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.