Firms need to update GST systems
Today's Business View columnist is Brent Hulbert, a partner at PricewaterhouseCoopers in New Plymouth, specialising in taxation services.
Column: Business view
All bets are on that a GST rate increase to 15 per cent will be confirmed in the Government's Budget on May 20 and come into effect as early as October 1. This means time is running out for businesses to plan for increased compliance costs and any related challenges.
Taking action now means managing in a more efficient way various areas which may be affected by a potential rate increase. Systems will need to be updated and tested and pricing models will need to be revisited. For example, the ability to claim a GST input tax deduction for periodic supplies (such as regular lease or rental payments) may be problematic.
Currently, the GST rules do not allow businesses to claim GST input tax deductions, where the relevant tax invoice shows an incorrect GST rate. This means businesses making periodic supplies to customers will be required to issue updated invoices following the rate change. If new invoices are not issued, customers will not be entitled to claim GST input tax on supplies made after the change.
Updating all existing perpetual invoices (eg, invoices issued annually in respect of monthly lease payments) is likely to be a costly and time consuming exercise. We would encourage Inland Revenue to take a pragmatic approach to these strict requirements over the transitional period. This will assist businesses with implementing changes.
One consideration for the Inland Revenue is to allow businesses to rely on the "original" tax invoice to claim input tax deductions for periodic supplies, at least for a transitional period following the rate change.
The issuing of credit notes is another area of potential difficulty for businesses following a possible GST rate change. Credit notes must be issued using the GST rate which applied to the original supply. For example, if a sale was made in September 2010 with GST charged of 12.5 per cent and the goods were returned in October 2010 after the GST rate had increased, the relevant credit note would need to apply a GST rate of 12.5 per cent (as this was the rate that applied to the original transaction). This requirement is likely to present several difficulties for businesses.
Business systems will need to be flexible enough to cater for two GST rates following a GST rate change. Sales and accounts staff will also need to be educated to ensure that correct GST rates are used for each transaction. In some cases, it may be difficult, or near impossible, for businesses to determine which rate of GST applied to the original sale. For example, it is common for suppliers in the food and beverage manufacturing sector to provide customers with a credit for "spoilage". When customers make spoilage claims, it is difficult for suppliers to know exactly which supply the claim relates to, and therefore, which GST rate applies.
Again, Inland Revenue will need to provide pragmatic guidance to businesses to assist them with these challenges following a GST rate increase.
One solution would be to allow suppliers to issue credit notes at the old GST rate for a transitional period following a GST rate change. Another solution could be to suspend the requirements to make adjustments and issue credit notes for business-to-business transactions between fully GST recoverable parties. This approach has been taken to assist with GST rate changes in other countries.
A change in GST rate will present several other opportunities and challenges for businesses. Evidence following the last GST rate increase in 1989 suggests consumer spending will rise immediately before a GST rate increase.
Similarly, consumers will be more focused on savings after a rate increase. In 1989, a dip in consumption was seen immediately after the GST rate increase. Businesses should be planning for increased demand in the months leading up to the potential change and be prepared for a possible drop in sales immediately after.
Predicted changes in consumer spending patterns also present an opportunity for businesses to re- visit their pricing strategies. Businesses will need to consider whether they can bear the additional GST cost, or whether this will be passed on to customers. Potentially higher costs following a rate change may also give customers the incentive to pay for recurring purchases up front. This could create significant cashflow advantages for business.
There is no doubt businesses should start planning now and we strongly encourage Inland Revenue to plan and be ready for a possible higher GST rate and its financial and human impacts on businesses.
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