Tax Experts Support One Rate, No Exemptions V.A.T. Framework


Tribune Business Reporter


A “one rate, no exemptions” Value-Added Tax (VAT) framework has worked “extremely well” in New Zealand according to tax experts from that country, noting that such a move would broaden the tax base and minimise compliance costs.

Dr Don Brash, a former political leader and one of New Zealand’s leading economic and financial policy advisors noted that under that country’s tax regime there were virtually no exemptions except for financial services and rent. “That means for a business it’s extremely simple to implement,” said Dr Brash, who is in the country along with former PricewaterhouseCoopers (PwC chairman John Shewan to produce a report on the government’s readiness for VAT implementation. The duo reiterated that they were not here to tell the government what to do and noted that they had found in the case of New Zealand, which has a population of more than four million, a one rate, no exemptions framework worked well.

Acknowledging that the government’s proposed VAT rate of 15 per cent was “not set in stone” Dr Brash said: “If you have a large number of exemptions your rate has to be higher. With a smaller number of exemptions the rate will be lower. We found that the one rate no exemptions framework worked extremely well but what the government does decide is up to them. A lower rate of VAT will obviously affect final prices but our experience has been that it better to have a no exemptions and a lower rate than a high rate with a lot of exemptions. If you want to minimise compliance costs, go with a lower rate and no exemptions,” said Dr Brash. New Zealand introduced a goods and services tax in 1986 at a rate of 10 per cent. That subsequently increased to 12.5 then to 15 per cent.

Mr Shewan said that exemptions was not the most effective way to ensure equity and fairness. “Most business willow want to be in the VAT net. People use the word exempt very often and it sounds like a good thing but in the context of a VAT regime exemptions are not a good thing. Most business we think would want to be registered,” said Mr Shewan.

He further explained: “If they don’t register they end up with a situation where their costs are going up, VAT is being paid on their inputs but they can’t recover it . Most registered business want to buy from other registered business because they charge their input on purchases and can only claim the refund if they are buying from registered business, even small business want to be registered.” Mr Shewan said that VAT had proven to be the most efficient and was largely self policing.

Explaining why electricity for example should not be VAT exempt Dr Brash said: “If you exempt it, what do you for the power company’s oil supply. If it is exempt it means that they don’t claim any credit back for the oil they buy or transformers for example because electricity is an exempt supply. In New Zealand, having no exemptions was very sensible from the point of view of the business community and the end consumer.” Dr Brash noted that in New Zealand, the government had brought financial support directly to lower income families as opposed to exempting various categories of items such as bread basket items which government is proposing under its VAT regime.

Pointing to the fiscal impact, Mr Shewan noted that the New Zealand government had estimated revenue intake of $2.1 billion in the first year and ultimately saw an intake of $2.8 million. “For the next five years were up five per cent on projections. A number of businesses that had not been compliant with income tax found that they had to comply because if they didn’t register for VAT other businesses didn’t want to work with them. Dr Brash noted that after New Zealand enacted the Fiscal Responsibility Act 1994 it ran fiscal surpluses for the next 12 years.

The men noted that information surrounding the government’s tax reform agenda was “absolutely critical.” Mr Shewan said: “It’s important to get people to understand how it works. It’s not a scary tax once you understand it. The education program needs to be ongoing. The reason our education program was so successful was because their was a commitment to an 18 month educational program.”


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