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VAT and GST Developments

By Editorial
July 27, 2015

This month's Tax-News feature focusses on developments in the area of consumption taxes, as governments continue to fine tune their value-added tax and goods and services tax regimes to increase their efficiency, raise revenue and, in some cases, achieve social policy goals.


We start our round-up in Australia, where there has been intense focus on how the GST system can be improved in recent weeks.

The debate on GST was intensified at the end of June 2015, when the Australian Government released a draft discussion paper on the future of the country's federal tax system, which explores options for GST reform.

Changes to the GST rate or base require the unanimous support of states and territories, as well as the endorsement of the Commonwealth and the passage of relevant legislation by both federal houses of Parliament. Under the horizontal fiscal equalization (HFE) regime, all GST revenue (less the cost of administration) is passed to the states and territories.

The paper considers options for reforming GST revenue distribution. The methodology could shift from full equalization to a less comprehensive equalization, by establishing a GST relativity "floor," which would set a minimum level of GST to which any state or territory would be entitled.

There is certainly no shortage of opinion on how the Australian Government can improve the GST regime.

On July 1, 2015, the Grattan Institute, a think tank, called for the Australian GST base to be widened as part of a broader reform of taxation.

According to the Institute, these reforms would "materially increase government revenue with limited collateral damage to the economy and the most vulnerable in society."

Changes to Australia's GST system are also supported by the majority of Australians, according to a survey commissioned by the Property Council of Australia. The survey found that 72 percent of respondents expect GST to rise over the next decade. Almost half said that they would support a higher GST rate and a broader base in return for doing away with other taxes such as stamp duty.

Chartered Accountants Australia and New Zealand (CA ANZ) have calculated that increasing the GST from 10 to 15 percent could generate AUD265bn (USD200bn) in revenue over four years. This money could be used to lower income tax and abolish inefficient state taxes, CA ANZ argued.

However, the Australian Chamber of Commerce and Industry has urged the Government to think carefully about its options for GST reform and ensure that "political opportunism" doesn't stymy the debate.

ACCI, together with the Business Council of Australia and the Australian Council of Social Service, has released a set of tax reform objectives, which focus on the need for bi-partisanship and inter-jurisdictional cooperation. The organizations said: "Every one of the leaders knows that we need to reform a tax system that's out of step with the rapid economic and social changes Australia faces. A rethink of financial relationships between the Commonwealth Government and states and territories is also needed and this should complement national tax reform.

New Zealand

Across the Tasman Sea, changes of a much more technical nature were announced as the New Zealand Government issued new GST guidance on directors' fees in July.

The new guidance is set out in Public Ruling BR Pub 15/10, which amends previous Ruling, BR Pub 05/13, issued on April 1, 2005.

Two amendments were made to section 6 that relate to the GST treatment of fees paid to directors. The first amendment moved the former proviso to section 6(3)(b) to a new section 6(5). Before the amendment, the proviso to section 6(3)(b) treated services performed by directors as being supplied in the course or furtherance of a taxable activity when the director accepted the office in carrying on that taxable activity.

The second amendment introduced a new section 6(4). Section 6(4) provides that when an employee is engaged by a company to be a director and the employee is required to account for any fees received to their employer, the employer will be treated as supplying the services to the company. The employer will therefore return GST output tax and the company will be able to claim input tax on the payment for these services. The Ruling has been updated to reflect the new structure of section 6 and to explain the effect of section 6(4).


Elsewhere in the Asia-Pacific region, Singapore's Finance Ministry announced a two-week-long consultation on the draft Goods and Services Tax (Amendment) Bill 2015 on July 13.

The draft Bill provides three changes to existing tax policies and administration that arose from ongoing reviews of Singapore's GST system.

The first change would allow the Comptroller of GST to impose a Travel Restriction Order on a person who fails to repay a tourist refund wrongly claimed under the Tourist Refund Scheme.

The second change would revise the definition of "aircraft" for the purpose of zero-rating supplies made in relation to an aircraft, and extend zero-rating to specific supplies made in relation to non-qualifying aircraft.

Last, the Bill clarifies the scope of zero-rating in relation to merchandise for sale on board an aircraft or ship.


Staying in Asia, in a significant development on July 22, 2015, an Indian parliamentary committee approved the majority of the provisions of the constitutional amendment bill that will allow the proposed GST to be introduced in 2016.

The proposed GST will represent one of the largest shake-ups of the Indian tax system for decades. By replacing a plethora of indirect taxes charged at state and federal level, the GST is designed to make India's consumption tax system far more efficient, boosting inter-state trade and economic growth.

This reform has been problematic from the start however, with state governments, fearing they will lose out in revenue terms and jealously guarding their tax jurisdiction.

After more than a decade of drawn-out negotiations, the lower house of Parliament on May 6, 2015, passed the Constitutional Amendment Bill to enable states to levy the GST on services, which was seen as a major step towards the adoption of GST in India.

Then, on July 22, the Rajya Sabha (upper house) select committee on GST of almost all of the 21 clauses in the constitution amendment bill. However, the ruling BJP Party lacks a majority in the Rajya Sabha, where the bill will need the approval of at least two thirds of the members before it can be signed into law by the President. This casts doubt on whether the GST will be introduced in April 2016 as planned.


Something of a surprising development took place in Japan in July 2015, when the Japanese Finance Ministry reported a surprising surge in tax revenue, buttressed by a large rise in receipts from the controversial consumption tax.

According to the revenue statistics for fiscal year 2014, tax receipts rose by 14.9 percent, or some JPY7 trillion, over the level recorded in the previous year.

The greatest portion of the tax revenue rise was found from a 48 percent boost in consumption tax receipts to JPY16 trillion following the increase in the tax rate to eight percent from five percent in April 2014.

With the Government attempting to close its budget deficit and start reducing its huge stockpile of debt, the consumption tax revenue increase may encourage it to go ahead with a second rise, to 10 percent which is tentatively scheduled to take place in April 2017. Tentatively, because the Government may postpone or cancel the increase if Japan's fragile economy looks vulnerable as this date approaches.

Nevertheless, some economists and supranational bodies think that the Japanese Government will have to raise consumption tax well above 10 percent if it is to achieve its fiscal consolidation targets, including the International Monetary Fund.

South Africa

Moving to Africa, rumors that the South African Government would raise the rate of value-added tax in the 2015 Budget as its books fall deeper into the red turned out to be ill-founded. However, changes to South Africa's VAT regime remain a distinct possibility, especially after the Davis tax reform committee released two reports on potential options for value-added tax reform in South Africa in July 2015.

However, shortly after the release of these two options papers, the IMF released a report which concluded that, in comparison to other national VAT regimes, South Africa's VAT system is operating relatively effectively.

The IMF report, covering the period 2007 to 2012, found a VAT compliance gap of between 5 and 10 percent of potential VAT revenues, which is low by international standards and is largely the result of South Africa's simple VAT structure. Also low is the policy gap, the amount of theoretical revenue lost due to concessions, compared with the revenues South Africa could receive from levying the headline rate on all supplies.

The IMF concluded that there is limited scope for improvements to South Africa's VAT regime. "Although the level of policy gaps is higher than the level of compliance gaps, the room for additional revenue by changing VAT policy structure looks limited," it said.

United Kingdom

Turning our attention to Europe, a notable development was the newly-elected Conservative Government's summer budget, announced on July 8, 2015, which confirmed the party's earlier pledge that VAT rates will remain unchanged for the next five years under a "tax lock." The tax lock legislation, included in the summer 2015 Finance Bill, means that the main rates of income tax, National Insurance (social security) contributions and VAT (including reduced rates of VAT) will not be raised in the life of the current parliament, which runs until the spring of 2015.

In a less high profile development, but nevertheless one that was keenly awaited by the gambling industry, on the same day that Chancellor of the Exchequer George Osborne announced the Budget, the Rank Group lost its Supreme Court appeal against a decision by HM Revenue and Customs (HMRC) to levy VAT on takings from certain slot machines.

The key issue was whether Rank was exempt from VAT because it had introduced technology that separated the Random Number Generator (RNG), which is the system for producing numbers for the machine's software to determine the outcome of a bet, from the machines themselves.

It is common ground that a slot machine is a "gaming machine" for VAT purposes when the element of chance is provided by a component that forms part of the body of the machine on which the game is played. Rank had argued because these two elements were separate that supply should be exempt.

However, in dismissing Rank's appeal, the Supreme Court decided that since the RNG was an integral part of the gambling experience, "it is a fair use of language, and consistent with the apparent policy of the legislation, to describe the element of chance as provided 'by means of' the terminal."


Easily the most significant recent economic development in the EU was the third bail-out package for Greece, which has been granted on the proviso that Athens legislates for further fiscal consolidation measures, including increasing revenues from VAT.

Indeed, Greece's Government has already started implementing the demands of the EU refinancing deal, with a steep rise in rates of VAT. For most goods and services, the rate of VAT has increased from 13 percent to 23 percent with effect from July 20, 2015.


There has also been much activity on the VAT front in Romania over the course of recent weeks.

Firstly, in June 2015, Romania's lower house of Parliament approved plans to introduce a new 5 percent reduced rate of VAT for cultural services, lower value houses, and printed media.

Shortly thereafter, extensive debate by the Budget Committee, the Lower House agreed to reduce the main rate of VAT to 19 percent from 24 percent – a move that goes against the trend of rising VAT rates in the European Union.


Tags: gambling | compliance | Europe | VAT rates | budget | New Zealand | fees | Finance | legislation | tax reform | Singapore | Greece | India | Romania | services | South Africa | Japan | Africa | Tax | Australia | tax



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