𝐈𝐬 𝐭𝐡𝐞 𝐂𝐨𝐮𝐧𝐭𝐫𝐲 𝐑𝐞𝐚𝐝𝐲 𝐟𝐨𝐫 𝟏𝟎% 𝐓𝐚𝐱 𝐨𝐧 𝐅𝐢𝐱𝐞𝐝 𝐃𝐞𝐩𝐨𝐬𝐢𝐭 𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭?

…𝒕𝒉𝒆 𝒎𝒐𝒗𝒆 𝒎𝒂𝒚 𝒘𝒆𝒂𝒌𝒆𝒏 𝒃𝒂𝒏𝒌 𝒍𝒊𝒒𝒖𝒊𝒅𝒊𝒕𝒚, 𝒉𝒖𝒓𝒕 𝒓𝒆𝒎𝒊𝒕𝒕𝒂𝒏𝒄𝒆𝒔, 𝒂𝒏𝒅 𝒅𝒊𝒔𝒕𝒐𝒓𝒕 𝒇𝒊𝒏𝒂𝒏𝒄𝒊𝒂𝒍 𝒃𝒆𝒉𝒂𝒗𝒊𝒐𝒓

By Yeshi Dolma

The government’s proposal to introduce a 10 percent tax on interest income from fixed deposits has drawn serious concern from economists, financial experts, and members of the Bhutanese diaspora. Many fear that the move could weaken the country’s savings culture, affect bank liquidity, discourage remittances, and slow economic momentum at a time when financial stability is critical.

An economist noted that while the proposed tax might yield minimal revenue, its broader consequences could be significant. “Bhutan is a lower middle-income country. It needs investments to fuel economic growth, and the sources of investments come from bank loans, which depend on stable savings such as fixed deposits. Taxing the interest earned from the fixed deposit will reduce the incentives for people to put their savings in a fixed deposit,” the expert explained.

With annual inflation at 4 percent and projected to rise to 5.5 percent in the next fiscal year, returns on fixed deposits are already modest. For instance, if a deposit earns 7 percent, the proposed tax would reduce this to 6.3 percent. Adjusted for inflation, the real interest rate would fall to 2.3 percent, or as low as 0.8 percent if inflation projections for 2025 and 2026 hold true. “People may not sit down to calculate real interest rates, but they will sense that saving in a fixed deposit no longer makes sense. This could push savers to withdraw their funds, move to ordinary savings accounts, or look for alternative assets that are untaxed,” the expert said.

The effect on banks could be substantial. Bhutanese banks play a key role in converting household and business savings into productive investment. These institutions finance major sectors such as hydropower, tourism, small businesses, and infrastructure. A reduction in long term deposits could lead to an imbalance between bank assets and liabilities, increase their cost of funds, and eventually push lending rates higher, potentially slowing private sector growth.

According to the National Statistical Bureau’s National Accounts Statistics 2024, gross national savings, which includes both government and private savings, stood at Nu 49,129.23 million, up from Nu 48,361.04 million in 2022.

overnment savings showed a deficit of Nu -9,559.87 million, while private savings from households, private, and public corporations totaled Nu 58,689.09 million. Domestic investment demand exceeded national savings, resulting in a saving investment gap of Nu 54,785.20 million. The saving investment ratio was 0.44, meaning national savings financed only 44 percent of domestic investment in 2023. This was, however, an improvement from 2022 when savings financed 38 percent.

In several developing economies, governments have traditionally avoided taxing interest income until financial markets matured and citizens had greater investment options. India, Malaysia, and Thailand implemented such taxation only after their markets became more developed and diverse. India introduced tax on interest income in the 1990s after creating accessible markets for bonds, mutual funds, and equities. Similarly, Malaysia and Thailand imposed these taxes after domestic financial instruments became widespread and familiar to the public.

Bhutan’s financial sector remains limited in scope, with few safe investment options outside bank deposits. The expert noted that remittances from Bhutanese citizens working abroad have begun to increase steadily in recent years, partly because the absence of interest income tax makes Bhutan an appealing destination for diaspora savings. “If we start taxing interest income, Bhutanese abroad may prefer to keep their savings overseas or invest in their host countries where their money can generate better returns,” the expert said. “It is already happening, Bhutanese are investing in property markets abroad, like in Australia, and this policy will only push more people in that direction.”

There is concern that the proposed tax could discourage savings at a time when Bhutan requires more domestic investment. “It penalizes savings at a time when Bhutan needs to encourage it the most,” the expert added. The tax may also impact Bhutan’s foreign reserves, balance of payments, and investment levels, which have all benefited from remittance inflows.

On the timing of the proposal, the expert was direct. “The proposed tax is not only untimely but irrelevant to Bhutan’s current structure. Our economy remains undiversified and is heavily dependent on government spending, hydropower, and tourism. The argument that this tax supports post pandemic recovery is hollow, Bhutan’s economy has already recovered beyond pre pandemic levels. What we face now are deeper structural challenges, not recovery issues.”

Rather than taxing interest income, the government focus on planned broad based taxes such as the Goods and Services Tax and excise taxes, and collaborate with state owned enterprises to boost dividend payments instead of introducing taxes that affect the wider population.

Economist Sanjeev Metha expressed similar concerns. “This interest tax on fixed deposits will not alter saving rate any significantly, however it will change the financial portfolio of the individuals (or even firms). Most likely, the individuals will shift their funds from fixed deposits to other untaxed alternatives — recurring deposits, stocks, bonds, real estate, and bullion, depending upon their propensity to risk taking. The larger the extent to which the new financial portfolio contains financial assets beyond banks, the banks would suffer more from liquidity crunch. Interest tax on one financial asset will only result into distortions in investors’ choices. Some people might prefer to hold cash rather than any other financial asset. Worst scenario, if the people shift the resources from fixed deposits to real estate, the land prices may further go up.”

He added, “This tax will not add much to the tax revenue due to a likely shift in the financial portfolio away from the fixed deposits. Such policy shocks adversely affect the investors’ psychology and affect growth process. It will also not have any significant distributive effect due to portfolio shift or may even worsen the distribution if the top percentiles move to riskier but high yield assets.”

A Bhutanese individual who has lived in Australia for about 10 years shared a personal perspective. “We work hard abroad and save our money back in Bhutan. I have invested part of my savings at home, and the rest is in a fixed deposit account as my retirement plan. Hearing about the 10 percent tax on interest income was disappointing because we keep our savings in banks to ensure our money retains its value in the future,” the individual said.

As Bhutan evaluates the proposed tax, the debate reflects a larger concern about balancing revenue needs with preserving financial stability. Many believe that imposing interest tax before the economy and financial markets mature could produce unintended negative consequences.