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GST on/off food

GST on/off food

The question of whether GST should be removed from food has been raised in the media and by political parties a number of times over recent years. The objective being to improve the diet and wellbeing of lower socio-economic groups within society. 

The idea seems reasonable and is likely to resonate with the “reasonable” person on the street, if only from a perspective of fairness and equity. But would it work? A recent Treasury report has shed some light on the issue and some key messages from the report have been outlined below.

The report provides that the proportion of a family’s food budget does not increase at the same rate as incomes rise. Therefore, an equity argument exists for the rate of GST on food to be reduced. However, given that high income earners spend more on food in an absolute sense, they would actually benefit more from a blanket food exemption.

In addition, to ensure the tax generated from GST remains the same, the GST rate on other items would need to increase by an estimated 2%. This evidences a further flaw in trying to achieve social aims by manipulating GST. The rate can’t flex based on a person’s individual circumstances, the same way that income tax rates do. The rate applies to goods (and services) irrespective of the person buying them.

In addition, to ensure the tax generated from GST remains the same, the GST rate on other items would need to increase by an estimated 2%. This evidences a further flaw in trying to achieve social aims by manipulating GST. The rate can’t flex based on a person’s individual circumstances, the same way that income tax rates do. The rate applies to goods (and services) irrespective of the person buying them.

No consideration is given to a more targeted reduction in GST, such as in Australia where certain types of food are not subject to GST, such as bread, flour, sugar and milk. While other items such as biscuits, cakes and takeaways are subject to GST. Research led by the University of Auckland found that taking GST off fruit and vegetables led shoppers to buy about half a kilogram more fruit and vegetables, per household, each week.

One argument for keeping the status quo is that New Zealand’s system is simple and efficient. The broad based approach avoids the complexity and compliance costs that arguably exist under other regimes; such as Australia’s.

The pressure on the New Zealand Government to introduce an exemption on food will only increase if GST increases. However, it is important to ensure any decision is based on rational debate and certainty that it will have the desired outcome, thereby outweighing any associated costs.

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