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Government unable to solve GST problem

1 July 2016

The NZ government has delayed any attempts to reduce the GST threshold for personal imports into NZ until at least 2018.

This announcement comes just months after we were told that a new system would be in place by the end of this year and that overseas companies would have to collect GST on sales to Kiwis and then remit it to the IRD. At the time of this announcement I expressed strong skepticism and suggested that they had wildly underestimated the scale of the problems associated with issues such as getting voluntary compliance from companies outside NZ's jurisdiction.

Gosh, seems I was right.

I wonder how much time and taxpayers' money was spent coming to the obvious conclusion that this was virtually mission impossible?

Far too much I expect.

So now the government has admitted that it basically doesn't have a clue how they could implement a system such as the one proposed.

And chances are, they never will.

Short of convincing credit card companies and the likes of PayPal to act as unpaid tax-collectors, the government will be on a hiding to nothing when it comes to trying to effectively collect GST on small personal imports.

And, whilst one might think that it would be a good idea for Visa and Mastercard to simply plonk 15% on every overseas purchase made using their service, even that would soon become unworkable -- for a number of reasons.

Firstly, some of the goods or services purchased using a credit card are zero-rated for GST purposes. Things such as pre-paying for travel or accommodation on your next overseas holiday. Since the service provided never leaves the shores of the country in which it's purchased then by law, it is not subject to GST.

Of course I have no doubt that idiot bureaucrats would come up with some cumbersome refund system whereby the credit-card company would charge you the GST but you could then apply to the IRD for a refund. Would this be viable?

Hell no it wouldn't.

We've already determined that it's simply not practical to collect GST amounts less than $50 so how could it be practical or cost-effective to reimburse similar amounts? Just when so much work has been done to streamline the IRD, by introducing new computer systems and cutting staff, the introduction of a refund process would be a giant step backwards.

Not only that... but it becomes yet another case of theft by government. If they required card companies to charge GST on all overseas transactions, they would effectively be taking money from the public without a right to do so. I'm sure any refund process would be slow and awkward and therefore the public at large would effectively end up lending many millions of dollars to the IRD for weeks at a time -- that is not right.

And why are we even contemplating doing this anyway?

Simple -- it's because the government's cloth-heads don't understand that the traditional bricks-and-mortar retail sales model is reaching its use-by date. Under pressure from an industry that would rather grizzle than adapt, they're intent on trying to prop up an aging dinosaur by taxing the newer internet-based retail model.

How many times have we been told that prices in NZ are higher (even for our own exports like milk, butter and cheese) than they are in larger markets such as the UK (where Kiwi dairy is often significantly cheaper than the same product at Pack'n Save)?

One of the reasons that NZ-based retailers can't compete with direct imports is clear -- their market is too small so it become harder to amortise the overheads involved in running such an operation. By comparison, some large online retailer based in China can sell products for a much, much lower price -- which benefits consumers.

Instead of whining about the unfairness of the GST situation, why don't local retailers realise that just like those buggy-whip retailers of the early 1900s, they're going to have to adapt or die.

When I buy a widget from a shop in the main street of my local town, chances are that it's passed through many hands and many levels of redistribution before I finally pay for it. Every time it's passed along the distribution chain, another layer of margin is added until eventually, when it gets to the shelf in my local town, it can be four to ten times as expensive as it was when it left the factory floor.

The real strength of online shopping is that it allows the number of mark-ups between manufacturer and consumer to be dramatically slashed.

When I go online and buy that same widget from DX or some other Chinese etailer, there's probably only one level of markup -- and that's the one that DX puts on it. What's more, because they're using JIT warehousing and using high volumes to offset small margins, I'm going to get an incredibly low price. There's just no way that Joe Blow & Sons shop in the high street can match that. Goodbye Joe!

Of course there is another option... Joe can stock his shop with sample units and then allow people to purchase directly from the Chinese supplier, making his money from their affiliate scheme. The product would then be shipped directly to the customer's own home in a week or two.

Customers get to check out the product in the shop but they also get the benefit of super-low prices. Joe Blow & Son no longer need to hold stock (other than the demo stuff) and their overheads can be super-low -- especially considering that their revenues will arrive in the form of a royalty payment at the same time each month.

Of course Joe's store will also have a website so that he can effectively sell to markets that are far beyond the reach of his tiny shop -- whilst still making that affiliate margin.

Does the government get its GST from this?

Hell no... unless to the total value of an individual shipment reaches the $50 threshold. But then again, the government, like the high-street retailer, will have to learn to adapt to a changing world.

The wife and I were discussing just the other day that The Warehouse is no longer a place to get a bargain. Prices in The Warehouse are silly-high in many cases and so rather than stroll down to The Red Shed, I am far more likely to log onto DX, Banggood or some other Chinese retailer and do my shopping these days. It seems that The Warehouse has lost sight of its original point of distinction and, in an era of cheap personal imports combined with ubiquitous internet access, I think they will soon start to feel the squeeze.

Of course the problem still remaining is "how can the government collect GST on these low-value purchases?"

The answer is, as it has always been: they can't.

Learn to live with it guys and turn it to your advantage. Just as China is making a killing by selling trinkets to Kiwis over the Net, the NZ government should be creating an assistance program to help small Kiwi companies and individuals market their own wares to the world by way of the internet. If you can't beat em, join em! That's what the smart people do.

Are our cloth-heads smart enough to understand this?

I fear not.

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