too wide just like sitting in the middle of the "person is guilty until proven innocent", and "person is innocent until proven guilty."

The Bolero Politics

In early March 2017, the Election Commission of Bhutan (ECB) announced that February-May 2018 (presumably for national council) and August-October 2018 (national assembly election) be kept event-free, religious or otherwise, to enable smooth 2018 elections. Everyone knows 2018 is an election year in Bhutan. The ECB announcement gives clear time-slot for national politics. The local government elections at gewog (gewog is the village level local government organisation with “Gup” as its elected head) level were over in 2016. So gear-up for national election with Azha (Uncle) Gup as pivot. Or is it?

Few weeks prior to the ECB announcement and on the first day of the ninth local government chairpersons’ conference (LGCC), the Government distributed one Bolero each to country’s 205 gewogs with much fanfare and grand announcements of fulfilling one of its biggest political promises, strengthening  gewog centres and empowering local government at grassroots level. The theme of LGCC read: Towards Greater Decentralisation and Participatory Governance. Even Anand Mahindra could not have helped but chuckled to note Boleros being piggy-backed to anticipated political pivots of 2018 inundated by military-precision display of vehicles for the occasion. The prerogative of the ruling party, understandable to an extent.

Even Nu 142.62 million Government of India (GOI) fund for 205 Boleros and annual allocation of Nu 60,000 per gewog for running and maintenance are understandable. What I cannot understand is 205 Boleros being treated as political capital by ruling as well as other political parties, with conviction that the country will be on standstill for more than a year. The voters' trust and their mandate are political assets. Politics is not an one-act show. It is an intense 24x7 occupation. So what I cannot understand is perceived accumulation of people’s trust and their mandate through distribution of new Boleros. Will it enhance credibility, reliability and policy consistency? I would have given my crooked smile on the ruling action had I been in a party seeking mandate. I am nowhere but for strong and progressive candidates.

In my view voters’ trust and mandate will be pinned mostly to how those Boleros are utilized in coming months (knowing fully well how sensitive pool vehicles are everywhere, not only in Bhutan, in terms of their use/misuse) than whether or not Boleros have been distributed to gewog centres. Before the election, voters normally are on fault-finding mode. I can give you blind assurance that finding hundred-and-one lapses before the election on procurement and utilization of Boleros will be as easy as apple pie (should I say political pie?). I do not feel comfortable to go so early into the details of how many of those Boleros have been driven through workshops. So what is the problem of the political parties eyeing the “chairs”, oops looking forward to serve the nation (on the wrap)?   

And I do not believe voters’ mind will be stretched to policy issues, not even of so called educated ones, considering the policy inconsistencies leading to more like paralysis. So what is wrong if import of Nissan Leafs were justified on reduction in fuel import and Boleros on strengthening the gewog centres contradicting earlier import policy implication including reduction in fuel import, improving balance of payment and reducing debt-to-GPD ratio? Do we have policies on fuel import, vehicle standardisation and import, and/or necessary back-up support services? If it is there, the implementation obviously is forgotten. So policy changes depending on whom and for what to appease is like a prerogative that cannot be given up easily. Even the voters of politically mature countries sometimes have difficulty correlating policy inconsistencies.

Why would the voters be bothered if the concerned authorities followed proper procurement procedures or not, as long as they do not sense some kind of political patronage, and can take a Bolero ride, transport their goods and/or benefit directly/indirectly? There are, after all, agencies to look into procurement issues. The agencies will only need to understand well that procurement is the process of acquiring goods, services or works in most economic and efficient manner from an external source to meet the needs of the procuring agency in terms of quality and quantity, time, and location. I have my doubt.

The voters will not be even concerned with if their gewog centres will have Boleros in coming years. “We can always request GOI” will more be attuned to their minds than program sustainability on our own. I think Bolero sustainability from voters’ perspective is a non-issue. They will think it more in terms of a ‘headache' of the next government.

In politics headache of one is help for the other, and capital of today is liability tomorrow. If political parties do not have maturity to understand these flip-flops, what fault is of voters! Voters will vote anyway. 

So do not vote with a notion of which party should form next government. Vote for Best Candidate!

The Power of Connection

Those who went to India for education in 1950s/1960s may have vivid picture of what it was like then. The communication connections were nonexistent and foot/bus/train travels arduous. If a message had to be delivered you hike all the way, find someone to walk for you and give a message or hand-delivered a written note, if you ever went to a school. No modern communication networks existed, not even post offices. I remember sending initially letters to my parents from my school in Kalimpong (India) addressed as:

Dhanbir Tamang

Damphu, Chirang, Bhutan

P/O: Kokrajhar

(P/O for post office)

District: Goalpara (Assam)

We could never tell if the letter had reached home.  I did not know until winter break when my father would take out his well-preserved smoke-stained paper that his son had sent him months back.  My brother tells me that my father, when he received the letter, would say often "pheri padtiuley jyojyo la chitti" (read again your elder brother's letter). There was no other way of connecting with higher education except through physical travel to schools in India. The travel from Tsirang (Chirang then) to school took us full four days: two days of trek on the horse-trail (track formed due to frequent animal passage) from Tsirang to Sarpang (Sarbhang then), bus/truck ride on a dirt road to Kokrajhar (Assam) next day, night train journey from Kokrajhar to Siliguri (West Bengal), and then a seat on dilapidated dodge bus from Siliguri on the fourth day took us to Kalimpong. It really felt other end of the world, and the power of connection as weak as that.

The travel had its own tailspin. When you are dead tired walking whole day, you look forward to most is an even ground to sit and let your two feet lie flat on ground. That felt relaxed. Just before nightfall (no light at night except firewood flame rays), dinner of rice with “gundruk” (fermented and dried green vegetable) curry was a delight. The sleep under a tree or in an “orar” (more like a small cave) was so deep that deadwood would have stared us with amusement. After two-day trek, travel by vehicle was more like “pay fare, but where you sit is your problem.” Clinging on luggage rack on the roof of bus or on top of lumber loaded on the truck was not uncommon. The night steam-engine-powered train journey gave us a black coal-dust facelift and bird’s nest hairdo next day. Many did not eat after the train ride fearing car sickness on a narrow winding hill road along Teesta river. Finally we crawled half-dead to the hostel. The youthful energy revived as soon as we saw our other friends, and everything was a distant past. The school education connection was certainly not as easy!

The first “cycle rickshaw” (3-wheeled bicycle for transport with covered seat for passenger behind driver) ride from Hijli rail station to Indian Institute of Technology Kharagpur (IITKGP) for my civil engineering degree was as wet as Indian monsoon. The open spaces between the blocks of Rajendra Prasad Hall of Residence (RP Hall, the hostel of IIT) had turned into ponds, and half-naked boys were playing soccer while four-storied building corridors of both the blocks were packed with pretty wild spectators making fun of soccer players. Turned out that the soccer players were the “freshers” (newcomers) and the spectators the “seniors” (2nd-5th year students), and latest addition to “freshers” had just arrived on a “rickshaw” to join wet-soccer game. No sooner a ground floor room next to toilet (considered worst room of the block, the room gets better as you move to higher years) was allotted, there were two choices: join the half-naked soccer game or be dragged into it. Being alone in a strange place made the situation worst but was no excuse. When there is no connection to the rest of the world; you are powerless. So anger, frustration and/or homesickness have no place in you. Face ragging (rude interactions of seniors with newcomers) or leave the campus like a loser.

Once the “mass ragging” (final ragging) was over, life got back to normal. The tough seniors gave “freshers” canteen treats of “muglai paratha” (Indian flatbread with meat in-between) with tea and there was no need to “sir” them thereafter. Fair enough. Next it is your turn for “freshers” to “sir” you and ridicule them when they show their swim strokes on a concrete floor. Different time cycle, and unconnected college campus world that was.

The IIT Kharagpur was our world for five years, except for occasional glance on newspapers and “Doordarshan” (distant view literally) TV in common room, and once in a while quick jaunt to Calcutta (Kolkata now) to buy bell-bottomed pants and Beatles records from New Market, and eat Nizam’s beef roll. IITKGP admits smart students. Time and sleep were precious. The teachers lectured presuming students pre-read lessons. Those who hadn’t, went blank and could not participate in class. Teachers pronounced them dumb and ridiculed as intellectually unfit to be IITKGPians. All complex engineering calculation were done on slide rule (a ruler with a sliding central strip, marked with logarithmic scales and used for making rapid calculations including for functions such as roots, logarithms and trigonometry). Not even calculators existed. So engineering education revolved around teachers, books, labs and slide rules. Any other opening and/or education connection were beyond imagination.

Fast-forward 45 years, wonderful development progress has been made. Who will believe my obsolete story now? Certainly, not my granddaughter who teaches me how to use smartphone more smartly and googles anything that is new to her. Anyone can send videos, photos and texts real-time and make a voice/video call to anyone in the other corner of the world (distribution). And this blog is shared with everyone in the world through a connected central stage called google blogspot (concentration). The system is so connected now that the power is defined by such concentration and distribution. The new innovations on the concentration and distribution systems which are connected by countless devices and people add-up at unmeasurably quick pace. The learning apps (like BYJU) that can be downloaded on phone offer learning programs for students of all classes and for competitive exams. The students who are not given the intellectual space, freedom, or support to fulfil their educational potential and desire for learning can join virtual classroom in Piazza that connects students and professors from around the world. And there are Facebooks, Tweeters, eBays, Amazons, Alibabas, Agodas, Ubers, Didi Chuxings, Airbnbs, PayTMs and so on and on....

While the connected world gives ample opportunities to be part of power and influence through centralization and distribution, it is also true that the world leaves behind those who do not realize the value and power of connection to be dominated by those who do, at the pace much faster than the speed of connection innovations I just tried to depict from my school days till now. The connected system of profound concentration and massive distribution cannot be understood in simple either/or terms. Therefore we need to be able to understand and tap the advantages of network power. The world is moving fast, the pace of which I doubt if anyone can make even a rough guess!

Mainstreaming the Economy

1.         The economic growth these days cross-cuts every other field even ideology, not the other way round. If economic policies, planning and growth get subdued priority, overall development stagnates. The programs and projects will have minimum impacts on the lives of the people. In our situation, we need far-reaching economic foresight and robust policies, strong institutional measures, and mainstreaming thereof. The key to this will be a strong government organization/agency to act as the driver of economic policies (maybe my impression of the Planning Commission of early 1980s is still fresh). We are at very critical juncture, the reason why economic mainstreaming now is so very crucial. That is why change is necessary or inevitable to put it more frankly. The change is never easy and quick. What is at stake, I believe, is bigger than transformation that we may think is tough for mainstreaming the economy. The future is not to be feared, but embraced and to be made stronger if we have to leave better a place for our children/grandchildren.

2.          The economy seems directionless (para. 5 below) and highly government-centric. So private sector/NGO at this stage has capacity to neither complement change initiatives nor leverage any move to influence proper economic directional adjustment. Private sector is partner not subordinate. Without sound private sector and strong system of checks and balances, government (with low capacity) managing the economy (finance in specific) is always unstable and exposed to high risk for misuse, mismanagement, fraud, corruption etc. The change may need government to devolve powers, the reason why the changes/reforms are resisted. The resistance will increase once revenue flow increases substantially. Before that if the economy is in right direction set with courageous policy and institutional measures, all that is needed is "keep on walking". 

3.              The IMF has cautioned that “Risks are linked mainly to the high public external debt and the need to manage projected large hydropower-related revenues. If not properly managed, the large pickup in hydropower exports and the projected increase in export earnings and budget revenues could undermine macroeconomic stability and the competitiveness of the economy, resulting in overheating and external imbalances akin to those seen during 2012-13. In addition, Bhutan’s growth could be adversely affected by a growth slowdown in India triggered by delays in structural reforms.” I wonder if we can afford to remain status quo!

4.         “The fiscal incentives rendered to the business establishments through the Economic Development Policy (EDP) did not benefit the cottage and small industries but 39 high-end hotels and nearly 80 percent of business entities availing tax holidays located in Thimphu, Paro and Bumthang.” “After 20-months of operations, the Business Opportunity and Information Centre (BOiC) has closed shop and passed its mandate to the Rural Enterprise Development Corporation Ltd (REDCL), which was launched on May 21.” “Most activities executed under the Gewog Development Grant (GDG) in the last two fiscal years (2013-14 and 2014-15) are of no economic value to the local economy, the Royal Audit Authority (RAA) has found.” These words are from daily news, not mine. Obviously all these programs have been shallow for any in-depth impact on the economy.  Also the Guaranteed Employment Program is only good as numbers (take a look at MOLHR's Employment Agreement Form). These programs have failed to vitalize economic activities, and may have even acted counter-productive to initializing stabilization required which IMF is cautioning us about. The lack of accountabilty is appaling!

5.               It is time we be clear about the type of economic system we want to put in place that will best suit us taking into account our overall situation, heavy hydropower investments and externalities including globalization trend. Every country has potential to do well. The potential is lost if its citizens’ days do not take definite direction and are spread thin. The country’s ability to deliver requires combined efforts and core structural strength, individual as well as institutional, to perform, more specifically, in this digital age, ability to perform with creativity and innovation to a common goal.

6.            Once a firm decision on the economic system is taken, step by step transition to the new system with proper institutional measures is key to economic success. It will take time but taking a direction will make us move forward rather than every person/entity/organization circling around the hotch-potch of traditional, command, market and mixed economies based on their own (mis)interpretation/(mis)perception. For instance, the recent flash floods in southern Bhutan call for a strong capacity for river training and flood protection. It is highly specialized area that requires years of study, research, data analysis and implementation capacity. And the need for an institutional structure to take stock of and manage the country’s water resources and watersheds cannot be overlooked. Water is the most import resource of the world.

7.            The transition will call for high political willpower, commitment and foresight. The short-sightedness now will impair the longer-term perspective. It is going to be politically tough but will be good for the nation longer term. Take the case of Bangladesh, Bhutan, India, & Nepal (BBIN) transport agreement. We need to see longer-term interest of the consumers, not short-term benefits to transporters. Let the transporters be slowly exposed to competition and come out strong. It will be good for consumers and also eventually for transporters. I cannot believe people seem to think there is alternative. The notion that the days of keeping economy closed, with unending flow of external assistance, will never end is simply mistaken. And so is the argument that bigger transporters from the region will overflow and dominate us. What matters is how smart we are, not how big we are because globalization knocks on every door and gives only two options: embrace or face force-entry!

9.    The change, in my view, is more inevitable than our misperception of its need. The approaches on how best to manage the change may differ. Ideas may flow in, some solid others sugar-coated hollow. Only open contest of bright ideas will drive the nation much ahead. 

10.    Late Lee Kuan Yew of Singapore said, "Well, we are pragmatists.  If in order to survive, we have to open up a sector, we open it up. Because the best test - the yardstick is, is this necessary for survival and progress? If it is, let's do it. We are ideology-free. What would make the place work, let's do it." Very True,  for small nations particularly!

Safety First!

We are in the midst of rainy season and very heavy at that, this year. There are reports and photos showing road formations and bridges damaged, villages destroyed, Sarpang market washed-out, traffic interrupted, people stranded and supply of essential items disrupted.  It is a natural calamity. People are panicking, worried and some even depressed. This is no time to put our heads down. Let us all keep our heads on our shoulders, keep spirit high and move on using our mind, belief, dedication and commitment.

In times like this I have seen in many places, time becomes very critical factor. Everyone will have their own account of losses because of disruption created by the natural calamity. Pressures to connect roads, rebuild bridges, resettle villagers, and relocate markets quickly build up. The authorities like to display their efficiency in handling emergency situation. This is no time to panic and make mistakes. The decisions should not be made making only time as the critical factor. We should prioritize safety above time. Let us not put lives at high risk to get things back on track haphazardly. So I say, SAFETY FIRST.

The critical areas where safety measures need to be implemented from beginning are roads and bridges. On roads and highways safety has to be ensured in two ways: (i) through technical measures; and (ii) traffic management & control.

(i)         Technical Measures

(a)  Ensure all structures are technically safe before opening the road to traffic.

(b)  Stability of bridge abutments is critical if temporary bridges are being launched.

(c)  Fresh cut areas need adequate formation widths and set back slopes;

(d)  Ensure water is drained out from the area as quickly as possible.

(e)  No unstable hanging rocks should be kept above the road.

(f)  After opening the road to traffic, constantly monitor the area by competent technical person for unusual soil and structural movements/behaviours.

(g)  The installation/construction  of road/bridge structures should be planned in such a way that (i) construction of permanent roads/bridges could continue without hindrances; and (ii) road workers are not put to high safety risk.

 (ii)  Traffic Management and Control (more critical where traffic volume is high)

(a)  To avoid traffic bottlenecks, traffic management & control plan should be prepared for controlling traffic from two points on both sides. The first point should be about 5 km before reaching the critical area, and second at the entry point of critical area.

(b)  Two way traffic should not be allowed on fresh cuts or on temporary bridges.

(c)  Bridge should take one vehicle at a time. Two or more vehicles should not be permitted on the bridge.

(d)  The traffic management & control plan should be widely circulated to public.

(e)  Vehicles should not be allowed to ply on critical areas during heavy rain.

Let us move ahead in one direction with much sense, not in multi-direction on panic-mode!

(These are not my off-the-cuff remarks and suggestions, but have come out of my experiences of handling disaster of national proportion in other countries as staff of the Asian Development Bank.)

Why do you think Jaigaon is booming?

The Bhutanese border town of Phuentsholing, our main commercial hub, and adjacent Indian town, Jaigaon, are separated by the main gate, few pedestrian entry/exit points, and the fenced partition. In 1980s when I looked down from Kharbandi hill-top, Phuntsholing was a vibrant town and Jaigaon just a strip at the tip of connecting Hasimara-Phuntsholing road. Since then Phuntsholing has now turned into Phuentsholing, and Jaigaon is a booming town, more like no. 3 city in West Bengal after Kolkata and Siliguri. Except for an additional ‘e’ and some Jaigaon-influenced growth, Phuentsholing has failed to serve effectively the rest of the nation. Jaigaon supports us with most goods and services, at heavy costs obviously. Why? Everyone’s perception is because it is so near to us that’s why. Wrong. Nearness is a factor but a lame reasoning why Jaigaon has become so important to us.

There are other important aspects along with proximity that puts Jaigaon at higher business echelon for its commercial boom. Proximity is a phenomenon, not an event or process, that happens due to strategic and other advantages (and our weaknesses?), not otherwise. The bad news is we may never be able to catch-up with Jaigaon (who says compete?). India is on its way to carry out structural reforms including introduction of new tax regimes such as goods & services tax (GST), bad bank loans clean-up and lure credible investors including FDIs, and also train its young population (65% of population is in less than 35 years age group) with an aim to supply to the world the productive Indian workforce, whereas we have nothing of the sort in plan, and not even looking forward to be on an economic dance floor. The contemporary examples below will give you some idea why sluggish Bhutanese private sector is dormant, and therefore Bhutanese entrepreneurs (will) find so very hard to catch-up with Jaigaon.

The reality is we have to import goods and services from India. Have we focused on framing smart policies, regulations and procedures centered around this reality to help make Bhutanese private sector vibrant for developing our economy? I believe, no, not at all. Without policy reforms focused on strengthening our own workforce and systems for economic development, parroting private sector as engine of growth is going to get us nowhere. And, we should not be big fan of miracles.

Broadly Jaigaon does business with Bhutanese in four ways, as: (i) an end-use seller, (ii) business to business (B2B) supplier, (iii) government proxy supplier through Bhutanese business to government (B2G) linkages, and (iii) service provider. They buy from other parts of India and sell direct to end-users and/or Bhutanese business enterprises in B2B set-up or through B2G links, and also provide services to both Bhutanese individuals and businesses.

Jaigaon is attractive to end-users as well as to businesses. The Bhutanese consumers find it beneficial for purchase from Jaigaon. The fact is consumer nondurable goods, motor parts, construction materials, electrical and electronic items and others are easily available and much cheaper in Jaigaon than in Phuentsholing. The Bhutanese are very price sensitive (not quality conscious as much) consumers. Therefore why shouldn’t one go there and buy? Let us take a look why it is advantageous through the angle of  the so called “ease of doing business” there and here.

Jaigaon has strong traditional-type supply chain: local, regional, national and even international (if rumours are to be believed). I have heard neither Bhutanese business houses nor the Government ever making solid efforts towards improving/strengthening Indian supply chain to benefit Bhutanese consumers. Naturally the Bhutanese business supply chains revolve around Jaigaon and its networks. They need Jaigaon help rather than being able to contend with it. So even B2B operations cannot bypass Jaigaon, except for some direct dealership of manufacturers.

For any import of goods from India, we need 7 invoices, yes seven. First, we need Proforma Invoice, based on which money is sent to supplier through Real Time Gross Settlement (RTGS) or bank draft. Upon receipt of the amount, goods are supplied that require 6 invoices: 1 for Indian customs, 1 Bhutan customs, 1 buyer, 1 for bank through which RTGS was sent, 1 more for Bhutan customs to process exemption certificate, and 1 copy goes back to supplier with buyer’s acknowledgment of goods. How many invoices will Jaigaon buyers require when they buy goods from other parts of India? Just two, one each for seller and buyer.

The payment to supplier through Real Time Gross Settlement or RTGS involves filling 2 forms, submitting an undertaking with a copy of citizenship ID and issuing a cheque. The “real time” transfer of fund from any Bhutanese bank to seller account in India takes 2 to 6 days depending on interest and efficiency of bank staff here and there. Sometimes it takes weeks. The Jaigaon trader can walk to the bank and deposit cash in supplier’s account real time.

The cost is the other important factor where two issues come into play: taxation and quality. Indian suppliers sell to Bhutanese on maximum retail price (MRP), with/without discounts (seller’s discretion). MRP includes Indian taxes, including value added taxes (VATs). Bhutanese import goods at MRP (minus small discount if any) and pay Bhutan sales tax (BST). Upon payment of BST, Bhutanese buyers apply for Indian tax Exemption Certificates that enable return to the Bhutanese buyers normally an amount of 14.5% of invoice value. Most of the Jaigaon suppliers do not accept Exemption Certificates issued by Department of Revenue & Customs (see below for the reason). Therefore Bhutanese consumers bear both Indian VAT (to the tune of 14.5%) plus BST.

The Bhutanese government bureaucracy is rusted and relaxed. It cannot make effort to see beyond imposing numerous (some outdated) rules and regulations. The Indian entrepreneurs are becoming innovative and globalized. They get goods manufactured all over the world and sell in India, after payment of applicable Indian import duty, as an Indian item with Indian rupee MRP but with label “ Made in (country of manufacture)”, e.g. “Made in Korea” for Hyundai spare parts. The Bhutanese have to pay import duty because of the label, even if it is imported from India. The fact that Bhutanese consumers have to pay double, Indian and Bhutanese, import duties and/or bear double taxation (Indian VAT+BST) are of no concern to our bureaucracy, because these are “as per the rules”. And, Bhutanese consumers do not come in the picture as far as government to government excise refund is concerned.

On quality, Jaigaon finds itself in a heavenly abode to supply spurious goods to Bhutanese. Jindal is an ISO 2001-2008 certified Indian company. Jindal corrugated galvanized iron (CGI) sheets (with its trade mark and ISI stamp) bought from Jaigaon corrodes in less than two years. Jaigaon suppliers know that Bhutanese cannot go back to take them to task for poor quality supply. They sell Jindal imitation at Jindal genuine MRP with discount (Jaigaon is expert in discount psychology), and do not accept Exemption Certificates because goods traded under shadow economy are not reflected in their books of account. Jindal is an example but you name it and they may have it. The GST (fingers crossed) may make such parallel economy disappear (hopefully).

The only area that has slight edge over Jaigaon is direct dealership of goods, the manufacturers/suppliers of which accept Indian tax Exemption Certificates issued by Bhutanese customs authorities, because of small tax advantage (14.5% in India against 5-10% in Bhutan), but not in any other terms. If the dealership is of product associated with after-sales-service, the advantage gets neutralized because of hi-fi sales with poor after-sales-services here.

How can any Bhutanese private sector possibly be price and quality competitive, play positive role and pass benefits onto Bhutanese consumers? And on top of all banks charge 14% interest (may be offsetting bad loans) on business loans compared with about 13% (which may come down significantly after bad loans clean-up) in India on working capital & term loans of Rs 25 lacs or less. Then...

There is no system of BST for services. Anyone can go to Jaigaon, and avail the services. I do not know anyone can or just doing it. The fact is Jaigaon fully encashes on poor quality of Bhutanese workforce and their low productivity, and our regressive imported labour policy. I believe there is no difference of opinion on workforce. The imported labour policy requires that all border towns employ non-nationals as day workers only, meaning they stay across the border and commute everyday to Bhutan for work. Let the institutional commitment, work ownership, organizational discipline, team work, labour control and management of Bhutanese enterprises be thrown out of the window. The workers commute everyday from Jaigaon for few years and then open their own businesses there that obviously has helped expand Jaigaon market. Jaigaon started with such people and Dadgiri (opposite Gelephu) is fast moving towards the capitalization (while we play around with our notion of one-half km land strip as national security buffer) which, for all you know, may accelerate after 19 May 2016. People go for services where good worker is, not where there is just a service. 

The rules do not apply when low calibre non-national skill-workers come into Bhutan under  work-permits and work as “thikedars” (proxy contractors). Jaigaon and its associates supply those “thikedars”. They need neither licences nor to pay taxes because they do not sign contracts. The immigration rule restricting the person to work in specific project for which the person has been recruited is mostly bypassed for the reasons known to regulators. The “thikedars” carryout multiple electrical, plumbing, painting, aluminium window or marble work contracts dictating their costs and terms to Bhutanese. They undertake such contract works under everyone’s nose. Can we not regularise award of such contracts to non-nationals making them follow country's rules and regulations and pay taxes if Bhutanese are not available or capable? I do not need to tell you which rule regulators apply -- "We have hundreds of electricians, plumbers and other skilled workers passed out from TTIs, and should get the works carried out by Bhutanese. Also award of contract to non-nationals are not permitted as per the rule.” The same illusionary lines that are repeated for years while the construction sector is exploited by unscrupulous elements. Everyone knows what the ground reality is! Why would anyone make an effort to regularize/systematize such award of electrical/plumbing contracts to non-nationals when people benefit from not doing it? As easy and simple as this!

The system is too loose and leakages far too many. The conservative imported labour policy refuses to trust Bhutanese entrepreneurs/investors on any account as far as non-national workforce is concerned. I still do not understand why the employers cannot be allowed to recruit non-national workforce as required and be made fully accountable with regard to their management, service utilization, and safe and secure habitation following the rules and regulations. The fact that it is the optimized blend of national and non-national workforce that stimulate economic activities and generate jobs, and also upgrades local skills is beyond comprehension of pseudo-regulators, and therefore not permitted "as per the policies/rules". What good is a policy/regulation/rule that revolves around comfort and convenience of regulators but is regressive to our own development, and therefore fails to serve Tsa-Wa-Sum (King, Country & People).

As long as standard of living is better on our side, the Jaigaon growth is imperceptible (is it also camuflaged?) or even if noticed it is not so much of an issue for most on this side. I wonder what would be the situation when the balance tilts on that side (may happen sooner than later). We may perhaps look back and say we knew North Korea, Laos, Cambodia, Myanmar, and New Guinea were east Asia's failed states, but not anymore because they now trade and interact with the world. It may, by then, be too late to ratify the Bangladesh, Bhutan, India and Nepal (BBIN) Motor Vehicle Agreement (MVA) and participate in BBIN economic zone, or to do anything of substance except watch Jaigaon pass by the window. The entrepreneurial spirit need solid support and encouragement. As of now I do not see any policy support forthcoming may be because as Upton Sinclair rightly said, ”it is difficult to get a man to understand something when his job depends on not understanding it.”