This paper presents a participatory methodological framework to identify Gross National Happiness (GNH) issues at the smallholder level in Bhutan. GNH is a development paradigm of Bhutan that has increasingly drawn international attention. Its four pillars are sustainable and equitable socioeconomic development, preservation of the environment, preservation and promotion of culture, and promotion of good governance. Since GNH is usually discussed at the national level, its domains and indicators have been defined through a top-down intellectual exercise, with possibly limited relevance of the major issues for most rural Bhutanese, which represent 69 percent of the country’s population. The methodology applied in this study was useful in identifying key GNH issues from a systems perspective at the smallholder level. Socioeconomic development and the environmental aspects were found to be the pertinent issues. The study also revealed trade-offs and dependencies among the four GNH pillars and their indicators. Inclusive policies are needed to address the concerns of smallholder farmers. If GNH is to work for the present and future generations, then it is essential to embrace the GNH issues of smallholder farmers who compose the backbone of the Bhutanese population. Further, the GNH concept is currently a mix of issues and indicators. Translating the issues identified by the study into indicators is required to properly evaluate the progress at the farm level and to support GNH policy development.