International case studies suggest keeping it simple makes sense. By Trina Snow, executive director, NARGON.

Finance Minister Bill English confirmed on 20 May that GST would rise from 12.5% to 15% on 1 October 2010. This announcement came as no surprise as the Government had clearly signalled as early as February that it was contemplating this increase in order to pay for the personal and company tax cuts it wanted to introduce.

Labour immediately ran an ‘Axe the Tax’ campaign which made it politically impossible for National to backtrack, even if they had wanted to. The campaign’s name attracted considerable discussion because Labour did not promise to ‘axe’ GST and indeed was reluctant to commit to even axing any increase. Nevertheless, Axe the Tax served its political purpose and a number of voters are unhappy at National’s decision to increase a tax everyone pays every day.

Nargon’s advice on the GST issue is simple. All stores should already be working to ensure there is a seamless transition at the start of October. This involves checking all aspects of the pricing system and testing all changes thoroughly. The last change to the GST rate was a long time ago – 1 July 1989 when it went from 10% to 12.5% – and many have forgotten the difficulties some retailers had because they were not properly prepared.

The surprising aspect of the GST debate is that a number of groups are still advocating for exemptions,

usually for so-called ‘healthy’ foods. MP Rahui Katene from the Maori Party has introduced a Goods and Services (Exemption of Healthy Food) Amendment Bill. The bill was immediately mocked by Labour’s Trevor Mallard who correctly noted that an army of inspectors would be needed to define what is healthy and what is not.

That is precisely the situation in many countries overseas. In Australia, there are hundreds of pages of exemptions and explanations but the courts were still forced to decide if a mini-ciabatta was a bread or a cracker for GST purposes. In Britain, it cost millions of pounds in legal fees to determine whether Pringles were crisps or biscuits.

Nargon believes that New Zealand should retain a clean, broad and simple GST system. Indeed, since 1990 both major parties have been in agreement on this issue. However, Labour Leader Phil Goff has recently hinted that Labour might look at scrapping GST for fresh fruit and vegetables. This distinction, he argues, would be easy to enforce.

However, problems quickly emerged with this suggestion. A journalist asked if salted peanuts would count as fresh vegetables. Goff replied “anything that’s processed is out” which cause problems. Economist Bernard Hickey said the suggested exemptions were “lame” and would open “loopholes to drive trucks through”. It would also destroy the simplicity of the current GST system.

While in power, Labour consistently (and correctly) opposed exemptions for items such as food. Goff is on record saying he favours a comprehensive low rate of GST. His argument now is that the 15% rate will hit low and middle-income people harder, so exemptions should be considered again.

Nargon remains unconvinced that a workable GST exemptions regime can be developed and introduced. Certainly, the evidence from Australia and Britain suggests that it cannot, even with the best intentions from the politicians. Raising GST is always likely to be unpopular, but at least the increase is being applied across the board and should be largely offset by personal and company tax reductions.

October 1 is going to be enough of a challenge for retailers without having to wade through a big guide about which foods are healthy, fresh or unprocessed for the purposes of GST.