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The BC government recently announced their plans to harmonize their sales tax with the federal GST effective July 1, 2010. While harmonization has its benefits, there are some issues to be aware of. Here’s what you need to know.
HST (Harmonized Sales Tax) is not uniform across the country. Each province will have its own set of requirements and has the flexibility to choose its own combined HST rate. In the case of Ontario, Nova Scotia, New Brunswick and Newfoundland, the HST rate will be 13% (a 5% GST base rate plus a provincial component equal to the former 8% PST rate). For BC, the HST rate will be 12% (a 5% GST base rate plus a provincial component equal to the former 7% PST rate).
How does this impact your business? The consumer?
Sales tax harmonization makes sense for most businesses. All companies currently absorb some PST as a cost, but most can claim back all GST as input tax credits. Consequently, the PST increases the cost of doing business putting companies at a disadvantage on the national and global playing fields. Under the harmonized structure, consumers will pay more on some items, however, since the costs for businesses will decrease it is believed that the savings will be passed on to consumers in the form of lower prices.
The HST will for the most part follow the same rules as the current GST. For example, if you are a food producer who is currently not required to collect GST on the sale of your fresh fruit or vegetables because they are zero rated for GST, these items will still retain their zero rated status for HST purposes.
What happens if you are a service provider and are not currently required to collect PST on your services? How will the HST affect your business? For example, if your business is in the middle of the supply chain that is moving the food from the farm to the table and you currently collect GST on the services you provide, once the HST is in place you will be required to charge the 12% HST on the majority of your services. For example, you may not have paid PST on the purchase of something that was going to be resold. Under HST, the HST will be applicable on all of the components that make up what is being sold, even on inventory items. The good news, however, is that the HST will be recoverable as an input tax credit.
Since PST will become a component of HST; the HST paid on purchases relating to GST/HST taxable sales can be recovered in the same manner as GST currently is recovered. Therefore businesses may want to consider the benefit of deferring major PST taxable purchases until July 1, 2010. BC has announced that very large businesses (those with sale in excess of $10,000,000) will have their input tax credits deferred for a period of time.
End consumer pays more:
There will be an impact on end consumer purchases that are currently GST taxable but not PST taxable. For example, in BC, snack foods sold at retail stores, will be subject to 12% HST whereas, in the past, the 5% GST rate was applicable. If end consumers in BC are not willing to pay the additional 7% then businesses may suffer a drop in sales. It may be prudent for businesses to revisit their processes to identify areas of cost reduction. By improving business performance management and finding ways to reduce their costs, businesses will be in a better position to pass these savings on to the end consumer.
Cash flow impact:
The current cash flow impact experienced by a business relating to GST, whether positive or negative will be amplified due to the increased rates. The effect could be magnified further if, for example, goods were purchased in BC at 12% HST and were sold in Alberta at 5% GST.
At the end of the day, businesses will benefit from reporting to fewer sales tax authorities than before. This in the long run will make it easier for businesses.However, in the short term, accommodating the rate change will involve retooling POS systems, computerized accounting software and A/P and A/R systems.
Managing the transition:
It is imperative to set your systems up as soon as possible and ensure they are correct. If your system is set up incorrectly, even the small dollar value sales or purchase transaction errors really multiply. The key is to analyze it and make sure you get it set up properly the first time. As with all tax issues the details will be complex and the overall impact may not be obvious immediately. The government will be providing transition rules and those rules may be complex. There will also be differences on the application of the HST among the HST provinces i.e. such as different rates. It will be important for companines doing business in other provinces to understand those differences.
To effectively manage the transition, it is important to seek the advice of a professional business advisor who can assist you in understanding the rules, setting up the proper systems as well as take advantage of the tax savings and other ways to improve your business performance.
Heather Weber, CGA is a Commodity Tax Specialist with Meyers Norris Penny. She works closely with Andrew Raphael to provide specialized tax advice for his food and beverage processor clients.
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