Archive for the ‘GST exempt food’ Tag

“Australia should follow NZ GST”?   Leave a comment

NZ’s GST is certainly the most efficient form of VAT in the world.

The “VAT Revenue Ratio” is used by the OECD as a measure of VAT efficiency. The average in the OECD is about 50%.

The least efficient is Turkey’s VAT at about 30%. NZ ranks top at a little more than 95%, followed closely by Luxembourg.

Australia’s VAT Revenue Ratio is around 45%.

The Australian Treasury Secretary thinks they can learn from NZ’s GST and argues for a further shift in Australia from income taxes to GST. See: http://www.stuff.co.nz/business/world/9900014/Aussies-should-follow-our-GST-lead

If efficiency is the goal then the evidence seems compellingly in favour of the Secretary’s argument.

However, political realities seem to pull most countries in the opposite direction.

Yes VAT is spreading around the world as the tax of choice for governments but, increasingly those governments are voting for multiple rates, exemptions and zero rating when designing their version of VAT.

When the GFC hit we saw governments making greater use of reduced rates to stimulate activitiy. There is now a growing trend to use penal VAT rates as policy tools to discourage certain “undesirable” consumption (e.g for environmental reasons). Policies like these make a VAT system less efficient but they also make it more politically acceptable and relevant.

Perhaps the questions are: how long can NZ resist these political pressures and is it more likely we will follow the Aussie lead?

Iain

Eating Australian style   Leave a comment

The Australian Tax Office has updated their GST Food List.

The 86 page Food List details from ‘A’ to ‘Z’ the GST treatment of hundreds of food items. It is necessary because in Australia some foods are subject to GST and some are not.

For example, a fruit bun with a sweet filling is subject to GST but a fruit bun without a sweet filling is not.

Another interesting example is, a “bird’s nest nutritional supplement” is subject to GST but a “bird’s nest with sugar” is not. Yes, seriously.

The latest update clarifies the treatment of a host of products like pizza rolls, baked puddings, various indian foods, combat rations, dukkah and hampers, to name a few.

Check out the complete list at http://law.ato.gov.au/atolaw/view.htm?DocID=GII/GSTIIFL1/NAT/ATO/00001&PiT=99991231235958

It’s fascinating to see the work that’s created by tax exceptions.

Iain

GST exemption gaining momentum?   Leave a comment

Today’s presentation of a petition to Parliament for GST to be removed from food shows debate around this is only going to intensify leading up to the election.

It seems there’s support coming from Maori and Mana Parties and the Greens. With Labour’s stated policy to remove GST from fresh fruit and vegetables there is growing public sentiment which National may find hard to bat away should they be forced into tough post election negotiations to stay in Government.

Of course it’s not just low income households which would benefit. The biggest spenders would save the most. So it could be a real vote winner.

Iain

“Fresh fruit and vegetables”   Leave a comment

So the Labour Party has confirmed their policy to remove GST on “fresh fruit and vegetables”.

This is new ground for NZ’s GST policy and it will be interesting to watch the debate unfold as producers strive to get their products within the concessionary rate.

For my part, if there were tangible evidence the policy will benefit low-income households with consequential health benefits for the country then I think I could live with the added complexity it will undoubtedly bring.

However, two things concern me most.

1. Overseas experience suggests the retail price impact of a reduction in VAT tends to be short-lived. The UK reduced their VAT rate in November 2008 and while there was an immediate reduction in consumer prices the following month a UK Government report found by February 2009 prices had returned to their pre November 2008 levels. So who really benefits from a GST rate reduction? Some evidence at least suggests it won’t be consumers.

2. If we go down this path the precedent will be set for future governments to use GST rates as a lever to influence consumer behaviour. The ice will have been broken and lobby groups with the most influence will more easily persuade politicians of the merits in lower or even higher rates for different products. There’ll always be a public interest component which politicians could find hard to resist having succumbed this once.

Iain

Tax free shopping zone for Christchurch?   Leave a comment

A tax free zone in Christchurch has been suggested by a new business owners’ group there.

I think it is a well intentioned idea which poses some reasonably big challenges in practice.

The intention is to encourage businesses (and shoppers)to return to the CBD during the re-development.

The boundary issue is the most obvious practical consideration. Where will the lines for the tax free zone be drawn? Every time there’s a boundary in tax there are winners and losers. There are also those who will modify their behaviour to take advantage of the boundary.

If the plan went ahead we’d almost certainly see some businesses around the fringes of the CBD lobbying to be included in the tax free zone. Shops just a few metres from each other could conceivably have quite different tax treatments.

We might also see some who take up temporary residence in the tax free zone to take advantage of the concession as long as it is in place.

There are other issues to sort out when designing the tax free zone. For example, does it apply to purchases from those businesses situated within the zone or only those purchases which physically occur within the zone? In other words, does it apply to internet purchases from a business which is inside the zone?

A technical issue is whether the proposal involves an “exemption” from GST or “zero rating”. They are quite different. In my view “zero rating” is more likely to produce the benefits the proponents of the idea want. Technically this means prices would be subject to GST but at a rate of 0%. That is less complicated for the businesses and produces quicker benefits than an “exemption” from GST.

Also, will the tax free status apply to business transactions as well as sales to private consumers?

It has been suggested ordinary commercial transactions would still be subject to GST. If that’s the case retailers will have to monitor which sales are which and, if they get it wrong, could be penalised under current law. This is important because there would be a financial incentive for some businesses outside of the CBD to take advantage of the tax free zone by buying business inputs within the zone. This could have the perverse result of giving those businesses an advantage over their competitors who are not able to buy within the zone. I’m sure that’s not what the supporters of the tax free zone would want.

Care will also be needed towards the end of the tax free period. Removing tax exemptions is challenging. When people know the change is coming they’ll respond. There is bound to be a jump in retail activity just before the change. There’ll also be some who seek to take advantage of the tax free period for as long as possible by manipulating the rules, perhaps by entering in to pre payment arrangements and such like.

These are merely some of the practical design issues which admittedly can be dealt with if there is political will to support the idea.

Iain

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