What Are the Key Penalties for Overtime and Tax Non-Compliance in Bhutan?

Compliance with payroll, overtime and tax requirements is an important responsibility for employers operating in Bhutan. Errors in overtime payments, wage records, tax withholding or tax filings can create financial liabilities and, in some cases, offences under Bhutanese law.

For employers, understanding the applicable requirements and maintaining accurate payroll records can help reduce the risk of penalties.

1. Overtime Payment Requirements in Bhutan

The Labour and Employment Act of Bhutan 2007 requires employers to pay employees below supervisory level overtime when they are required to work outside the normal working periods specified by the Act.

Section 124 provides that overtime must be paid at a minimum of the employee's normal rate of pay.

This means employers should not treat overtime hours as ordinary unpaid working hours. Payroll teams should separately record normal working hours and overtime hours and apply the applicable overtime rate.

2. Incorrect or Unpaid Overtime

Failure to correctly calculate and pay overtime can result in an employment-law compliance issue. Employers should therefore maintain records showing:

• Normal working hours
• Overtime hours
• Overtime rate
• Overtime amount
• Allowances and other payments
• Deductions
• Net wages paid

The Labour and Employment Act also requires employers to provide employees with wage information, including the amount of overtime worked and the rate applicable to that overtime. Employers must maintain the relevant wage register for five years.

Maintaining these records provides evidence that payroll has been calculated correctly and can help resolve employee wage disputes.

3. Night-Work Payment Requirements

Night work has a separate requirement under the Labour and Employment Act. Where an employee below supervisory level is required by the employer to perform night duty in addition to the normal day shift and outside the relevant normal working period, the employer must pay an additional 50% of the employee's normal rate of pay for the applicable hours.

Contravention of this requirement is classified as a petty misdemeanour under section 126.

Payroll systems should therefore distinguish between ordinary hours, overtime and qualifying night work instead of combining them into one earnings category.

4. Penalties for Wage-Related Non-Compliance

Overtime compliance should also be considered alongside general wage-payment requirements.

The Labour and Employment Act provides penalties for certain violations relating to payment of wages. For example, an employer that contravenes sections 118–122 can be liable for a fine calculated at the Daily Minimum National Wage Rate, up to a maximum of 90 days of that rate.

The Department of Labour has also recently reminded employers that timely payment of employee wages is an employer responsibility and that non-compliance can attract penalties.

5. Late Tax Return Filing

Tax non-compliance can create separate financial consequences.

The Income Tax Act of Bhutan 2025 provides a late-filing penalty for a person who fails to file a tax return or other required document by the applicable due date. Section 664 specifies:

• Companies: Nu. 300 per day
• Other persons: Nu. 100 per day

The Act provides these penalties for late filing of a tax return or other required document, subject to the applicable statutory provisions.

Employers should therefore maintain a tax compliance calendar rather than relying only on annual reminders.

6. Failure to File Tax Returns

Failing to file a required return is more serious than simply submitting it late.

The Income Tax Act 2025 provides that failure to file a tax return or other document without reasonable cause by the due date constitutes an offence. The Act also provides procedures under which the taxpayer can be ordered to file the outstanding return following conviction.

Businesses should therefore investigate and resolve missed filings promptly rather than allowing an overdue return to remain outstanding.

7. Tax Payment and Penal Interest

Late payment can create an additional liability beyond the original tax amount.

The DRC's notification for Income Year 2025 states that filing after the applicable due date attracts a Nu. 100-per-day late-filing penalty and 24% per annum penal interest on tax payable, with non-filing penalties applying after three months under the referenced provisions.

The DRC also explains that when a payment deadline has lapsed, fines and penalties can be calculated as part of the payment process.

Because Bhutan's Income Tax Act 2025 is now the relevant statutory framework, businesses should check the latest DRC notifications and applicable transitional provisions rather than relying on older tax guidance. The DRC lists the Income Tax Act 2025 and its associated rules among its current tax legislation.

8. TDS Non-Compliance

Employers that are required to withhold tax must also pay attention to their Tax Deducted at Source (TDS) responsibilities.

The DRC published a specific 2026 notification concerning TDS return filing obligations and penalties under the Income Tax Act of Bhutan 2025.

Payroll teams should therefore ensure that:

1. Applicable tax is calculated correctly.
2. The correct amount is withheld.
3. The withholding is recorded in payroll.
4. The relevant TDS return is prepared.
5. The return is filed within the applicable deadline.
6. The withheld tax is remitted.
7. Payment and filing records are retained.

A reconciliation between the payroll register, accounting records and TDS filings can help identify discrepancies before they become compliance issues.

9. Incorrect Tax Information or Tax Shortfalls

Tax compliance is not limited to filing a return. Providing inaccurate or materially misleading information can also result in penalties under the Income Tax Act 2025.

The Act contains provisions dealing with tax shortfalls and statements that are false or misleading in a material particular.

For payroll teams, this highlights the importance of using accurate employee income information, properly classifying taxable payments and reviewing payroll calculations before submitting tax information.

10. Keep Payroll Records for Compliance

A strong payroll recordkeeping process can help employers demonstrate compliance with overtime and tax requirements.

Businesses should consider maintaining:

• Employment contracts
• Attendance records
• Overtime approvals
• Overtime calculations
• Payroll registers
• Salary payment records
• Tax calculations
• TDS records
• Tax return acknowledgements
• Tax payment receipts
• Employee wage statements
• Allowance and deduction records

The Labour and Employment Act specifically requires employers to maintain wage-related information for five years.

11. Use Payroll Software to Reduce Compliance Errors

Manual payroll processing can make it difficult to track overtime, night work, deductions and tax obligations across a growing workforce.

Payroll software can help businesses:

• Capture employee working hours
• Separate normal and overtime hours
• Calculate overtime pay
• Track night-work payments
• Maintain employee payroll records
• Calculate applicable tax deductions
• Generate payroll reports
• Reconcile payroll and tax information
• Set reminders for filing deadlines

Automation does not replace the employer's legal responsibility, but it can provide better controls and reduce repetitive calculation errors.

12. Create a Payroll Compliance Checklist

A monthly compliance checklist can help employers identify problems before payroll is finalised.

Overtime

• Confirm approved overtime hours.
• Verify employee eligibility.
• Apply the correct overtime rate.
• Check qualifying night work separately.
• Include overtime in the employee wage statement.
• Reconcile overtime with attendance records.

Tax

• Review taxable employee income.
• Calculate applicable withholding.
• Reconcile TDS with payroll.
• File required returns on time.
• Remit tax by the applicable deadline.
• Save filing and payment evidence.

Records

• Maintain attendance and overtime records.
• Maintain wage registers.
• Retain tax documents.
• Keep payment acknowledgements.
• Review DRC and Department of Labour updates.

Conclusion

The key compliance risks for Bhutanese employers include incorrect overtime payments, failure to meet night-work payment requirements, wage-payment violations, late tax filing, unpaid tax, TDS non-compliance and inaccurate tax information.

The consequences vary depending on the specific provision involved. They can include daily monetary penalties, penal interest, fines calculated using the Daily Minimum National Wage Rate, and, for certain violations, offences under Bhutanese law.

Employers can reduce these risks by maintaining accurate attendance and payroll records, reviewing overtime calculations, reconciling TDS, monitoring DRC deadlines and regularly checking current labour and tax notifications. Since Bhutan's tax framework has been updated through the Income Tax Act 2025 and related rules and notifications, current DRC guidance should be checked when applying specific penalties or filing requirements.

InnBuilt Attendance and Payroll Software helps reduce overtime and tax non-compliance risk by applying configured rules, validating payroll inputs, and flagging exceptions before processing. Detailed records also support internal reviews and corrective action.