GST changes likely to save banks $40m

By BRIAN FALLOW

Banks will escape about $40 million worth of goods and services tax a year under GST changes announced by Revenue Minister Michael Cullen yesterday.

"Financial institutions cannot claim GST refunds on most goods and services they buy, because the services they supply are exempt from GST," he said. "Instead they must absorb the costs or pass them on to their customers.

"We are proposing to zero-rate GST on services supplied by the sector to registered businesses. The effect would be that GST would still not be payable on the services but the financial institutions could claim back GST on their business costs."

Details on how the zero-rating idea should work will be contained in a discussion document due in the next few months.

Among the technical issues to be resolved is that the proposed zero-rating in effect applies only to services banks supply to businesses, so some formula will be needed for working out what proportion of the GST the banks pay will qualify for an input tax credit.

Kiwibank, which is targeting retail rather than business customers, will benefit from the zero-rating move less than banks whose customer base has a high proportion of businesses.

Bankers Association executive director Errol Lizamore said market pressures would determine to what extent this reduction in banks' costs would be passed on to their business customers.

Zero-rating also will make the banks a lot less unhappy about another change to the GST laws which was already in the offing, the application of GST to imported services.

The Government has deferred measures to apply GST to such services through a "reverse charge" where the recipient rather than the overseas supplier of the service has to pay the GST. That was to have been in the next tax bill, in May.

Imported services would include management fees and information technology New Zealand banks buy from their overseas parents. Without zero-rating, the banks would not have been able to claim back the GST on those imported services.

The present situation under which imported services escape GST is regarded as anomalous, in that New Zealand suppliers of the same services have to pay GST.

Cullen said legislation to apply GST to imported services would be introduced at the same time as the zero-rating measure, in the first tax bill after the election.

Both measures would take effect on April 1, 2004.

The argument for changing the GST treatment of bank-to-business services is that the present situation involves an element of double taxation. The bank has to charge its business customers more than it otherwise would to recover the GST it pays, but the business customers cannot claim an input credit for that.

The theoretical alternative would be to end the GST-exempt status of financial services.

The problem with that, says GST consultant Alastair McKenzie, is it is difficult to accurately value such services and no other country with a GST or value-added tax system includes financial services.