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Special Committee Value-added Tax Bill, 1971 debate -
Tuesday, 20 Jun 1972

SECTION 11.

Chairman

There are some amendments that are related to No. 7. The suggested grouping for debate is as follows: amendments Nos. 7 to 14, inclusive, 16, 17, 18, 19 and 62 together. This group includes 12a.

I move amendment No. 7 :

In page 14, lines 41 to 60, and page 15, lines 1 to 24, to delete subsections (1) and (2) and substitute the following :

" (1) Tax shall, subject to subsection (2), be charged at whichever of the following rates is appropriate in any particular case—

(a) 11.11 per cent of the appropriate amount of any consideration which relates to the promotion of dances and the delivery of goods delivered or services rendered in connection with dances, where payment of the consideration for such delivery or rendering is included in the consideration in respect of admission to the dance or is a condition of admission,

(b) 30.26 per cent of the appropriate amount of any consideration which relates to the delivery of goods of a kind specified in the Fourth Schedule,

(c) 5.25 per cent of the appropriate amount of any consideration which relates to the delivery of any other goods or the rendering of any other services, and

(d) zero per cent of the appropriate amount of any consideration which relates to the delivery of any goods in the circumstances specified in paragraph (i) or (v) of the Second Schedule or rendering of services of a kind specified in that Schedule,

(2) Where goods which are of a kind specified in the Fourth Schedule and which—

(a) were imported, or sold in the State, before the 1st day of March, 1973, in such circumstances that wholesale tax was chargeable or would have been chargeable if that tax had been in force on the date of the importation or sale, or

(b) were imported or delivered on any previous occasion on or after that date in such circumstances that tax at the rate of 30.26 per cent was chargeable in relation to such importation or delivery,

are delivered within the State on or after the 1st day of March, 1973, tax shall be charged at the rate of 5.25 per cent of the appropriate amount of the consideration for such delivery."

(Aceptance of this amendment involves the deletion of the Third Schedule to the Bill.)

I understand that the purpose of this amendment, among other things, is to eliminate the 16.37 per cent tax rate so as to simplify greatly the whole system. The 30.26 per cent rate involves for the retailer only the payment of 5.6 per cent. If one could eliminate the 16.37 per cent the retailer would reach a stage where there would be a single stage tax.

This is of enormous importance. It is one thing which is coming through from all the representations we have had. A single stage tax at retail level is essential for this purpose. The complications of trying to distinguish at the retail level are beyond belief. I do not see how we could expect them to do so. One example has come to hand in a document which I received today. I have not had time to read it thoroughly. Take a department in a pharmacy dealing in one specialised area: baby cream, 5.26; baby powder, 16.37; baby food, 5.26; baby bottles and teats to pass the food through, 16.37; nappy liners, 5.26; nappy pins, 16.37; magnesium, 5.26; baby toilet utensils, 16.37. How could you expect the average small retailer to sort that out?

The Deputy is not quoting the case of an average small retailer when he quotes that.

Hundreds of items are sold in small chemists' shops. It is one of their major problems to keep their stocks right.

Take any country store dealing in these things, or any chemist's shop. I have only chosen these things at random. I could just as easily have chosen a list of goods in an ordinary general store. The point is that to have two different rates at retail level creates impossible complications. Only a very small proportion of the retail outlets in this country are geared for this kind of operation. It is an unjustifiable complication. I am astonished that we have got to the stage where it is being suggested that it should be done in this way.

There is another point which I want to deal with as well. I could develop that point further but I will just put it generally and then get the Minister's reaction. I am sure others will have something about it too. The 16.37 per cent has been calculated in a way which involves a significant increase in tax incidence. The Minister has given an assurance that the whole aim of this Bill is to keep taxes at present levels. As I understand it, the effect is to increase taxation on the relevant products by amounts which, depending on the margin of gross profit, could be quite significant. It could increase by 10 to 20 per cent, that is, by between one-tenth and one-fifth of the present amount.

Perhaps an example would make it clear. I have several sets of examples which were submitted to me. If goods are sold at present at a gross profit margin of 20 per cent on the cost of the goods, if the goods cost £100, the wholesale tax adds £11.1, and the profit is then charged on top of that at 20 per cent which brings the price up to £131.1. Turnover tax is then added at 5.26 per cent which gives another 6.8 per cent. The total tax paid therefore is 11.1 at the wholesale level and 6.8 at the retail level, that is 17.9 per cent. Under the new system, if the cost of the goods is £100 and you add the profit of 20 per cent you then add value-added tax at 16.37 on the £120 and this gives you tax payable of £19.64. In that instance, the increase in tax is about 10 per cent or one-tenth. In a similar case if the gross profit margin were 50 per cent the increase in tax would be about one-quarter of the present level.

There are two separate issues here. One is the undesirability of having a multiplicity of rates, a problem which can be solved quite simply by eliminating the 16.37 per cent rate, and the other is that even if you were keeping the 16.37 per cent rate you would have to reduce it to something like 13 to 14 per cent in order to avoid increasing the burden of taxation if the calculations submitted to me are correct. Perhaps they are based on some misconception. Since some of these calculations have come from accountants with a major firm and others from retailers, I would be surprised to find that they are entirely wrong. I should like the Minister to consider whether the rate should be 16.37 per cent anyway, whether such a rate should be charged, and whether we should not go for a simple system.

One recognises that it may be desirable to have different tax rates on different goods according to whether or not they are luxuries. In fact there is a different tax rate on certain goods at 30.26 per cent. It may be that in time the Minister may feel the range of goods covered by the higher rate should be increased if he is going to eliminate the middle rate. It may be that if you are to maintain revenue you do this by having a fractional increase in the standard rate combined, at some stage, with an extension of the range of goods covered by the 30.26 per cent rate. If that is necessary in order to eliminate the multiplicity of rates at retail level, it would be worth doing. I accept that the Minister wants to maintain revenue but he has several options open to him to do that. The basic option is to increase the basic rate.

If he feels that, by increasing the basic rate on the general run of goods at the expense of a reduction in the tax rate rate on less essential goods, if he feels this would be inequitable or socially regressive, he could combine a small increase in the basic rate with an extension in the range of goods charged at 30.26 per cent rate. I do not think the Minister can say he has to do this to maintain revenue. Nor can he say that he has to do this to maintain the present level of taxation, because he has chosen a tax rate of 16.37 per cent which is not the present rate, but higher. He is, I think, estopped from claiming that he is going to great trouble to ensure that he is simply maintaining the existing tax rates. That claim is vitiated by virtue of the fact that he is increasing taxation. I should like to hear other views and to hear the Minister's views. I am sure that when I have heard them I will have more to say but I do not want to waste time now.

First of all on the question of the 16.37 rate and how it is calculated, I could not take in all the figures while Deputy FitzGerald was giving them but there seems to be a misconception in the figures he quoted. I am saying this off the top of my head having just listened to him quoting figures. He appeared to be adding together the wholesale tax and the turnover tax and taking them together as being the equivalent percentage of the final retail price which they do not appear to be on the face of it.

The basis on which the 16.37 rate was arrived at was the sum of the present turnover tax rate of 5 per cent and the wholesale rate of 10 per cent both expressed in tax exclusive terms. If you add 5.26 and 11.11 you get 16.37. The application of this rate down to the retail stage in respect of goods where the existing charge is 11.11 per cent at the wholesale stage and 5.26 at the retail stage will produce no more than sufficient additional revenue to compensate for the surrender of revenue amounting to about £3½ million a year because of the elimination of the double taxation which exists under the present system.

On the general principle involved in this amendment, which is primarily designed to substitute a single rate of 5.25 per cent for both the 16.37 per cent and the 5.26 per cent rates set out in the Bill, first of all I am advised that it would result in a loss of revenue of £18 million in a full year and, in order to compensate for that, some additional taxation would have to be applied in some area. This would, of course, completely depart from the principle which I am very anxious to adhere to in this whole Bill of not changing the incidence of taxation so far as is humanly possible.

Our experience in the past has been that changes in indirect taxation have led to a greater increase or to put it in another way, it provided an excuse for people to increase prices.

Furthermore, the effect of this proposal would be to reduce the incidence of taxation on less essential goods and, assuming no change in the tax rate in order to compensate for loss of revenue—assuming we do not increase the basic rate—allowing no increases on essential items with the virtual certainty that the rate of taxation would not be passed on in full to the consumer, if we were to increase the basic rate we could be certain that the amount of the increase would be passed on, plus, of course another amount, on essential items such as food. It, accordingly, does not seem to me that there is any advantage in principle from the point of view of the incidence of taxation on the taxpayer in increasing the basic rate.

If we do not increase the basic rate but abolish the 6.37 rate, in some other way the £18 million has to be found, and we are simply passing that on in another form, possibly in a form that would mean another impost. That approach does not appeal to me. Furthermore the general approach here seems to me to be desirable in that as far as possible we should try to ensure that the existing incidence of taxation is maintained. There are many good and valid reasons why this should be done. Our experience of changes in the turnover tax, for instance, shows clearly what can happen if one were to change the basic rate. From the point of view of the taxpayer, therefore, I have no doubt the approach we are adopting is the right one.

Then we come to the point of view of the retailer, the shopkeeper. We have been told the operation of the two rates would present an impossible problem. We should try to see this problem in perspective. First of all, the average retailer will have a very small proportion of his turnover at the higher rate. That is the average retailer. You will find, of course, some cases where the bulk of the tax is at the higher rate. You might find cases where it is 50-50, but the average case will be that only a small percentage, relatively, will be at the higher rate. If a retailer has any at the higher rate he has a problem, and I am not suggesting this will not present any problem: I am suggesting it does not present the insuperable problems suggested by some representatives of some retailers.

I have had deputations in to see me and I discovered that when they painted a picture in relation to some of the items arising, they just did not know the basis on which VAT would be operated. I am speaking of a period of about four or five months ago. I would assume that by now they will know more about it.

I referred earlier to the fact that there have been discussions between the revenue Commissioners and the different kinds of wholesalers, and arrangements have been made whereby the operations of the wholesalers would be designed to make life much simpler for retailers than it would otherwise be, as regards the presenting of invoices, the manner in which they are presented and, in regard to cash sales, the acceptance of tally rolls as equivalent to invoices.

There are four different ways in which this may be approached and they can adopt whichever they like, and the Revenue Commissioners will accept it. The exemptions they will be allowed would operate on the basis of the target rates, and only if it is quite clear during a period that the methods they adopt are grossly out of line with the actual trading they are doing would the Revenue Commissioners interfere.

There are other approaches which I can elaborate on for the Committee if necessary. At the moment I am only trying to put the problem into what I think is the proper perspective. There will be problems but I do not believe for a moment that they will be insuperable problems for the retailers. I can understand some of the fears that this might involve them in elaborate book-keeping. It will not. Many of them thought that when the turnover tax was introduced it would present them with insuperable problems. It did not. Now, because of the operation of the turnover tax, they are better geared than they were before that tax came into operation.

Therefore, from the point of view of the retailers, although there is a problem, I think it is untrue to say there is anything like an insuperable problem. From the point of view of the principle involved in this amendment, I have no doubt the taxpayers' interests will be best served by the approach in the Bill, which is designed to ensure that the incidence of taxation will be unchanged.

On the Minister's statement that there will not be any insuperable problem, the Bill states that a firm's purchases must be recorded properly in order that they may make returns to the Revenue Commissioners.

That is not so.

Then let us have some clarification.

I said I am prepared to elaborate. What the retailer has to show is the total amount of goods at one rate and the total amount at the other, present his invoices or his tally rolls, as the case may be, or whichever way he is billed for them. That is the type of total he has presented in respect of turnover tax. He does not have to identify or keep accounts of every transaction.

The Minister mentioned the word " estimate ". An estimate of what? Could it be estimated at, say, 80 per cent of the higher rate.

Basically, three figures will be required. The purchases will be broken down at the 5.26 rate and at the 6.37 rate. The third is the total amount of cash taken in, from the point of view of cash transactions. From these three figures he can make a full return for his VAT. There are four options, but they really start with these three. In some cases he will have to make an estimate, in others he will not.

The point I am making is that while a global figure in relation to purchases and sales is required by the Revenue Commissioners, in order to compile that global figure it will be necessary for the retailer to keep very up-to-date records and this will cause certain administrative difficulties for traders. I do not think the Minister can deny that aspect of the system. I think the degree of such difficulties is being underestimated. Traders, particularly small traders, will have to keep these concise records.

There were other points raised by the Minister which I should like to deal with later, perhaps tomorrow. However, with regard to estimation, I did not understand the reference to mark-ups. It seems to me that different goods have different mark-ups and these are not related to different tax rates in any consistent way. I do not see how an estimate based on purchase could yield a meaningful estimate of the proportion of goods sold at different tax rates when the value or enhancement of the goods by mark-ups will differ according to the nature of the goods. This might work to the benefit of the Revenue Commissioners or it might work against them. A retailer would want to consider whether an apportionment of his turnover based on a detailed analysis of the invoices would give a picture completely unfavourable to him, if the relationship between the mark-ups and the tax rate on those goods is such that such an apportionment would yield a tax burden beyond the true tax burden. He must make a complete analysis of his turnover between the different items and relate the mark-ups and the tax rates and see if the system of estimation will work mutually, in his favour, or against him. If it works against him he will have to abandon the estimation system.

If he discovers it is operating against him, he can change it. As we have said, he can adjust his returns.

How? He can discover this in advance before he starts paying by doing a complex analysis of his turnover for the past year in relation to mark-ups and tax rates. If he discovers it works against him—and this will happen in a fair proportion of cases—he will have to abandon the estimate system. If retailers wish to avoid losing money they will have to analyse fully their turnover, unless the cost of such an analysis is so much more than the amount of tax they will lose that it is not worth their while. The Minister is getting into a tricky area here—where people will have to pay more tax than they should simply because they cannot employ enough accountants to prove they are not liable for tax. This would be a totally unsatisfactory tax system.

The Minister's proposal does not take account of the fact that the relationship seasonally between sales and purchases varies; in fact, goods may be purchased but may not be sold. The Irish Drug Association have made this point. They said sales varied from season to season depending on variables such as the weather, epidemics and so on. For instance, this year there is no relationship between the quantities of summer lines such as cameras, films, sun lotions and sun glasses which have been purchased by retailers and the amounts sold.

Also, at certain times of the year traders have to gamble on what to purchase to meet fickle public demand. For example, at Christmas it can be financially tough on traders whose gamble does not come off and whose purchases are left on the shelves. It would be unfair to have their losses compounded by making them pay tax on the basis of miscalculations. The Minister may say that he can adjust that retrospectively, but how can he do this without a most complex analysis of his sales, of what stock he is left with, the rate at which he has disposed of different goods and then make a case to the Revenue Commissioners which must be based on an analysis of turnover. The idea that you can meet this by estimating on the basis of purchases is unrealistic and so crude that any retailer who accepts it is in danger of paying too much tax——

Or too little.

A system should not be such that people are put in the position of having to pay more tax than they should pay or else be forced to employ extra staff to prepare the accounts. Even if retailers take a chance on having to pay too much tax, they can only operate the system if they analyse all the invoices they receive having regard to the different tax rates and this would be a complex operation for a small retailer. Such a retailer would have to sort out his invoices daily, weekly or monthly and divide them into the different tax rates—

When would he have to do this?

If he is going to apportion his turnover on the basis of the proportion of goods purchased at different tax rates, he will have to analyse the invoices.

The proportions will be analysed already for him as between one rate and another rate. This is the arrangement made with the wholesalers.

Would the Minister develop that?

I said that arrangements had been made to have the wholesalers invoice the retailers, showing the total amount at the lower rate and the total amount at the high rate. In other words, the invoices will segregate for the retailer the items which are at one rate and the items at the other rate. They will total them for the retailer.

This is true of all wholesalers?

That will put a considerable burden on the wholesalers.

That is another story.

In relation to a large purchase by, for example, a chemist—a purchase which may involve a wide range of commodities—there will be trouble in analysing in this case.

The retailer will be given an invoice which will be analysed for him.

Will he be given two invoices?

He will either get two invoices or one invoice with two columns.

He will have to get the invoices from all the wholesalers. The wholesaler has the job of segregating all the invoices he sends out. That will involve him in a considerable amount of work.

There is reference to this matter in Appendix B of the explanatory memorandum.

These are designed to cover every conceivable kind of case, there is nothing to suggest that they would be very complicated for the ordinary retailer.

(Dublin Central): Which ones will exist for the ordinary retailer?

I do not take the Minister's point that, for the ordinary retailer, this is not complicated.

I tried to outline in general how it will work for the small retailer. The onus is on Deputy Collins not to say that he does not take the point that it will not be complicated but to tell us in what way it would be complicated.

I thought I had done that.

I think Deputy FitzGerald was under a misapprehension in regard to part of his argument in so far as he was not aware that the retailer would be provided by the wholesaler with a ready division between the two types of goods and the two rates.

I wonder whether the Minister would be good enough to provide us with a short table showing how the £18 million tax is calculated?

Before we adjourn there is a point I would like to make. We have not yet received the Report of last week's proceedings. This presents us with a difficulty. When we began today I could not recall where we had got to last week.

Chairman

I understand they are with the printers.

What time lag is there to be in their printing? We had this trouble before. Committees of this House cannot function unless they get their reports at least as rapidly as the Dáil gets its reports which, by the standards of other countries, are not rapid.

Chairman

I shall see the Editor of Debates and see what can be done.

I emphasise, from my long experience, that such delays are not the fault of the Editor of Debates. With respect to the Minister for Finance the fault lies in the fact that this House has no power to buy a pencil or employ staff of any kind unless he approves. I know from advice received that the Minister is less than generous to this House in the matter of providing staff.

What Deputy FitzGerald has said is not only totally irrelevant but inaccurate. Also, may I say that I undertook on the last occasion to try to give some concrete examples of certain things. We have made some effort at this which I am proposing to circulate now.

Can the Minister explain in what way I said was inaccurate?

The Deputy is inaccurate in saying that the Minister for Finance is not providing money for the purchase of a pencil or for the supply of staff.

I said we cannot do either of these two things without the Minister's approval. From the point of view of the reporting of our debates, the staff has been inadequate, under great pressure and this has caused impossible problems for us on the Committee of Public Accounts. Now we cannot have the reports of these proceedings even a week later.

The Deputy will appreciate that the problem may not be quite as simple as he thinks.

If you do not pay people enough, you will not get enough staff. Could we have an assurance from the Minister on this?

Surely if the services we require are not being provided we should report the matter to the Ceann Comhairle so that arrangements can be made to have adequate staff and, consequently, a proper report and a speedy report.

On the Committee of Public Accounts, because this problem arose we were pilloried for being responsible for employing staff at £29 a day each. This was necessary because inadequate staff was being provided for the working of the House. I do not think this Committee should get itself into the position of being pilloried in the public press in that way.

I do not accept that the operations of the Public Accounts Committee illustrated the absence of adequate staff. Is the Deputy suggesting that we ought to have employed in this House sufficient staff to meet every possible contingency that could arise including the kind of sessions that there were of the Public Accounts Committee which were unprecedented?

What was unprecedented about the sittings of the Committee of Public Accounts?

Think about it.

The PAC were given specific directions from Dáil Éireann to hold an expeditious inquiry into the spending of £100,000.

Were the PAC ever involved previously in the kind of operation in which they have been involved during the year?

Every time a Committee sits, it is unprecedented. This is the first time that a Committee has sat on value-added tax. Committees must be serviced. I do not wish to introduce a note of acrimony but I thought it better to make this point clear at this stage lest we should become involved in great trouble and considerable bitterness as between the Committee and the House. I hope we will have an assurance that the necessary staff will be provided and that the reports will be available promptly.

The Committee adjourned at 10.10 p.m. until 8 p.m. on Wednesday, 21st June, 1972.

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