S
Stephanie Alkoussa
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On 1 January 2026, Bhutan introduced a 5% goods and services tax (GST), replacing its fragmented sales tax regime. Like value added tax (VAT), GST taxes consumption while allowing registered businesses to recover tax on eligible purchases. For a small, mountainous and import-dependent economy, the challenge is making “Smart Tax, Smart Economy” work in practice.
The ICTD working paper on Bhutan’s rollout examines the first filing cycles (1 January – 26 June 2026). Its central lesson is that registration, invoicing, filing, payment, credits and refunds must work as a connected system. Early receipts and filing rates show that businesses are using the new channels at scale, but they do not yet establish that returns are accurate, payments and credits are correctly posted, refunds are timely, or the reform is generating lasting revenue and compliance gains.
Bhutan reported Nu4.40 billion (Bhutanese ngultrum) in gross GST collections between 1 January and 16 June, with 81% collected on imports. Import GST builds on established customs procedures, while domestic GST requires businesses to issue invoices, keep records and claim credits correctly, making collection more dependent on taxpayer compliance and the effective functioning of the GST system.
For the January 2026 tax period, over 87% of monthly filers submitted returns by the deadline. By 26 June, this figure rose to almost 98% once late returns were included.
Importers pay GST upfront on taxable goods, when goods enter Bhutan, and generally before businesses sell their goods. For registered businesses, if eligible input tax credits exceed GST due on sales, the difference becomes a credit that is either carried forward or refunded, subject to the rules. Until the tax is recovered through credits or refunds, firms cover the cost of the recoverable tax, leaving less cash for stock, wages and investment.
A fuller assessment requires more filing and refund cycles, alongside data on outstanding credits, refunds, payment reconciliation and net revenue. Assessing revenue gains also requires comparison with the previous tax regime, accounting for changes in economic activity and imports.
Digital tax administration requires careful planning, sequencing and implementation. Indeed, BITS-1, the initial Bhutan Integrated Taxation System, failed to deliver an operational GST platform, delaying implementation. An ambitious scope, delivery delays and weak oversight prevented registration, filing, payments and taxpayer accounts from functioning together.
The second version, BITS-2, adopted standardised software and phased delivery, prioritising core GST functions and testing them with selected taxpayers before launch.
During the early rollout, automated reconciliation between the Electronic Customs Management System (eCMS) and BITS-2 remained incomplete. When a registered importer paid GST at customs, the customs declaration and payment information needed to be transferred accurately to BITS-2. BITS-2 needed this information to confirm that the importer had already paid GST and could claim it as an input tax credit. However, errors or delays in transferring or matching this information could delay the use of import credits to offset GST due on sales, either increasing the payment due or delaying the recognition of an excess credit balance.
Pending full integration of the eCMS and BITS-2, the Department of Revenue and Customs (DRC) used manual checks to verify and reconcile import credits. These checks required staff time and could become harder to sustain as transaction volumes increased. The eCMS portal now reports integration with BITS for the exchange of taxpayer, GST and payment information, providing a digital connection between the two systems.
The OECD’s work on integrated digital tax administration reinforces this point: digital filing depends on reliable connections between systems, data and administrative processes.
Bhutan’s experience highlights four practical lessons for matching GST reform ambitions to administrative capacity and businesses’ ability to comply.
Bhutan set mandatory registration at Nu5 million in annual turnover, with voluntary registration from Nu2.5 million, subject to conditions. Income tax returns filed in 2024, indicate that around 95% of business filers had turnover below the mandatory threshold. Separate GST registration data recorded 4,570 taxpayers by mid-June 2026, with almost 69% of those concentrated in Thimphu and Phuentsholing, indicating the need for accessible taxpayer support outside the main commercial centers.
The threshold helps focus scarce administrative resources on a manageable taxpayer base, but leaves much of the business population outside the invoice-credit chain. Consequently, small, unregistered businesses may still pay GST when importing or buying from a registered supplier but are unable to claim input tax credit.
Despite meeting the threshold, registered firms may still lack bookkeeping skills, accounting support, hardware or reliable internet. Taxpayer support should help businesses correct invoices and filing errors, match payments to their returns and provide the records needed to claim GST paid on imports.
To drive public acceptance, the National Assembly reduced the initial 7% GST rate to 5%. Early evidence does not establish, however, that the lower rate improved compliance or limited inflation. The expansion of GST exemptions in June 2026, sought to address affordability concerns but narrowed the tax base and could eventually lead to further exemptions. Such measures call for clear justification and periodic review, taking account of missed revenue, consumer benefits and effects on the invoice-credit chain.
The DRC’s training and regional focal points should support taxpayers in meeting their GST obligations. For example, unintentional first-cycle mistakes need accessible correction routes, while deliberate non-registration and false invoicing require proportionate enforcement. Enforcement can broaden as administrative capacity and workflows improve, without postponing action against serious abuse.
The early evidence points to a clear priority for the DRC: strengthen core operational functions such as dependable payment posting, accurate credit recognition, timely refund processing, reliable customs integration and clear responsibility for resolving exceptions.
Lowering the registration threshold or adding reporting requirements before these functions are operating reliably risks increasing errors, unresolved cases and workloads for both the department and taxpayers.
In parallel, taxpayer support services should be maintained as a permanent function, with service standards, escalation routes and recurring problems informing guidance and system improvements. Accountants, business associations and software providers can extend the DRC’s reach with consistent guidance.
The Tax Administration Diagnostic Assessment Tool (TADAT) offers a reference for monitoring administrative performance. Bhutan should track system availability, filing timeliness and accuracy, payment-posting errors, customs matching, refund processing and case-resolution times, alongside revenue. Publishing selected indicators would help identify persistent weaknesses and guide further reform.
Bhutan’s lesson for other small digitalising economies is to design law, technology and taxpayer support together, and expand as administrative capacity allows. Legislation starts a GST reform; reliable daily operations determine whether it succeeds.
Read the full ICTD Working Paper 244 and the accompanying Research in Brief 178.
The ICTD working paper on Bhutan’s rollout examines the first filing cycles (1 January – 26 June 2026). Its central lesson is that registration, invoicing, filing, payment, credits and refunds must work as a connected system. Early receipts and filing rates show that businesses are using the new channels at scale, but they do not yet establish that returns are accurate, payments and credits are correctly posted, refunds are timely, or the reform is generating lasting revenue and compliance gains.
What the early figures on GST rollout show and what they don’t
Import dependence and established customs capacity
Bhutan reported Nu4.40 billion (Bhutanese ngultrum) in gross GST collections between 1 January and 16 June, with 81% collected on imports. Import GST builds on established customs procedures, while domestic GST requires businesses to issue invoices, keep records and claim credits correctly, making collection more dependent on taxpayer compliance and the effective functioning of the GST system.
High uptake shows early engagement
For the January 2026 tax period, over 87% of monthly filers submitted returns by the deadline. By 26 June, this figure rose to almost 98% once late returns were included.
Timely VAT refunds protect businesses’ working capital
Importers pay GST upfront on taxable goods, when goods enter Bhutan, and generally before businesses sell their goods. For registered businesses, if eligible input tax credits exceed GST due on sales, the difference becomes a credit that is either carried forward or refunded, subject to the rules. Until the tax is recovered through credits or refunds, firms cover the cost of the recoverable tax, leaving less cash for stock, wages and investment.
A fuller assessment requires more filing and refund cycles, alongside data on outstanding credits, refunds, payment reconciliation and net revenue. Assessing revenue gains also requires comparison with the previous tax regime, accounting for changes in economic activity and imports.
Digital systems are part of the tax, enabling or hindering collection
Digital tax administration requires careful planning, sequencing and implementation. Indeed, BITS-1, the initial Bhutan Integrated Taxation System, failed to deliver an operational GST platform, delaying implementation. An ambitious scope, delivery delays and weak oversight prevented registration, filing, payments and taxpayer accounts from functioning together.
The second version, BITS-2, adopted standardised software and phased delivery, prioritising core GST functions and testing them with selected taxpayers before launch.
During the early rollout, automated reconciliation between the Electronic Customs Management System (eCMS) and BITS-2 remained incomplete. When a registered importer paid GST at customs, the customs declaration and payment information needed to be transferred accurately to BITS-2. BITS-2 needed this information to confirm that the importer had already paid GST and could claim it as an input tax credit. However, errors or delays in transferring or matching this information could delay the use of import credits to offset GST due on sales, either increasing the payment due or delaying the recognition of an excess credit balance.
Pending full integration of the eCMS and BITS-2, the Department of Revenue and Customs (DRC) used manual checks to verify and reconcile import credits. These checks required staff time and could become harder to sustain as transaction volumes increased. The eCMS portal now reports integration with BITS for the exchange of taxpayer, GST and payment information, providing a digital connection between the two systems.
The OECD’s work on integrated digital tax administration reinforces this point: digital filing depends on reliable connections between systems, data and administrative processes.
Match reform ambitions to administrative and taxpayer capacity
Bhutan’s experience highlights four practical lessons for matching GST reform ambitions to administrative capacity and businesses’ ability to comply.
Set a manageable registration threshold
Bhutan set mandatory registration at Nu5 million in annual turnover, with voluntary registration from Nu2.5 million, subject to conditions. Income tax returns filed in 2024, indicate that around 95% of business filers had turnover below the mandatory threshold. Separate GST registration data recorded 4,570 taxpayers by mid-June 2026, with almost 69% of those concentrated in Thimphu and Phuentsholing, indicating the need for accessible taxpayer support outside the main commercial centers.
The threshold helps focus scarce administrative resources on a manageable taxpayer base, but leaves much of the business population outside the invoice-credit chain. Consequently, small, unregistered businesses may still pay GST when importing or buying from a registered supplier but are unable to claim input tax credit.
Turnover does not guarantee readiness
Despite meeting the threshold, registered firms may still lack bookkeeping skills, accounting support, hardware or reliable internet. Taxpayer support should help businesses correct invoices and filing errors, match payments to their returns and provide the records needed to claim GST paid on imports.
Balance revenue goals with public acceptance
To drive public acceptance, the National Assembly reduced the initial 7% GST rate to 5%. Early evidence does not establish, however, that the lower rate improved compliance or limited inflation. The expansion of GST exemptions in June 2026, sought to address affordability concerns but narrowed the tax base and could eventually lead to further exemptions. Such measures call for clear justification and periodic review, taking account of missed revenue, consumer benefits and effects on the invoice-credit chain.
Combine taxpayer support with proportionate enforcement
The DRC’s training and regional focal points should support taxpayers in meeting their GST obligations. For example, unintentional first-cycle mistakes need accessible correction routes, while deliberate non-registration and false invoicing require proportionate enforcement. Enforcement can broaden as administrative capacity and workflows improve, without postponing action against serious abuse.
Recommended GST strategy for DRC moving forward: consolidate before expanding
The early evidence points to a clear priority for the DRC: strengthen core operational functions such as dependable payment posting, accurate credit recognition, timely refund processing, reliable customs integration and clear responsibility for resolving exceptions.
Lowering the registration threshold or adding reporting requirements before these functions are operating reliably risks increasing errors, unresolved cases and workloads for both the department and taxpayers.
In parallel, taxpayer support services should be maintained as a permanent function, with service standards, escalation routes and recurring problems informing guidance and system improvements. Accountants, business associations and software providers can extend the DRC’s reach with consistent guidance.
The Tax Administration Diagnostic Assessment Tool (TADAT) offers a reference for monitoring administrative performance. Bhutan should track system availability, filing timeliness and accuracy, payment-posting errors, customs matching, refund processing and case-resolution times, alongside revenue. Publishing selected indicators would help identify persistent weaknesses and guide further reform.
Bhutan’s lesson for other small digitalising economies is to design law, technology and taxpayer support together, and expand as administrative capacity allows. Legislation starts a GST reform; reliable daily operations determine whether it succeeds.
Further reading
Read the full ICTD Working Paper 244 and the accompanying Research in Brief 178.
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