Given the current cost of living crisis and the constantly increasing price of food in New Zealand, questions are being raised about how to make food more affordable. A common response is that GST on food should be removed, and we can expect to see various politicians and commentators raise this during the upcoming election campaign.
Is removing GST from food a possible solution to the cost-of-living issue? In short, yes, but it may be a blunt tool in a toolbox with sharper options. While it would certainly make some difference, typically such changes provide the greatest dollar benefit to the highest earning households.
What would it cost?
GST makes up a significant portion of the total tax collected by Inland Revenue, with GST revenue from food and drink estimated to be around $2.6 billion in 2018 (or around 15% of total GST collected) according to the Tax Working Group.
As with any potential changes to the tax mix, if there were to be a cut in the total amount of GST being collected, then the Government would have to cut Government spending, raise or collect more taxes in other ways, or borrow more. There is no free lunch and we might not like the alternatives.
How would we determine what items of food should be exempt from GST?
If the financial impact of removing GST from all food and drink is too great, should we consider only removing GST from “healthy foods” such as bread, eggs, milk, fruit, and vegetables? While there may be some merit to this, it gives rise to interpretative issues. For example, if milk is to be exempted, what about milk powder or alternatives to milk? If fruit is exempted, what about fresh fruit juices, canned fruits, frozen fruit, or fruit spreads?
Experience in other jurisdictions shows that this can result in arbitrary and blurred lines between what is subject to tax and what isn’t.
In summary, the removal of GST on food is unlikely to be an efficient method of reducing the cost of food for the individuals and households that need help the most.
In the UK we’ve seen cases to determine whether a Jaffa Cake is a biscuit or a cake, or whether a Pringle is a potato chip. In Ireland the courts have had to consider whether Subway uses ‘bread’ (spoiler alert – it does not – there is too much sugar for the buns to be considered a staple and exempt from VAT).
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 so would potentially exclude supplies to the likes of restaurants or dairy owners. 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 (subject to GST).
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 rich households who spend more money on food (even though it is a smaller percentage of their spending).
Given this, it needs to be considered if more targeted tools could be used to result in a more efficient outcome at a lower overall cost to the Government.
For example, the recent cost of living package announced by the Government will provide targeted financial support to approximately 1.4 million Kiwis to help offset cost of living increases. This package has a total cost of $311 million, a fraction of the likely cost of removing GST on food.
Overseas experience also shows us that removing 15% GST from items of food would not necessarily translate to a 15% reduction in the price to consumers. For example, when the UK removed VAT on tampons there was an overall decrease in cost of 1-1.5%, but the applicable VAT rate was 5%.
In summary, while the removal of GST on food would be great for GST specialists and accountants, it is unlikely to be an efficient method of reducing the cost of food for the individuals and households that need help the most.
Related: Year-end tax considerations