Cabinet met yesterday in a special session to consider the Goods and Services Tax (GST). The bill will be presented for its first reading at a House meeting on Friday. Tonight, technicians will be working overtime crunching the numbers to find a compromise between Cabinet's political exigencies and government's fiscal requirements.
The technicians have to figure out how to make the tax generate at least $116 million in revenue to match the current sales tax. Cabinet, on the other hand has two critical political considerations. First, what will be the rate of the Goods and Services Tax, and two, will it be charged on light and water bills? According to our reports, the current proposed rate is 9.5% across the broad.
The confidential Cabinet white paper obtained by 7NEWS proposes that rate to be charged on light and water bills. That reportedly met Opposition in Cabinet and presently, the technical staff is making final reviews to see if government can afford not to charge the GST on light bills. The current compromise between fiscal needs and political realities is that the tax may be exempted from residential and low-income customers, but may be slapped on, in the guise of a luxury tax, charged only on high end and industrial consumers. Again, that is the proposal and technicians are tinkering with the figures to see if the revenue target can be realized while making that political concession.
But 7NEWS has now obtained a technical document which shows that no matter how much money GST makes, government will have a revenue shortfall. This document dated August 2005 prepared by the GST technical team produces a table which shows that a Ministry of Finance technicians forecast a funding gap for 2006 of $24 million, and for every successive year thereafter, though to 2010, when, the projection says, that gap will be $40 million.
And while that's one long-term worry, for the GST planners, the immediate short term concern is that the GST must match the sales tax, and that's going to be no easy task. We say not easy because the Cabinet white paper makes it clear that even though sales tax claims to be a 9% tax, in truth it works out to much more than that because of what government's technicians call a "cascading effect" that technical team found that at the current rate, of sales tax at 9%, it "cascades" to create an effective taxation rate of 23% on low mark up items such as foodstuff and 35% on high mark up items such as hardware. So that means that by the calculation of Government's own technicians, sales tax may sound lower than the VAT at 9%, but it worked out to an average of three times its stated value.
Now to compete with that over-performing tax, GST will have to have fewer exempt and zero-rated items. The proposed list in the Cabinet white paper features only 7 headings: including rents and leases, public health, education, postal services, and public transport. As for zero rated items, that list includes basic foodstuff, education and agricultural supplies.
Again, those are proposed and the GST implementation team is still working out the details before the bill is presented for the first reading at Friday's House sitting.
