Bhutan’s Enigmatic Software Industry

Bhutan Software
Bhutan’s enigmatic software and copper export business that had the government looking askance for years could be headed for a complete meltdown.

The trade department has issued a notification to its regional offices not to issue the certificate of origin for software being exported to third countries from Bhutan.

“Without the certificate of origin, the importer in Hong Kong or Singapore won’t accept our product,” Tandin Dorji of Yarab Pvt. Ltd. said.

“It means we won’t earn hard currency to import copper, and the copper factories that export the product to India and earn Indian Rupee (INR) will have to be shut down.”

While there has been widespread suspicion that the industry is leading to large outflows of INR, and contributing to the crunch in the Bhutanese economy, Tandin Dorji said these allegations were false and had no basis.

“In fact, this industry brings in INR, and shutting it down is only going to add to the crunch, and loss of revenue to the government” he said.

Pema Wangchuk of Bhutan Metals said that, besides the six copper industries employing about 80 people, it pays a TDS (tax deducted at source) of three percent on software exports, 30 per cent as BIT to the government, and a duty of 1.5 Ngultrum (US$.02) on every kg of copper imported.

Pema Wangchuk said the government approved the software and copper export projects in 2001. “Since the government policy allowed tax-free imports of raw material from third countries, if done with one’s own hard currency earnings, our partners in India suggested that we export software, and use the hard currency to import copper for export to India” Pema Wangchuk said.

The software procured from India was then packed and labelled in Bhutan and exported to other countries.

The sale proceeds was used to buy copper from another country, which was again sold back to India.

India has a five percent duty on copper imported as a raw material.

Five years ago, these businesses were closely scrutinised by the government, after complaints that they were mere fronts. The government declared that rules were being followed and that business was not illegal.

“We went through all their books of accounts for a year and found no loopholes, so the businesses technically becomes legal” a senior government official, who was involved in the study said.

One of the problems with this business is that the value of software imported from India is not reflected anywhere in the trade statistics. But when it goes out as an export, it is worth billions of Ngultrums.

Pema Wangchuk of Bhutan Metals explained that the cost of software is normally paid back to the Indian associates after the entire cycle is completed, and the copper exported to India. “If we export about INR 2,000M of copper, then INR 1,800M goes back to them as the cost of software” he said. “At the end of the day, some INR still remains within the country.” These payments have never reflected in trade data, distorting export and import figures.

The Industry Director, Tandin Tshering, said the government should see whether a business has a net benefit to the economy, and if it uses the formal channels. “If it does, I don’t see anything wrong with it” he said.

On the notification not to issue the certificate of origin, Pema Wangchuk said they have not received it so far. “If the government is taking away our source of foreign currency, then they should be willing to provide it for us” he said. “We’re worried.”

Tandin Dorji added that their accounts and balance sheet have always been open for inspection to customs and industry officials.

Trade officials said that any business, like the copper industry, which relies on tax differentials between two countries is not economically viable, and should be discouraged. “If anything happens at the taxation front, the business would crumble,” the official said.

 

———- The story above appeared in KUENSEL on 15 March, 2012 ———-

 

The country’s exports could dip in 2012 that is, if the government has kept its word of not issuing certificates of origin as mentioned in the economic development policy for the software export business, which total Nu 3.3B last year.

All the export went to Hong Kong, making it Bhutan’s largest trading partner, other than India.

The copper industry, which had an export of Nu 1.9B last year, should have also melted into oblivion since it is linked to software export which supposedly earns the hard currency to import copper from a third country for export to India.

Those in the business have said that without a certificate of origin the software will not be accepted by importing third countries as a product from Bhutan. This means no hard currency to import copper from Korea for export to India. Last year the industry had imported Nu 1.9B of copper from South Korea.

The government notification not to issue certificates of origin came in mid March when the Rupee crunch the economy was facing had gone public and measures were being taken to curb the Rupee outflow.

The software and copper industry have been viewed as one of the contributors to the draining of the Rupee because the people who provide the software to partners in Bhutan are in India and need to be paid in Rupee.

The more serious allegations against the industry is that it was serving as a conduit to turn black money into white, by using the Bhutanese banking channel, for which those in the industry got a decent commission that ran into millions.

Those in the industry maintain that these are mere allegations, and that every transaction they make is recorded, and all their accounts are open to inspection. They are in the business to cash in on the tax differential that exists between India and Bhutan, when importing copper as a raw material.

Both copper and software were among the economy’s top ten imports and exports in 2011. Software export was next only to Ferro silicon, which was around Nu 6B in 2011. Copper was in third place, with an export value of Nu 1.9B.

In the top ten import category, copper with an import value of Nu 1.9B comes after diesel oil, which had an import value of Nu 3.6B last year.

Software comes from India via email but its value is nowhere reflected in the trade statistics. The item is packed and labeled in Bhutan and exported to Hong Kong, which pays for it in hard currency. This is then used to procure copper rods from South Korea, which is stretched into stranded wires in Phuentsholing and then exported to India.

In an earlier interview those in the business said their business was clean and open to inspection any time. Besides employing about 80 people the six copper industries paid a TDS (tax deducted at source) of three percent on software exports, 30 percent as BIT to the government, and a duty of Nu 1.5 on every kg of copper imported.

The government approved the software and copper export projects in 2001. With the government policy allowing tax-free imports of raw material from third countries if done with one’s own hard currency earnings, those in the business said that their partners in India suggested exporting software and using the hard currency to import copper for export to India.

The cost of software is normally paid back to the Indian associates after the entire cycle is completed with copper exported to India. Almost 80 percent of the total value flows back to India but these payments are never reflected in the trade data.

Five years ago, these businesses were closely scrutinised by the government, after complaints that they were mere fronts. The government declared that rules were being followed and that business was not illegal.

 

———- The story above appeared in KUENSEL on 1 October, 2012 ———-

KUENSEL
This story from KUENSEL

KUENSEL is Bhutan's national newspaper. Founded in 1967, KUENSEL is Bhutan's oldest newspaper.

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