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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.
THE NEW ZEALAND BROAD BASED VALUE ADDED TAX*
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 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),
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:
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
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.
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
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-
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
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.
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.
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
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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