Is GST a bread and butter issue?
Tax Alert - March 2023
By Allan Bullot, Hana Straight & Harry Lynskey
Given the current cost of living crisis and the forever increasing prices of food in New Zealand, questions are being raised about how to make food more affordable. A common response, that is raised on a regular basis, is to remove GST from “food”.
Is removing GST from food a possible partial temporary solution to the cost-of-living issue? In short, yes, but as ever in tax, the position is more complex. While it may make some difference, it is likely not the best use of Government funds to tackle the current situation.
OECD jurisdictions such as the United Kingdom, Australia and Canada have regimes where tax is not applied to particular food items. However, the introduction of such a measure would be complex in nature and may not be an efficient tool to ultimately and quickly reduce the cost of food in New Zealand. Recent studies of overseas changes to VAT rates have also shown that a significant portion of any GST rate cuts are not passed on to the end consumers. When you also consider spending patterns, any reductions that are passed onto consumers would provide the greatest dollar benefit to the highest-earning households who spend more.
New Zealand GST
GST is a broad-based tax on consumption in New Zealand, imposed at 15% across the vast majority of goods and services, with only a few exemptions. Notably, New Zealand has one of the broadest GST bases in the world, with GST being introduced in 1986 in conjunction with a reduction in personal income tax rates and excise duties. As a result of this broad base, and simple premise for taxation, GST makes up a significant portion of the total tax collected by Inland Revenue. In 2022 GST revenue was $24.7 billion and accounted for 25% of New Zealand’s taxation revenue. Food and drink, according to the Tax Working Group in 2018, made up GST revenues of $2.6 billion (from a total of $18.7 billion of GST collected by the Government at that time). These figures highlight that the potential cost of any GST change would be significant.
As with any potential changes to the tax mix, if there was a reduction in the total amount of GST being collected, then the Government would have to consider several options as a result of the reduced tax take. They would need to cut Government spending by that same amount, raise the same amount from other taxes, or borrow more. There is no free lunch, if the GST on food is currently being used to indirectly fund operations in a hospital and that GST was no longer collected, there would still be a need to find some way to fund the operations, or the operations could not go ahead.
How would we determine what items of food should be subject to GST?
If the financial impact of removing GST off all food and drink is too great, should we consider only removing GST from “healthy foods” such as bread, butter, eggs, milk, fruit, and vegetables? This gives rise to interpretative issues. For example, if milk is to be exempted, what about milk powder or dairy milk alternatives? If fruit is exempted, what about fresh fruit juices, canned fruits, frozen fruit, or fruit spreads?
Drafting a coherent framework to distinguish GST treatments for “good food” would be an onerous task and would likely require constant revision which may offset any savings that individuals may gain from the removal of GST on food items.
GST systems have been modified in some jurisdictions, like Australia and the United Kingdom, to achieve policy objectives, such as promoting the consumption of healthy products. This results in an arbitrary and blurred line between what is subject to tax and what isn’t. In the United Kingdom we’ve seen cases to determine whether a Jaffa Cake is a biscuit or a cake, or whether a Pringle is a potato chip, and in Ireland, whether Subway uses ‘bread’.
Applying these sorts of rules to New Zealand, a chocolate chip cookie would likely not be subject to GST as the chocolate chips are included in the dough before baking. However, a plain biscuit with the base dipped in chocolate would be subject to GST as the biscuit is partly decorated with chocolate.
Ultimately creating distinctions like this would create more work for GST specialists, food technologists and lawyers, which will indirectly add to the cost of food. So, while it may be good for our businesses to take GST off food, we question if it would make GST better in the overall tax mix for New Zealand.
A current private member’s bill by Rawiri Waititi proposes to remove GST from all food and non-alcoholic beverages. While this in theory is easier from a classification perspective, there are still potential issues – “food” is defined consistently with the Food Act 2004, which is wide in interpretation. Additionally, it only removes GST from sales to consumers which would potentially exclude suppliers such as restaurants and supermarkets. This could result in supermarkets needing the ability to determine whether a customer is a consumer (no GST), or whether they’re a café/restaurant working picking up extra milk or eggs for the business (subject to GST at 15%).
Who would benefit the most from GST being removed from food?
GST is seen as a regressive tax, which means it has a greater impact on lower-income households.
The Tax Working Group noted in 2018 that expenditure on food and drink represented approximately 20% of the weekly household expenditure of a decile 1 household compared to 14% for a decile 10 household.
While removing GST from food benefits all households, it would have a much greater dollar benefit on wealthier households who spend more money on food (even though it is a smaller percentage of their spending).
If GST is taken off all food, then while there would be no GST on a bottle of milk, making a modest dollar value change, GST would also not apply to airfreighted imported caviar or truffles at a much higher dollar impact, and not what could be considered an “essential food”.
Given this, it needs to be considered if more targeted tools could be used which could result in a more efficient outcome at a lower overall cost to the Government.
Would removing GST from food decrease the price of food?
The general assumption with removing GST from items of food is that it would provide individuals with savings of around 15% (the standard rate of GST in New Zealand), in practice this would likely not happen
Research has shown that the removal of GST or VAT often doesn’t result in an equivalent reduction in price. When the UK removed VAT on tampons there was an overall decrease in cost to consumers of 1-1.5% when the applicable VAT rate was 5%.
Other issues include:
- Would a manufacturer/producer lower the price if the market has been paying more?
- What stops artificial inflation in price prior to the removal of GST to give the appearance of a reduction?
- What about the impact of common “price points”, i.e. $0.99?
- Would the reduction of GST on food increase pressure on the Government to reduce/remove GST on other goods and services, such as medicine, education, and public transport? If so, what would the cost to the Government be?
- Would any reduction in the cost of food from GST changes actually have an indirect inflationary impact on the wider economy?
In summary, while the removal of GST on foods would butter the bread of accountants, its unlikely be an efficient method of reducing the cost of food for individuals and households. If GST was removed from all food, it would result in a significant loss of tax take which would need to be recouped by other methods. From looking at other jurisdictions, the guidelines on the GST treatment of foods are arbitrary in nature and come to distinctions that do not make practical sense. If the purpose of removing GST from foods is to assist lower-income households through the current economic landscape, in our opinion resources would be better spent exploring other options.
If you have any questions on GST, please contact the authors.
March 2023 - Tax Alerts