Media Release - 28 September 2010

Clare Farrant
Senior Communications Manager
Ernst & Young
+64 274 899 700
clare.farrant@nz.ey.com

Removal of GST on fruit and vegetables sets a precedent

 
28 September 2010

Labour leader Phil Goff’s announcement that his party, if elected, will remove GST on fresh fruit and vegetables represents a huge shift in GST policy for the political party which first gave us GST back in 1986.

Calls for no GST on food were rejected by the then Labour Government in favour of a single-rate universally-applicable GST on the grounds of added compliance costs in operating a multi rate system and evidence removing food from the GST would be of little benefit to low income households.

New Zealand’s GST is admired for its efficiency and simplicity compared to just about any other value added tax. Until now, the two major political parties have agreed on the fundamental importance of retaining the relative “purity” of our GST. So what’s changed?

When the current Government announced an increase of the general GST rate to 15% from 1 October 2010 renewed pressure for exemptions or reduced rates was inevitable.

In 1985 the then Government’s GST Advisory Panel received submissions from people calling for special treatment for food, clothing, books, libraries, electricity, gas, medical services, optometrist services, local authority rates, vehicle safety features, inbound tourism, charities and sports clubs. 

Those submissions mostly argued that taxing essential items such as food is regressive, in that low income households spend a larger proportion of their income on those items compared to high income households.

However, the calls for exemptions weren’t accepted and we got one of the most comprehensive GST systems in the world. The Government was able to do this while achieving remarkably high approval ratings for the new tax (up to around 65% just weeks after its introduction). In a way, a social contract was established.

The public accepted a comprehensive tax with few exemptions on the basis it would be a low rate tax (10%). In 1989 the rate increased to 12.5% and while there were grumbles, it was still a low rate compared to other countries.

At 15% our GST rate starts to reach the upper limits of what could be called “low rate”. Granted, it’s a low tax rate for luxury items which can be as high as 27% in some countries. But as a “standard” GST rate applicable to the majority of goods and services 15% certainly isn’t “low” by international standards. In fact, when applied to food it’s possibly the highest GST rate in the world.

So it’s not really surprising that pressure has mounted for exemptions or reduced rates for some items.

Maori MP Rahui Katene’s private members’ Bill proposing to exempt “healthy food” from GST was kicked out of Parliament earlier this month without even a select committee hearing. That’s probably understandable because it would have been hugely complicated to implement.

There’s a big difference in technical GST terms between “exempting” something from GST and “zero rating” it. The Labour Party clearly recognises this with their “zero rating” option. “Zero rating” is better if the objective sought is lower prices for the consumer. Because of how GST works “exemptions” can actually make things more expensive in the supermarket and they are certainly more complicated for businesses which have to collect the tax.

Limiting the exclusion to “fresh fruit and vegetables” rather than “healthy food” seems likely to be easier to implement. There won’t be as many definitional issues although there will be some.

The question for the policy makers is how much human intervention is allowed before the fruit and vegetables are no longer fresh?  Mr Goff said it will be a narrow definition and will exclude salads served in restaurants, but will it include the fresh salad in a plastic container bought for lunch? What about the piece of lettuce, tomato and gherkin in a hamburger? Or will it only apply to fresh fruit and vegetables bought from the market garden or orchard? Does this mean garden centres are going to have to distinguish between the plants they sell which are edible and those which are not because they’ll have different GST rates? What about nuts, edible seeds and fungi?

All of these questions are answerable. Many of the 130 countries with a GST/VAT type tax have dealt with issues like this already so there’s no shortage of experience for us to draw on. A more interesting aspect to this announcement however is what sort of a precedent it might set if ever enacted. Surely any Government which removes some items from the tax net on social and economic grounds has to consider it is leaving itself open to others who feel they have as worthy a basis for their particular product being treated the same.

An even more interesting aspect will be whether zero rating some foods actually invites future governments to introduce higher GST rates for “luxury” or other non essential items.

If we move away from a comprehensive single low rate GST regime by creating a special rate for certain foods it seems to me the policy door is open for future governments to increase revenue by hiking the GST rate for other goods and services which are considered non-essential. They’ll be able to do so by pointing to the fact they are not interfering with the GST rate on “essential” items.

As long as we have practically no exceptions there is pressure to keep the overall rate low. However, once we tinker with that and create an exception, albeit one aimed at helping low income households, the precedent is set to have higher rates for some goods. This could be the start of a radical transformation of New Zealand’s relatively “simple” GST system.

-ENDS-

Iain Blakeley Tax Partner. Ernst & Young.

Disclaimer: This article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information.

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