GST Squeeze on the Service Sector

2026-01-26 - 05:40

With the rollout of the Goods and Services Tax (GST), public attention has largely been fixed on the price of goods. This debate, while important, has obscured a far more consequential shift taking place quietly in the background: the first-time taxation of a vast and diverse service sector that forms the backbone of Bhutan’s private economy. Under the previous Bhutan Sales Tax (BST) regime, most services escaped taxation, barring a few such as tourist-rated hotels, restaurants, cable television, and certain telecom services. GST changes this fundamentally. For the first time, over 1,500 service companies are now required to levy and remit a 5 percent tax. This is not merely a technical adjustment; it is a structural change that will inevitably push up the cost of services that Bhutanese households and businesses rely on daily from construction and real estate to legal advice, vehicle repairs, IT services, and tourism. The impact is already being felt. Contractors will now charge GST on construction services, increasing building costs for both private citizens and the government. Tour operators warn that GST adds yet another layer to an already expensive destination. Professionals such as lawyers and consultants fear that GST will make already high fees less accessible, while small service firms worry about losing clients to non-registered competitors who can undercut them by 5 percent. Beyond higher prices lies an equally serious concern which is compliance. Bhutan’s service sector is dominated by small firms with lean staffing. Monthly GST filing, record-keeping, and the risk of audits and penalties impose real administrative and financial burdens. For many, this means hiring accountants or paying professionals, adding to costs without adding productivity. There is no doubt GST broadens the tax base, improves transparency, and brings services into the formal economy. Over time, input tax credits and better business practices could improve efficiency and competitiveness. The challenge, therefore, is not whether GST is necessary, but how it is implemented and managed. In a weak economy, abrupt cost increases and heavy compliance demands risk stifling the very sector that employs tens of thousands. A phased approach, targeted relief, simplified compliance for small service providers, and closer engagement with affected sectors could help ensure that tax reform strengthens, rather than strains, Bhutan’s service economy. “Taxes are paid in the sweat of every man who labors.” — Franklin D. Roosevelt