A proposed GST impost on software development services and software imported electronically will raise costs to local businesses generally, but is likely to work to the benefit of local developers, who already have to charge GST on what they supply. They will now compete on fairer terms with overseas suppliers, Inland Revenue (IR) argues.
An IR “discussion document” proposes that services acquired from overseas be effectively levied with GST by means of a “reverse charge” imposed on the business consuming those services. Software development performed overseas, and also the purchase of completed software in package form through online download, are classed as “services”.
The consumer of the services or software, it is proposed, will pay to government a charge equivalent to the GST at standard rate on the cost of the software or service. A business will naturally claim a GST credit on goods and services they supply with the aid of those inputs, but it still inflates their costs above what they are paying at present.
The most serious impact will be for providers of financial services, who cannot charge GST on what they supply, but will still have to pay it on overseas inputs. “However, the government is committed to working with banks and other financial institutions to ease the transition, and consultation with the sector will continue," says Finance Minister Michael Cullen.
The changes will not affect consumers who are not registered for GST, except by possibly raising the cost to them of goods and services from local producers who have to pay the new tax. The consumer will still be able to buy software online without penalty.
Such a regime will bring businesses relying on overseas software and services into line with those using local inputs. IR argues that the latter have hitherto operated at a disadvantage, and this has discouraged the use of local software and services.
One of the key objectives of a tax system is that it be “efficient”, says IR’s report on the proposed reforms. “An ‘efficient’ tax system is one that does not affect individuals’ investment decisions one way or the other.
“New Zealand’s GST was designed and introduced before the prevalence of electronic commerce,” it says.
“Although the general framework of GST remains robust enough to deal with most electronic commerce transactions, at a detailed level electronic commerce raises some difficult issues.”
Among these are that the taxman usually relies on invoices to assess the truth of a business’s GST claims. With an online sale, there is often no such documentation.
Suppliers who might have operated in New Zealand can now operate from anywhere in the world, still selling to New Zealanders, which makes access to records difficult, IR says.
The government has invited submissions on the proposals, with a deadline of August 31.