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New Zealand has used a sales tax at the wholesale level for over 
fifty years. The tax, highly selective and with a number of rates, has 
been subjected to increasing criticism in recent years. In November 
1984 the government announced that the tax would be replaced by a value added 
tax as of April 1, 1986. The value added tax proposed is the broadest that 
any country has used, with no commodity exemptions, and farmers, government 
departments, nonprofit organizations, and the like all being responsible for 
registration and collection and remittance of tax. Some details remain to 
be worked out. 


John F. Due 
Professor of Economics, University of Illinois, Urbana-Champaign 

On November 8, 1984, the government of New Zealand announced, in the 
Budget Speech, the plan to replace the wholesale sales tax "by a value added 
tax, to go into operation April 1, 1986. 

The Background 

The wholesale sales tax, like that of Australia and the manufacturers 
sales tax in Canada, has been subject to increasing criticism in recent 
years. The tax was introduced in 1933 > at a flat 5% rate, as a depression 
emergency revenue measure following the precedent set by Australia in 1930- 
The tax applies to the last wholesale transaction, the sale to the retailer, 
and to importation by retailers or final consumers. Over the years, the 
tax underwent substantial change in rates and coverage, but not in basic 
structure. Exemptions are very broad. Only about 27% of household expendi- 
tures are covered by the tax, which is concentrated on consumer durables, 

and about one- third of the tax is collected on business inputs. Industrial 

machinery and equipment, for example, are taxed. As of 1985 there are 12 

specific rates and seven ad valorem rates, ranging from 10 to 60 percent. 

The tax has been yielding about 13 percent of total tax revenue. 

*The author is indebted to officials of the New Zealand Treasury and 
the New Zealand Retailers Federation for their assistance. 

1. John F. Due, "The Wholesale Sales Tax in Australia and New Zealand," 
Canadian Tax Journal , Vol. 31 (March-April 1983), PP- 207-27; and "Accepted 
V. Controversial Sales Tax Structures— Switzerland, Australia, New Zealand, 
Canada," Australian Tax Forum Vol. 1 (Dec. 1984), PP« 363-77- 

2. New Zealand Treasury. Goods and Services Tax (Wellington: 1984), 
p. 8. 


In earlier years the tax was subject to very little criticism. But 
as time has passed, and the rates have risen, there has been growing 
complaint. There are several types of criticisms: 

First, the tax is highly selective, and many rates are high. The 
system had become little more than a set of excises applying to domestic 
production and importation. Thus it is not capable of raising substantial 
sums of revenue without intolerable rates. 

Secondly, because of the number of exemptions and rates, the tasks of 
the taxpayers in distinguishing among goods in various rate classes has 
become increasingly troublesome. The Customs Department, which administers 
the tax, has equal difficulty in ensuring proper application of the tax. 

Thirdly, the tax is highly discriminatory against consumption of various 
goods and causes distortion in resource allocation. 

Fourthly, the application of the tax at the wholesale level has created 
the fundamental problem of discriminating in favor of firms integrated 
backward into manufacturing, since the tax applies to prices of these firms 
that do not include typical wholesale margins. The tax favors large 
retailers able to buy directly from manufacturers at prices lower than those 
charged by wholesale distributors. The problem has increased over the years 
as wholesalers had disappeared from more and more fields. In 1982, to meet 
the problem the government applied a 15% uplift to the taxable price on 
direct sales by manufacturers to retailers — but this led to strong protests, 
particularly from firms in fields in which there were no wholesalers. Like- 
wise, there are complaints that imports by retailers and final consumers 
are favored over domestic products since the taxable price does not include 

1. John F. Due, "The Wholesale Sales Tax in New Zealand," Canadian 
Tax Journal, Vol. ^ (Sept. -Oct. 1956), pp. 351-55- 


the costs of many wholesale distribution functions. Ultimately, a 2% uplift 
was applied to the prices of taxable imports by business firms (not final 
consumers) . But these uplift figures are highly arbitrary and inequitable 
among various firms and products. 

As made clear in the 1984 Budget Speech, the prime motive for the 
proposed change is to allow a reduction in marginal income tax rates and 
general reliance on direct taxes ; this could not be done within the frame- 
work of the existing wholesale sales tax because of the limited coverage, 
and the inherent problems of taxing at the wholesale level and including 
services within the tax. The primary objectives of tax reform were 
outlined in the Budget Speech as follows: 
to increase equity; 

to lessen tax- induced distortion of resource allocation by 
reducing anomalies and concessions, broadening the base, and 
lowering marginal rates; and 

to make the tax system more certain and simple. 

Previous Consideration of Possible Change 

Serious consideration of change from the wholesale tax began with the 

presentation of the McCaw report in 1982, which urged substantial shift 

from direct to indirect taxes. The Report also evaluated the various forms 

of alternative sales taxes, without recommending any particular type. There 

was substantial support in industry for the value added form, partly because 

of the strong desire to eliminate the problems of the present tax. Initially, 

after careful study the Retailers Federation endorsed the value added tax 

~T. New Zealand has the highest percentage of tax revenues from income 
taxes (68.9) of any OECD country (l98l) . D.B. Perry, "A Review of Tax Levels 
of OECD Member Countries in 1981 and 1982," Canadian Tax Journal , Vol. 32 
(March-April 1984), pp. 392-98. 

2. New Zealand, Report of the Task Forcp nn Ta.ya.-Hp n .(Wellington: 
April 1982). 


rather than the retail tax, which they feared would concentrate the burden 
on the retailers and lead to evasion. However, in 1982, the Federation 
reversed its position, "because many small retailers thought the VAT would 
he too complicated to administer. Ultimately, the Federation again came to 
favor the value added tax so long as there was one rate and no exemptions. 

Announcement of the Tax 

As noted above, the Goods and Services tax (GST) was announced in the 
1984 Budget Speech (November of 1984) in conjunction with planned reduction 
in rates of the income tax. The new tax was outlined in the publication, 
Goods and Service Tax , issued November 9, 1984, a White Paper on Goods and 
Services Tax , and issued in March, 1985i and a document entitled GST; The 
Key to Lower Income Tax . The White Paper contains a proposed draft of the 
legislation. The final draft of the legislation will go to the House of 
Representatives in July 1985» with passage hoped by August. Registration 
of firms is planned to start in October, and the tax to go into operation 
April 1, 1986. The tax will be administered by Inland Revenue rather than 
the Customs Department, which administers the wholesale sales tax. Customs 
will collect the tax at importation. The wholesale tax will be abolished, 
except for levies on tobacco, alcoholic beverages and motor fuel. The 
revenue from the new tax will be used to allow lower income tax rates, and 
in part to reduce the deficit. 

Features of the Tax 

The proposed tax is a value added tax, modelled after the European 
value added taxes, with very much broader coverage and a single rate, 
applying to all commodities and all services (other than those rendered by 
employees to employers) . 


General Structure : The tax will operate on the tax credit method, tax 
applying at importation and to all domestic sales, tax paid on purchases 
"being a credit against tax due on sales. The objective is to make the tax 
completely universal, applying to all goods and services, including all 
governmental activity, both commercial and governmental in nature. 

Not only will the tax apply to all business firms in the usual sense, 
but to nonprofit organizations, all farmers, and all governmental units. 
Govermental units are assumed to be providing their services to the Grown 
and will, it appears, be subject to tax on their expenditures, receiving 
credit for tax on their purchases. Local authorities will be taxed as well 
as government of New Zealand Departments. Commercial services of governments 
will be taxed in the same fashion as sales by businesses. The general aim 
is to make the tax as productive of revenue as possible at a given rate, 
and to avoid the complications arising if certain groups, such as farmers, 
are excluded from operations of the tax or certain commodities or services 
exempted. The objective is to provide a completely neutral tax. 

There is only a very limited number of exceptions to the universal 
coverage rule: 

1. All export sales will be zero rated, thus providing for refund of 
tax paid on previous transactions and freeing exports completely from tax. 

2. Rental of residential facilities is exempted because of the impos- 
sibility of taxing owner-occupied homes. All elements involved in constructing 
and maintaining housing will be taxed. 

Short term rentals of hotel and motel rooms will be taxed. 
All building construction costs will be taxable, as well as rental of 
nonhousing real estate. 


3. Sales of existing buildings will be subject to tax in the usual 
way (excluding the value of land) when sold by a registered vendor; sales 
between nonregistered persons will be free of tax. A sale by a registered 
vendor of a building purchased from a nonregistered person would be treated 
as any second hand transaction. 

4. On sales by second hand dealers of goods purchased from 
nonregistered sellers, tax will apply only to the dealer markup, since tax 
has not applied to the dealer's purchase and no tax credit is possible. 

5. Financial services provide the most troublesome aspects in the 
design of any value added tax; the White Paper simply indicates that this 
issue is under further review. 

6. Churches will not be taxable on the contributions received, but 
will be taxable on their purchases of taxable goods and services and any 
regular selling activity. 

7. Tax will not apply to visitors' baggage and certain merchandise 
imported temporarily. Domestic purchases by persons entitled to diplomatic 
relief from taxes will be taxed but refund provided. 

The Treasury rejects food exemption, on the grounds that most of the 
revenue gain would go to persons in the middle and upper income levels, 
and that the interests of the poor can be taken care of more satisfactorily 
by adjustments in benefits from various government programs. 

Credit for Tax on Purchases : Credit will be allowed registered firms for t; 
paid on all purchases for business use, including capital equipment, unlike the j 
tice in some countries under which tax on purchases of motor vehicles, entertains 
and other items is disallowed. Credit can be taken for tax paid on purchases, 
however, only if payment of this tax can be demonstrated on invoices. 

Tax Rate : There will be a single rate. The actual figure has not been 
announced, but 10 percent has been widely mentioned. 


Other Features 

There are a number of other relevant features of the proposal: 

Quotation of Tax : On sales to registered vendors, the tax must be 
shown separately on the invoice, so that the purchaser may know the amount 
of tax for which he is entitled credit. The vendor must issue an invoice 
if the purchaser so requests. On sales to nonregistered persons, the tax 
may be shown separately or included in the price. The general presumption 
is that the retailers will typically include the tax in the price, although 
it is believed that supermarkets may add the tax at the cash register. In 
Zimbabwe and South Africa, which allow the option, both methods are used, 
though inclusion appears to be more common. In the United States, separate 
quotation of tax has been almost universal, even in the states that have 
not required it. 

Taxable Price : The tax normally applies to the sale price, including 
any charges for incidental services, such as transport, which themselves 
are taxable. The tax may be adjusted to open market value on nonarms length 
transactions. On imports, tax applies to the import value plus customs duty 
and any other taxes due. The taxable price does not include the tax element. 

Timing of Tax Liability . On imports, tax is due at the time of 
clearance from customs. On domestic transactions, normally tax liability 
will be incurred when the invoice is issued, although in some instances when 
the service is rendered or the goods become available to the purchaser. 
On hire-purchase (installment) purchases, tax will apply when the hire 
purchase agreement is entered into. 

Bad Debts : Deduction of bad debts from taxable sales will be permitted, 
plus credit for the tax paid on the purchase of the goods. 


Taxable Activity ; Liability for registration as a vendor and collection 
and remittance of tax is based upon what may be called a "business test." Does 
the firm or person carry on regular and continuous selling activity, with 
some form of organizational structure and record keeping? This has the 
effect of eliminating purely casual transactions from the tax. 

Operation of the Tax 

The proposed operational patterns are similar to those of value added 
taxes elsewhere. 

Registration : All persons who "make supplies of goods and services in 
the course of conducting a taxable activity," that is, all persons, including 
farmers, engaged in selling goods or rendering services as a regular activity 
must register for purposes of the tax. The government has under consideration 
the exemption of very small firms from the requirement — perhaps those with 
annual sales under $2500 dollars (about US $1200) . This would exclude only 
the very small establishments; it is not considered necessary to exclude 
the typical smaller firms, given the simplicity of the proposed tax. No 
decision has as yet been made on this issue. 

It is expected that there will be about 180,000 registered firms of 
which 60,000 would be farmers. The number under the wholesale tax is about 

Returns : Return forms are being developed and will be mailed out in 
each tax period. The tentative form is very simple — but has one unusual 
features the figure of gross sales is required on a tax inclusive basis, 
requiring the calculation of the tax due by dividing by one -eleventh 
(assuming a 10 percent tax rate) . 


Returns would be required on a two-month basis, due the first day of 
the second month following the return period (e.g., June 1 for the period 
March 1-April 30) . Firms would be placed on a staggered basis; for half, 
for example, the return would cover January-February, the other, February- 
March . 

Penalties ; A penalty of 10 percent plus 2 percent a month for each 
subsequent month will apply when payment is not made by the due date. This 
is the same rule as under the wholesale sales tax. Provisions for enforce- 
ment of payment, through ultimate sale of assets, are similar to those for 
other New Zealand taxes. 

When a refund is due, as will be common for exporters and firms making 
large capital investments in the period, immediate payment will be made by 
the government, so long as there are no outstanding balances due on this 
or other taxes. 

There are also provisions for so called penal taxes involving a 
tripling of the amount of tax due in the event of evasion. In addition, 
criminal penalties are provided, up to $2000 for an individual and $10,000 
for a corporation, for a variety of offenses, such as failure to register, 
to keep adequate records, to issue invoices when requested, falsifying 
records, issuing false invoices, failure to file returns, etc. 

As under the income tax, and as in Australia, there is provision for 
publication in the Gazette of persons convicted of various offenses under 
the tax. 

Audit ; A two stage audit program is planned. Brief inspections, 
called routine control audits, will be made at fairly frequent intervals, 
examining books of account and records on a somewhat limited basis, to 
ensure that the firm is complying with the tax and paying the correct amount 
of tax, keeping adequate records, and using proper bookkeeping standards. 


The second stage is an in-depth investigation, to be undertaken if the 
control audit reveals noncompliance or fraud. 

Transitional Provisions 

When the tax goes into effect, firms will have on hand merchandise on 
which wholesale sales tax has been paid. Provision is made for the credit 
against GST liability of the amount of wholesale tax that was paid on the 
purchase or importation of the goods, or the amount of GST that would have 
been paid had that tax been in effect, whichever is lower. 

The tax will apply to all transactions on which delivery is made after 
April 1, 1986, whether invoiced before or not. 

Summary Evaluation 

The proposed levy is substantially broader in coverage than any value 
added tax in operation, particularly by including all services, governmental 
units, and farmers. The broad coverage avoids some of the troublesome 
problems created by exemptions and zero rates, particularly the need for 
exemption or zero rating of major farm inputs, such as feed, seed, and 
fertilizer, if farmers are not registered, and the tax treatment of sales 
to government and charitable organizations. The broad coverage also has 
the advantages of maximum revenue at a given tax rate and the avoidance of 
distortions. The plan for a uniform rate has tremendous advantage from an 
operational standpoint; many of the problems in Europe have arisen from 
multiple rates. 

Several issues remain to be solved however. The most serious relates 
to financial institutions, to be covered in a supplementary Treasury report. 
This area encounters major problems arising from the fact that interest 
paid to individuals is not taxed and cannot easily be taxed. There are some 


aspects of building construction, sale, and rental of real property not 
fully solved in the reports. The exact treatment of governmental services 
is not specified entirely. The most serious operational problem, one 
not considered in the publications to date, is that of distinguishing between 
purchases for personal purposes and those for business purposes on the part 
of farmers and other small business operators and professional persons. 
While the registration of farmers has merit, it does increase the number of 
registered firms by 50 percent, and will involve a substantial volume of 
refunds on exported farm products. 




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