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New Zealand GST Rate Increase

Welcome to the first blog dedicated solely to New Zealand’s Goods and Services Tax (or “GST”).

Yeah I know, it’s not as exciting as political scandal or the lives of the rich and famous but there are already plenty of places to go to whet your appetite if you’re in to that stuff.

I spend my days studying and advising others on GST. I live and breathe GST so am probably a bit of a geek.

The aim here is to provide some perspectives on our GST system and generate some debate. While the topic might seem highly technical there’s no doubt GST directly affects us all, has had prominence recently in the media and is set to be a talking point for some time yet. In fact I’ve even witnessed non-GST geeks talking about GST around the dinner table.

Finance Minister Bill English will deliver the Government’s Budget in two days. Depending on your view of Mr English’s capacity for surprise it’s probably fair to expect a GST rate rise to 15% (currently 12.5%) effective from 1 October 2010. That seems to be the prevailing view of commentators.

Let’s assume the predictions come true. What does that do to New Zealand’s reputation for having a “low rate broad based” GST system? Well I reckon that reputation pretty much disappears.

Sure, back in 1986 when we started with GST at 10% in comparison to other countries our rate was at the lower end. Since then there has been an explosion of countries introducing some form of VAT/GST with more than 130 having adopted the system. Rates vary. In some countries they go as high as 25%.

I’m afraid, based on my analysis of many countries a rate of 15% can hardly be described as “low” particularly when you consider how broadly it is applied. If you look at our neighbours in the Asia Pacific region and our major trading partners in other parts of the world a 15% rate is somewhere in the middle of the field and if you’re talking about food, medicine, education, utilities, childcare, children’s clothing, healthcare and reading material it is in fact pretty high.

At 15% New Zealand will have one of the highest, if not the highest, GST rate on food.

In my opinion it won’t be accurate to continue describing our GST system as “low rate broad based”.

So what? Well, pressure has to increase for New Zealand to provide some relief for the items mentioned above which nearly every other country with a GST system taxes at a much lower rate or not at all. We’re already seeing this pressure starting to build. The Labour Party has announced it would look at exemptions for food. The Maori Party has a Bill before Parliament at the moment seeking to exempt “healthy food” from GST.

The next few months are going to be very interesting. I have no doubt GST will continue to be in the news.

Watch this space.

Iain

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