The purpose of this Bill is to replace, with effect from a day to be specified by order, the existing wholesale tax and turnover tax by a value-added tax. It is the intention that the changeover will take place on 1st November next.
The reasons for changing over to a value-added tax can best be understood in the context of the historical development of sales taxation in this country and the impact of developments abroad, especially in the European Economic Community. The introduction of the sales taxes to this country—the turnover tax in 1963, followed by the wholesale tax in 1966 —was one of the most significant measures in the tax field in recent decades. The increased flow of revenue deriving from these taxes has helped to finance the acceleration of the economic and social development which has taken place during the last decade. In 1964-65, the first full year of its operation, the turnover tax yielded £13½ million, equal to about 6 per cent of total Government revenue. This year, the sales taxes combined are expected to produce about £90 million, or up to 14½ per cent of total Government revenue.
The present sales taxes were introduced in order to provide a broader base for indirect taxation than had been afforded by the traditional sources —mainly tobacco, beer, spirits and hydrocarbon oils—which had, up to then, provided the bulk of indirect tax revenue. In 1962-63, the year before turnover tax was introduced, receipts from this narrow base accounted for over 40 per cent of total Government revenue and there was an ever-present possibility that the Exchequer's finances could be seriously upset by a sudden fall in the yield from any of these commodities. The turnover tax, on the other hand, extends to almost the whole range of consumer goods and services at the retail level and, since 1st May, 1970, is charged at the rate of 5 per cent on the price inclusive of tax.
The selective wholesale tax was introduced in 1966 in order to give greater flexibility and a degree of progression to the system. It does not apply, for example, to the necessities of life such as food, fuel, clothing and medicines or to services. Neither does it apply to goods such as beer, spirits, tobacco and petrol, which are subject to substantial excise duties. The rate applicable as from 1st January, 1969, was 10 per cent on tax-inclusive wholesale prices. However, in May, 1969, a further degree of progression was introduced by increasing to 15 per cent the rate for a narrow range of less essential items such as motor cars and television sets. With effect from 1st November, 1970, this rate was raised to 20 per cent. All these rates are expressed to apply to a tax-inclusive base, so that the effective rates are, in fact, somewhat higher when related to a tax-exclusive base.
While compliance by traders in the operation of these taxes has generally been very good the fact that such a large amount of revenue is now involved has raised doubts about the adequacy of the relatively simple administrative machinery of these taxes. The Government have been considering for some time what improvements in the collection machinery could be introduced.
One of the biggest disadvantages of sales taxes, such as our wholesale and turnover taxes, is that the duty of remitting the tax to the Revenue falls on one section of the business community only. The value-added tax, on the other hand, has, as its principal feature, the spreading of the tax collection over the whole process of production and distribution. We were also aware that the EEC had prescribed a common form of value-added taxation for adoption by all member States. Under the Treaty of Accession to the EEC we will, as members, be expected to introduce a similar type of tax not later than 1st January, 1974.
The form of value-added tax designed by the EEC and incorporated in two directives on the subject issued in April, 1967, was aimed at eliminating those features of existing turnover taxes in the Community which were acting as a barrier to the full implementation of the Treaty of Rome. All the EEC countries have now adopted sales tax systems based on these directives with the exception of Italy which, after some postponements, is due to make the changeover next January. Among the three countries, apart from Ireland, that are acceding to the EEC, Norway and Denmark already have a value-added tax on the general lines of the EEC model and Britain is adopting a value-added tax as from April, 1973, in replacement of the existing purchase tax and selective employment tax.
Apart from our EEC commitment the Government are satisfied that the value-added tax is the form of sales taxation most suited to our needs and I shall now refer to its main advantages for us. Firstly, with a minimum of disturbance to the existing incidence of taxation and to prices, payment of the tax can be spread over a wider sector of the business community than at present. The tax proposals represent little more than a change in the method of collection and their incidence and impact on prices should be broadly similar to the incidence and impact of the present sales taxes.
Secondly, value-added tax makes evasion more difficult as the system provides a cross-check by means of the invoices which will be required for all sales between accountable persons. Since the amounts shown on these invoices will enter into the calculation of the tax liability of both the seller and the buyer it will be in the interests of both parties to ensure that correct amounts are shown. Evasion will also be less rewarding that under a single stage system, as the tax collection will be spread over all stages of production and distribution and the fractional amount which has to be paid at each stage is small thus reducing the incentive to evade liability. Anything that makes for better compliance is in the interest of the general body of taxpayers.
Thirdly, the changeover will remove almost completely what little double taxation exists in the present system. For instance, while wholesale tax is at present borne by a firm on such requirements as office furniture and certain building materials, under the value-added tax double taxation of this nature, which in total is estimated at £3½ million a year, will be eliminated. Value-added tax on these items, in common with virtually all other such tax charged to a firm by means of invoices, will be deductible against the firm's own liability to value-added tax on its sales.
The Bill provides for a general sales tax to be charged at all stages of production and distribution at rates which correspond as closely as possible to the effective rates of sales tax at present in force. As I have already mentioned, firms whether manufacturers, wholesalers or retailers will pay tax on their sales, but in doing so can deduct the prior stage tax which they have been charged on their purchases. Thus, although tax is charged a number of times before the goods reach the final consumer it is borne once only and so no duplication occurs. A corresponding tax will be levied on imports to put them in the same position as home-produced goods.
I have already referred to the fact that the present sales taxes are chargeable on the price of an article including the addition made for tax. The rates of value-added tax are, by contrast, to be applied to the price before tax, so that, if the same amount of tax is to be collected as before, the nominal rates of the new tax must be somewhat higher than the existing rates. This is the reason why the rates proposed in the Bill are 5.26 per cent, 16.37 per cent, 30.26 per cent and a special rate of 11.11 per cent for dances compared with the present rates of 5 per cent, 5 per cent plus 10 per cent and 5 per cent plus 20 per cent respectively, and in the case of dances 10 per cent. Exports will be completely free from the tax. This will be achieved by applying what is described as a zero rate to exports and by refunding any tax charged at an earlier stage prior to export. Despite the fact that neither turnover tax nor wholesale tax applies to exports directly, there is a possibility that these sales taxes could be incurred indirectly at a stage prior to export. The mechanism of the zero rate will ensure the elimination of all value-added tax incurred at earlier stages. The zero rate will also apply to one or two other items to which I shall refer in a moment.
The Bill provides special arrangements for the agricultural sector whereby farmers and fishermen will not be obliged to register unless engaged in specialist activities such as market gardening, the commercial production of poultry or eggs or fish-farming. Those who remain outside the system will not have to pay tax on their sales or to keep detailed records. Such farmers will not, of course, be entitled to a refund of tax on their farm inputs, such as machinery and seeds, but they will be compensated for the tax element involved by increasing appropriately the selling price of their produce. This special addition to the price can be claimed as a tax credit by a registered purchaser against his liability on his own sales.
This tax credit will be at the flat rate of 1 per cent of the tax-inclusive price of agricultural and fishery produce and is calculated to be sufficient to recoup the average farmer for the value-added tax which he will have borne on his purchases. There have been numerous representations from farming interests to have farmers' raw materials exempted entirely from tax. I have examined this matter very carefully and have been able to meet a substantial part of the case by zero rating processed animal feeding stuffs, fertilisers and fishing nets. I am also taking power by order to enable repayment to be made to unregistered farmers of tax suffered in relation to their farm buildings and land reclamation work and to fishermen of tax suffered on the purchase of their fishing boats. The arrangements I have now outlined are the best that can be devised to protect farmers' interests, and the 1 per cent flat rate addition to prices will be adequate compensation for the balance of tax remaining in all farm inputs.
The Bill provides an arrangement whereby cattle marts and cattle dealers will be relieved of accountability on their sales of livestock where they opt for arrangements analogous to the simplified scheme applicable to farmers. The mart or dealer will be entitled to pass on the appropriate flat rate credit to a registered purchaser.
In the course of consultations, particularly with the manufacturing interests, it had been strongly represented to me that the original proposals in the Bill under which the taxable period would have been a calendar month and the tax would be payable by the 19th of the following month would cause serious problems in regard to liquidity for some firms. It was suggested that either the taxable period should be increased substantially or that a longer period should be allowed for payment. In considering these matters I was very conscious of the fact that the yield from VAT will be approximately the same as the yield from the present turnover and wholesale taxes and that, therefore, changes in liquidity should be very much a matter for adjustment between traders themselves. Any worsening of liquidity at the manufacturing stage is likely to be counterbalanced by an improvement at the wholesale or retail stage.
In those circumstances, since it was not considered feasible to have different taxable periods or different due dates of payment for different classes of persons, I have thought it proper to strike a balance between the position of manufacturers who are requesting total relief for their liquidity problems and the position of many wholesalers and retailers on whom a substantial benefit will be conferred by the change to the VAT system. Following acceptance by the Dáil of an amendment proposed by me the Bill now provides that the taxable period should be two months instead of one but that the latest due date for payment, that is the 19th day of the month following the end of the taxable period, should remain unaltered. This amendment should go a long way towards meeting the problems of manufacturers, and since it will at the same time improve the liquid position of most wholesalers and retailers it should make a considerable contribution towards the stabilising of retail prices.
The Bill has been drafted to conform, as far as possible, to the directives of the EEC. These directives do not lay down standard rates for the tax and, in other matters also, permit of a degree of flexibility in the systems to be adopted nationally. It may be found that some minor modifications to our system will be required to bring it fully into line with the EEC directives. The Community have agreed to our request for a transitional period of one year from the date of accession in order to effect any necessary changes.
It has been stated from time to time that the value-added tax has resulted in severe inflation in the continental countries which have adopted it and that similar results may be expected here. I should like to emphasise again that what we are doing is limited almost entirely to a change in the method of collecting tax. All of the countries which had unhappy experiences on the changeover were attemptting to do much more. In some cases, the incidence of the tax being replaced was being substantially altered. For example, the rate of tax on food, which in some cases was very low or nonexistent, was generally raised to 50 per cent or over. In other cases, the value-added tax was being used to increase substantially the revenue from indirect taxation as part of a general tax reform.
In our case the changeover will not significantly affect the revenue and, as I have already indicated, the incidence of tax will broadly remain unchanged. There will, therefore, be no ground for an increase in prices generally, though there may be some minor changes, which will balance out in the aggregate, because of the fact that it is not possible to ensure precise alignment at all points between the old and the new system. The relief from the double taxation existing in the present system, which I have referred to already, will accure to manufacturers and distributors and should help to counteract any tendency for prices to rise at the retail level.
With a measure as complex as this it is to be expected that unforeseen problems will arise for industry and trade from the transition to the new tax. So as to ensure that any such problems will be brought to notice and, as far as possible, solved, I intend to set up an Advisory Council on the Transition to Value-added Tax to advise me on these matters. The committee, which will be in existence for the three-month preparatory period before the commencement of the value-added tax and a further three months thereafter, will be representative of manufacturers, wholesalers, retailers, farmers, consumers, and the accountancy profession.
Together with the Bill, an explanatory memorandum has been circulated to Senators which contains a detailed description of the various provisions. I will be glad to give any further explanations or information that Senators may require during the course of this debate. I commend the Bill to the House for a Second Reading.
