Vehicle Tax Cut Fuels Growth and Controversy

By businessbhutan Canada Fund

Policy spurs affordability but raises concerns on forex, climate, and long-term sustainability

The recent government decision to reduce taxes on fuel-powered vehicles has triggered mixed reactions from economists, environmental advocates, and electric vehicle (EV) stakeholders across Bhutan. While the move promises affordability and a boost to the auto sector, critics warn of deeper implications for the country’s foreign reserves, environmental goals, and long-term fiscal health.

A Boon for Consumers and the Automotive Sector

Under the new tax policy, small- and mid-sized vehicles are now 9% to 21% cheaper, significantly reducing purchase costs by tens of thousands of ngultrum. This shift makes vehicle ownership more accessible to lower- and middle-income families, and could stimulate consumer spending.

“The reduced cost of vehicles will increase affordability, especially for first-time buyers in rural areas,” said an industry observer. “It also provides a much-needed stimulus for dealers, service workshops, and ancillary businesses.”

Additionally, the revised FOB (Free on Board) valuation for vehicle imports from India — as opposed to the previous CIF (Cost, Insurance, Freight) method — is expected to lower import costs and ease pressure on Bhutan’s foreign exchange reserves.

Concerns over Foreign Exchange and Environmental Costs

However, not all experts are convinced. Professor Sanjeev Mehta, a leading economist at the Royal Thimphu College (RTC) voiced concerns over the policy’s logic. Asserting that he is not convinced about the logic of lower tax on vehicles, he said, “Vehicles are not ‘bad goods’ like tobacco or alcohol, but they do place significant stress on foreign exchange reserves. History shows us that once vehicle imports spike, governments are forced into ad hoc bans or restrictions to control the trade deficit.”

The surge in fuel car imports, if left unchecked, could undermine Bhutan’s broader vision of environmental stewardship and carbon neutrality. Critics argue that the reduction in green and excise taxes may inadvertently encourage a shift toward larger, more polluting petrol vehicles.

The EV Sector Responds: Supportive but Cautious

Stakeholders in the electric vehicle sector have responded positively but cautiously to the government’s direction.

An EV dealer noted: “We fully support the government’s vision of a cleaner, greener Bhutan. While EVs are more expensive upfront due to battery costs, they offer long-term savings.”

“For instance, a Nu 2 million EV has zero running costs at present, whereas a Nu 1 million fuel car can consume Nu 1.2 million in fuel over 10 years,” she added.

As echoed by another key player in Bhutan’s EV market, it might seem like a dilemma, but actually it “doesn’t affect EV dealers that much. “

“EVs have their own market segment, and the demand is mostly driven by public awareness, environmental concerns, and long-term cost savings. Many people are already choosing EVs over fuel cars because of lower maintenance and running costs. So while the government policies might seem mixed, the public’s preference plays a bigger role in shaping the market,” said a dealer.

He reiterated, “EV demand is driven more by public awareness, environmental consciousness, and long-term savings than just tax policy. So while the playing field seems altered, we’re confident that many Bhutanese will continue to choose EVs.”

Dealers emphasize the importance of continued government incentives, charging infrastructure, and public education to maintain momentum toward sustainable transport.

Weighing the Economic Trade-Offs

The government’s move offers a number of economic benefits. There will be pros like Enhanced consumer affordability and increased mobility for rural and low-income populations; stimulus to the automotive sector, including vehicle sales, servicing, and logistics; Reduced import costs due to FOB-based duty calculations; and promotion of economic equity through broader vehicle access.

However, economists also caution about impending cons like short-term revenue loss from reduced tax collections; Risk of limited pass-through, with dealers potentially absorbing tax cuts as profits; Neglect of public transport, risking higher congestion and inequality; and Environmental setbacks, as reduced green taxes could spur higher emissions.

Long-Term Outlook: Guardrails for Progress

Leading economists alerted that while the tax reduction offers short-term economic relief and consumer benefits, the long-term success of the policy will depend on dealer transparency in pricing, sustained EV promotion, and targeted investments in public transport and sustainable infrastructure.

“The government must tread carefully to ensure that affordability today does not come at the cost of economic stability, climate commitments, and urban mobility challenges tomorrow,” said a financial expert. “It’s not just about whether cars are cheaper,” said an economist. “It’s about whether Bhutan’s policies are resilient, equitable, and aligned with our vision of Gross National Happiness.”

According to Professor Sanjeev Mehta, tax cuts will lower the relative prices of the carbon fuel cars in terms of EVs, and make them cheaper. This would stimulate substation effect in their potential choices- from EVs to carbon fuel cars.

“Actual market response will depend on the interaction between two factors- price elasticity of demand and its interaction with the environmental sensitivity of the potential buyers,” he said, whether this reduction in price will make these cars affordable and influence the actual decision to purchase.

He added, “Second thing is interaction. If the price elasticity outweighs environmental sensitivity, the demand for carbon fuel cars will rise and vice versa. Obviously, any forecasting is dubious. I feel that a majority of the low and middle income group, who the tax cuts mainly aim at, will still find it beyond budget.”

The Professor said that he does not foresee any significant rise in the demand for cars. “The lower and middle income group is more price sensitive than environment sensitive, and that the EVs will not be the main choice.”

Tashi Namgyal from Thimphu

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