April 23, 1996
(Finance)

The following statement was issued today Paul Dicks, Q.C.Minister of Finance and Treasury Board:

Ministerial Statement - Sales tax harmonization

The Strategic Economic Plan released in June of 1992 stated the province would pursue harmonization of the provincial Retail Sales Tax (RST) and the federal Goods and Services Tax (GST). I am pleased to tell you that today we are moving one significant step closer towards realizing that goal.

I join with the federal government to announce the signing of a Memorandum of Understanding (MOU) for the harmonization of the GST and RST into a combined 15 per cent value-added tax (VAT) for Newfoundland and Labrador. The MOU provides a framework for the negotiation over the next six months of a detailed agreement to proceed with harmonization. If a detailed agreement is successfully negotiated, it is our objective to implement a harmonized sales tax on April 1, 1997. This timing also will give groups and individuals the opportunity to make their views known to government on harmonization.

Sales tax harmonization would be a major tax reform initiative. It responds to two significant tasks that the people of the province have asked government to undertake. The first is to reduce the provincial sales tax rate below 12 per cent, preferably into the single digits. The second is to do whatever is necessary to ensure that more jobs will be created in the province. I believe that everyone in the province desires that these objectives be among government's priorities.

In responding to the wishes of the people, I am pleased to announce that the provincial component of the harmonized tax will be eight per cent. And, because the provincial tax will no longer be applied on top of the federal tax, the rate reduction will actually be almost five per cent, down from the current effective rate of 12.84 per cent to eight per cent. With the federal rate unchanged at seven per cent, the current combined direct sales tax rate of 19.84 per cent will fall by almost one quarter to 15 per cent, a relatively low sales tax rate by national and international standards.

A harmonized sales tax also would bring about a reduction in the indirect sales tax embedded in the retail prices of goods and services. This embedded tax, which results from the RST businesses currently pay on their operations and pass on to consumers by way of higher prices, will be largely eliminated when the RST is replaced through harmonization. Combining this with the significant tax rate reduction, consumers all over the province would see a significant reduction in the after tax prices of a wide range of goods and services, and families in all income categories would pay less provincial sales tax in total than they are presently paying.

After implementation of the new tax regime there would be significantly less tax paid by the people of the province than if harmonization did not take place. With a harmonized tax, our tax revenue would be reduced by $105 million annually. Taxpayers therefore would have $105 million more to spend, save or invest. Through harmonization we can achieve a significantly lower sales tax rate than the present RST, significantly lower after tax prices on a wide range of goods and services and significantly less tax paid by the people of the province.

As a result of lower taxes, people would be able to purchase more goods and services. And, as everyone knows, this would lead to a stronger economy with more jobs and a better climate for job creation. The removal of embedded tax as a result of RST elimination also would make Newfoundland and Labrador products and services more competitive locally, nationally and internationally. Moving to a value-added tax, which is by far the most widely utilized sales tax in the world, also would make the province a more attractive place for business investment. It is government's responsibility to help create a business climate in the province which will encourage local people to invest here and attract business investment from around the world. The right business climate is the key to business investment, and business investment is a key to job growth. Harmonization is one of the keys to a better climate for business investment, and a better climate for job creation.

The essence of sales tax harmonization is quite simple. On April 1, 1997 the Retail Sales Tax with its 12 per cent rate would disappear. In its place, the GST rate simply would be adjusted to add a provincial component. The new harmonized tax rate would be significantly lower than the combined rate of the outgoing RST and GST. It is important to note that nothing new would be added to the existing GST tax base. Only the rate of the GST changes, and to only 15 per cent, concurrent with the elimination of the RST. The combination of the GST tax base and lower tax rate would be fairer for consumers in that less tax would be collected more evenly across a broader range of goods and services. One sales tax system rather than the present two also would be simpler for both consumers and businesses.

Part of our plan for a simpler tax system would be tax included pricing so that the retail price of goods and services already would have the sales tax component included in the sticker price. Consumers would no longer have to know the different sales tax rules to calculate the full retail price of any item, as the stated price would be the true price including all taxes. The tax would not be concealed from consumers, however, as sales receipts would continue to show a breakdown of the price with each tax shown separately.

Businesses have told us that one sales tax system would greatly simplify their compliance with tax legislation. This is particularly true for small businesses who bear a disproportionate share of the cost and effort required for tax compliance. To the extent business operations are simplified, cost savings would be realized and passed on to consumers through lower prices. Simplified compliance also helps create a better business climate which leads to greater employment opportunities.

During the recent pre-budget consultation process, individuals and groups paid particular attention to increasing the efficiency within government. Reducing duplication in tax administrations also allows governments to operate more efficiently and at a lower cost. Initially the new sales tax would be administered by the federal government through Revenue Canada at no cost to the province. As part of the harmonization process, the federal and provincial governments will be exploring ways to further reduce overlap and duplication in tax administrations by considering the establishment of a joint Canada Revenue Commission.

Because sales tax harmonization is a major structural change which will require time for provincial adjustment, the federal government would provide the province with transitional assistance in the amount of $348 million. This fund is to aid in the transition to the new tax regime during the first four years until the economic advantages associated with harmonization can be more fully realized.

In conclusion, the Memorandum of Understanding signed between both levels of government represents an important step towards the implementation a harmonized sales tax that will help achieve a fairer, simpler and more efficient tax system. Both Nova Scotia and New Brunswick have signed similar agreements with the Government of Canada and also are making statements to this effect today.

We look forward to the successful conclusion of a detailed agreement with the federal government later this year and the introduction of the harmonized sales tax next year.

BACKGROUNDER

The Government of Newfoundland and Labrador has entered into a Memorandum of Understanding with the Government of Canada which provides a framework for the implementation of a value added tax (VAT) which will be harmonized with the federal VAT. Subject to the signing of a detailed agreement and the introduction and passage of legislation by the provincial legislature, the harmonized VAT will be implemented on April 1, 1997.

The basic objective of harmonizing the provincial sales tax with the federal VAT is to implement an economically efficient sales tax regime which will be fair to consumers and which will help protect and create jobs by making products produced in Newfoundland and Labrador more competitive in domestic and foreign markets. The tax will reduce duplication and administrative costs, simplify compliance for business and promote federal provincial fiscal cooperation and harmony.

WHAT IS HARMONIZATION?
Currently, in Newfoundland and Labrador, there are two sales taxes, the seven per cent GST and the 12 per cent RST. Since the RST is calculated on prices including GST, the effective combined tax rate on many goods and services is 19.84 per cent. Under the harmonized VAT, the tax rate will be 15 per cent, of which the federal government will receive seven per cent and the province will receive eight per cent. Consequently, for many goods and services, the tax rate will decrease by almost five percentage points.

The tax rate will increase on those goods and services currently subject to the seven per cent GST only. Items not currently subject to the GST will not be subject to the harmonized VAT.

The cost of producing goods and services in Newfoundland and Labrador will decrease as a result of the removal of taxes which are embedded in prices. This will result in a decrease in the price of goods and services. It will make goods and services produced by Newfoundlanders and Labradorians more competitive in domestic and foreign markets, helping protect existing jobs, and create new opportunities for job creation. Newfoundland and Labrador will be a more attractive location for business investment.

EFFECT ON CONSUMERS
Tax will not apply to many items under the harmonized VAT including basic groceries, prescription drugs, medical devices, financial services, residential rents, day care, dental care and education and health services.

The tax will increase on some items such as personal services, fuel and electricity, children's clothing and books.

There will be a decrease in tax on most goods including vehicles and vehicle repairs, adult clothing, building supplies, home furnishings, appliances, computers and entertainment equipment, restaurant meals and snack foods, and telephone and cable television services.

The cost of goods to consumers currently contains an indirect component of RST which is embedded in the price. Under the harmonized VAT, this tax will be substantially eliminated.

While the tax will be clearly visible on the invoice, advertised prices and shelf prices will include the harmonized VAT.

The net effect of the harmonized VAT is that consumers in all income categories will pay less sales tax.

PROTECTING AND CREATING JOBS
The VAT system will remove a substantial portion of the sales tax that is embedded in the cost of goods and services produced in Newfoundland and Labrador. Businesses in the province will no longer have to incur unnecessary costs of complying with two different sales tax laws, rules and procedures, and administration systems. This will make local goods and services more competitive with those brought in from outside the province. Goods produced for export will no longer contain the embedded sales tax. This will make goods produced in Newfoundland and Labrador more competitive in other markets.

The economically efficient VAT will make Newfoundland and Labrador an attractive location for business investment. It will help protect existing jobs and will result in additional employment opportunities.

FISCAL IMPACT OF HARMONIZATION
The amount of RST forecasted to be generated in 1997 is $570 million. The revenue which the province will receive from the harmonized VAT regime is estimated to be $465 million, a difference of $105 million. To assist in the movement from the current RST system to the harmonized VAT, the federal government will provide to the province one time transitional assistance of $348 million for a four year transitional period.

The harmonized VAT will be administered by the federal government at no cost to the province. This enables the province and the federal government to reduce duplication of services and promotes federal- provincial fiscal cooperation. The cost of tax administration will be decreased while at the same time decreasing the paper burden and cost to businesses and taxpayers in complying with sales tax laws.