GST hike to hit small businesses

Ringing the changes: About 19% of firms believe a GST increase will seriously reduce sales. Photo / Herald on Sunday

More than 60 per cent of small to medium business owners expect their sales to be hit by a likely rise in GST to 15 per cent, according to a survey.

Around 19 per cent of 500 firms surveyed believe any GST increase will "seriously reduce" sales while 41.2 per cent think it will have a minor impact. Another 38 per cent said there would not be any real impact, and 1.4 per cent thought the change could help increase sales slightly, said the survey by accounts software provider Accomplish.

Almost half say they will increase prices by the rate of the increase or more to cover the rise and claw back lost margins.

Just over 56 per cent oppose the tax, and of that figure 32 per cent were strongly opposed. The May Budget is likely to see GST rise from 12.5 per to 15 per cent for introduction in October - the first rise since 1989.

It is estimated the change would raise additional revenue of between $1.9 billion and $2 billion, although there will be cuts to personal tax rates.

Central and local government charges remain a target for business lobby groups. The charges were up 1 per cent in the past quarter and 4.6 per cent for the year. The impact of ACC levy increases, the emissions trading scheme and a GST rate rise will all feed into inflation during the next year.

The Accomplish survey covered all types of business and industry, ranging from self employed operators to large, multi-branch companies.

Firms with 50 staff or less make up 99 per cent of all enterprises, according to the Ministry of Economic Development.

The survey finds varying tactics to cope with the expected dent in sales.

While all firms plan to review their prices, 34.9 per cent envisage an increase of more than the GST increase of 2.5 per cent and 10.8 per cent plan an increase of more than 5 per cent.

Another 51.7 per cent did not envisage any change beyond the 2.5 per cent GST increase. And 2.6 per cent envisage dropping their prices by 2.5 per cent or more to steal a march on competitors.

More than 36.6 per cent said profits had been static and they needed to improve margins to keep pace with inflation and the GST change while another 22 per cent said profits had been falling during the recession and they needed to reverse that trend.

Around 21 per cent said that "most customers won't recognise we've increased our prices; any increase will be associated with the GST change".

Grant Hewson, general manager of Accomplish, said any move to raise taxes was bound to be unpopular.

"But this result probably also reflects the fact that implementing the change is another compliance issue for business owners, costing them extra time and money, regardless of whether or not they recognise the need for Government to find extra revenue to balance its books."

Business New Zealand chief executive Phil O'Reilly said he sympathised with businesses facing the hassle of a new GST regime but feedback to his organisation had been generally positive about the change.

"Overall the business community says it supports a rise in the GST as long as it's accompanied by a lowering of other taxes."

A GST change would affect businesses differently, with those worst hit including tourist operators with locked-in prices and small retailers for whom GST is a day-to-day necessity.

The other Government charges, particularly rising electricity and fuel prices after the July 1 introduction of the ETS, meant this was going to be a tough year, particularly for small- to medium-size businesses which had been through a recession.

"The problem they face is their resilience to these types of events is a lot less than it otherwise would have been."

Westpac economist Dominick Stephens said firms would be scratching to put up prices beyond the rate of increase in GST if they had not been able to sustain price rises now.

"Exactly the same sort of competitive pressures and market conditions that have got prices and profit margins to where they are now will prevail after the GST increase," he said.

More important to longer term prices was the extent to which the GST increase flows through to inflationary expectations and wages.

"Those types of second round increases are certain to occur, the only question is how large they are. If the Reserve Bank does a good job of maintaining expectations that inflation will be low in the future, they could be quite small, and if they do a poor job they could be quite large."

The Accomplish survey reveals the scope of work needed to cope with a GST change. Among preparations, 21.8 per cent of businesses plan to review their accounting system and its capabilities, 5.8 per cent need to review their cash register and eftpos capabilities, 17 per cent will review all price tags and price lists, 9.7 per cent will update point of sale material and 7 per cent will update advertising.

Hewson said the results of the survey, which has an error range of plus or minus 0.05 per cent were being sent to the Government to help officials planning for the GST change.

SNAPSHOT OF VIEWS

* "We haven't increased prices for three years, so it makes sense to look into prices around the same time."

* "The market is already so competitive we are currently pricing just to keep our employees in work."

* "Customers will simply have to wear the cost. We're a small business and simply cannot wear the cost ourselves."

* "The administrative costs to alter the GST percentage will affect small business, some of which will not be able to absorb the costs and will have to close."

Source: Accomplish survey