TalkTax

GST is a tax on consumers not businesses. Zero rating supplies like food may relieve the impost of GST from consumers but would certainly increase compliance costs on businesses.
Many small business owners already have problems identifying what items should be included in their GST return and what items should not. Zero rating more supplies will only lead to more confusion and more business owners making mistakes and putting themselves at risk of fines and penalties, to collect a tax for the government.

Here are a couple of interesting statistics to throw into the mix. The 2006 OECD statistics show that NZ is ranked towards the middle of the OECD when it comes to taxes on goods and services as a % of GDP. The unweighted average is 11.1%, New Zealand is at 12%. The US is the lowest at 4% and Iceland the highest at 17.6%. So increasing GST will move us up in the standings, assuming that they are roughly the same now as in 2006. At least this will be one thing where we will be in the top half of the OECD, but not so sure that it is actually a good thing.

Just looking at the rates, Denmark/Norway/Sweden are at 25% at the highest end, and Japan and Canada at the lowest end at 5%. The unweighted average is 17.61%.

The question about split rates can’t really be answered in a vacuum, however. We have to look at the direct and indirect mix to ensure the whole system is working.

Certainly agree with Alun that introducing a mixed rate will cause complexity. New Zealand’s GST system is revered as a very good system. Countries like South Africa, Singapore, and Jersey have copied our system almost wholesale. Introducing split rates will certainly damage this reputation, and we could very well see the size of the Act double. I would therefore prefer to see just the GST rate changed, and no other tinkering with the system.

There are quite a few countries that have copied NZ GST law – agree, but to say that one cannot have exemptions / zero rating of certain foods because it will ‘complicate’ the system is crazy. How is it that most other countries can cope with a complex GST system? Both developing and developed countries seem to cope well with these complexities. Even in countries like South Africa which have more small/medium businesses than NZ seem to be able to deal with a ‘complex’ system.

When a GST increase is announced we should stand back and ask the question if a GST reform is required. The NZ GST system has largely stayed the same since inception, however the economy (and our ability to deal with change and complexities) has changed and changed again.

Perhaps it is time to challenge the status quo and adapt the GST system to a globalised economy.

Hi Jeanne
Always good to hear another view, and it has made me think. The famous UK Marks and Spencer case stands out in my mind as a good example of what can happen when different rates apply to different things. The argument there was whether a Jaffa Cake was a biscuit or a cake – different VAT rates applied depending on the outcome. It took thirteen and a half years to decide, and who knows how much it has cost the UK taxpayer. I would prefer not to see cases like that in New Zealand, and if boundary lines are drawn in our supermarkets then these types of cases are bound to arise. Technological advancement has unfortunately not overcome the inherrent uncertainty in interpreting law.

I agree that the tax system can get a lot more complex, and can still work to a greater or lesser extent. For example, the UK VAT legislation, as I am sure you are aware, is at least four times as voluminous as ours. There you have the added EU complications, but it is working.

If we agree that GST is a regressive tax, and that that is bad, then as rates go higher we have but two options (that I can think of). We can either zero rate deserving goods and services or increase benefits to counter the regressive impact of the tax. If we assume that both options have the same outcome (and that may be a subject for another time), then we would be bound to choose the one that was cheaper to implement.

Now, this is where my argument goes from reason to “gut feel”. It would have been useful if I could find a statistic showing the cost of administering a GST per dollar collected goes up by x% if split rates are used. One could have compared that to the added administration of running more money through the benefit system.

I have been unable to find any statistics to this effect, so my argument is going to have to remain on the basis of “gut feel” and anecdotal evidence. I would be interested to know if anyone is aware of statistics out there that could cast some light on this argument, however.

Although not very scientific, I’ve had a quick trawl through the ATO website (www.ato.gov.au) to look at numbers of interpretive decisions as a guide to the administrative load of split rates. Among the four GST-free (zero-rated) groups of childcare, education, health and food, 37% of the 435 interpretive decisions (I’ve included withdrawn decisions to reflect the work load) related to food. Decisions range from the GST status of a supply of prawn lavae (taxable) to chinese pancakes (GST-free). To put that into context over all of the GST-related categories for interpretive decisions, food represented appoximately 14% of all interpretive decisions and was the second highest represented group by size.

Hi Sybrand

Yes, the Marks and Spencer case is uniquely interesting…in a weird way! And I agree that you can come to some very bazaar outcomes if you start to apply the zero rate to certain foods. No matter in which tax jurisdiction you look, you can find examples of these ridiculous outcomes – particularly in Canada! The Au stats by Vicky is not surprising.

But a multi rate GST system works, that’s why it is so widely followed world wide. And yes, one can expect to see more cases as to why there should be a difference in the GST rate for a muffin or a muffin and a coke that is considered a meal. But the increased compliance cost should be viewed with the direct benefit that is given to the poor. Unfortunately these benefits are not that easy to quantify.

But, as you said – GST is a regressive tax, so I guess the question still remains how to best compensate lower income earners that will need to pay more hard earned dollars for basic foods (and possible other essentials) needed for survival.

I can certainly see the arguments both for a reduction in personal income tax and the zero rating of certain living essentials. Perhaps a combination of the two is required.

I dont believe that the GST Rate needs to be increased. There is so much uncollected tax in the community, any tax shortfall the government is experiencing could ne reduced by collecting the tax that is already owed. I refer specifically to Student Loan debt and Liable Parent Contribution debt. Many student loan borrowers now live and work outside New Zealand Interest is charged on their loan and they must pay a minimum of $2000 per year. Many do not do this and their debt is increasing. The likelihood they will ever return to New Zealand to live and work is small so the likelihood that the debt will be recovered is small. It is the same with parents who owe money under the Liable Parent Contribution scheme. Many have moved overseas to escape their liabilities, meanwhile the government continues to pay the amount contracted, to the remaining parent via the DPB or some other arrangement. If people who owe monies to the government are prohibited from leaving or entering the country by immigration, as is the situation with unpaid fines, I think we would see a much greater repayment level of these two debts. At present all tax dodgers are free to enter and leave the country as they wish whilst those who stay behind pay the debt via their taxes. Is this fair to the law abiding citizens who remain behind? This argument could also be extended to GST and PAYE debtors. When many businesses go under their biggest debt is to the IRD. If the IRD acted sooner to recover this debt then there would be more likelihood of it being recovered and there would also be the possibilty of monies left over to pay the other creditors who usually get nothing after the IRD has got what pitiful payment it can from any remaining assets., Instead of introducing higher taxes that the IRD will still be unable to collect, lets get the system we already have working properly.What is the point of having a tax sytem if it doesnt work?