Proposal to remove GST on healthy food flawed

The case for removing GST on healthy food is flawed, according to New Zealand Institute of Chartered Accountants tax director Craig Macalister.

He says the objectives of the bill are laudable, but it is a flawed proposal as removing GST from these goods is unlikely to cause the price of the goods to fall by the GST component. Instead, the fall, if any, will be somewhere in between.

Macalister points out that GST is a tax charged at each stage in the supply chain of goods - not just at the retail stage. This means that GST paid during the production or growth stages will still be charged as a cost of the goods.

He says there is also no guarantee that the seller of these goods will not sell them at the price that they believe the market will withstand.

"In effect, this change could well have the perverse result that sellers of these goods could benefit from the change and not the final consumer."

He says another factor influencing the matter is that the GST compliance costs for people selling these goods will increase as their input tax credits relating to the sales of these exempt supplies cannot be deducted. Also, system changes will need to be made to their accounting systems.

Macalister says in turn these costs are likely to be passed on to consumers in one way or another.

"There are also definitional problems with the bill. For example, will a frozen fruit smoothie mix be GST free, but a fruit smoothie drink taxable? Why exempt bread when you do not exempt flour? Will a bread bun be exempt, but not the Boston Bun that has icing on top? The list is endless, and the experience in other countries highlights this.

"Of course once you start exempting things from GST for social reasons, where does this stop? Why not exempt certain medical or education costs? Once a Government starts on this slippery slope, it is very hard to say no to the next good cause," says Macalister.

He believes this change risks undermining the efficient and effective way that our GST system currently raises revenue for the public goods and services that the Government provides.

He says the change also overlooks the fact that when GST was introduced, the Government introduced family support to offset the effect of GST on lower income families.

Family support is now delivered through the working for families' tax credits. Macalister says if Government were of a mind to further assist lower income families with the effects of GST, then delivering that assistance through changing working for families or benefit levels would be the correct mechanism.

"While we see the merit in encouraging people to consume healthy food, trying to use our GST system to do that just won't work," says Macalister.

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