Will a GST rise affect me? (Pharmacy Today – May 2010)

Question:

What does community pharmacy need to consider with regard to the proposed GST increase?

Answer:

Currently there is a proposal GST will increase and personal income tax rates will decrease. If the proposed increase to GST proceeds there are several issues pharmacies will need to consider. The following outlines some of these issues.

There are some concerns the increase in GST will lead to an increase in inflation. This could lead to pressure to increase wages, if employees feel the decrease in personal income tax rates do not compensate for the increase in GST. The result of this is pharmacies may have to increase prices to compensate for the increased labour costs.

New Zealand last had an increase in the GST rate in 1989. Consumer spending increased prior to the rate change as consumers were focused on achieving savings. Consumer spending decreased after the rate change. Pharmacies will need to plan for this fluctuation in sales.

It can not be assumed any increase in GST will lead to higher prices for customers. It is the pharmacy’s decision as to whether they wish to pass on the increased GST cost. Pharmacies will need to complete an analysis to determine how much, if any, of the increased GST they will pass on to the customers.

Consideration should be given to the impact on the pharmacy’s cash-flow due to an increase in GST. It is likely your pharmacy will face increased costs from suppliers. This is merely a timing issue as when the GST return is completed there is a higher GST input claim, ie, increased purchases, resulting in reduced payments. However, if you pass the increase in GST on to your customers, then the impact on cash-flow is reduced, as you are receiving increased sales as well as paying increased amounts to suppliers.

If your pharmacy has any contracts, eg, to supply resthomes or prisons, a review of the contracts should be completed to determine if they are “plus GST” or “GST inclusive “. If the income is GST inclusive, then the net income you receive will decrease.

For any regular payments, eg, direct credits for rent, insurance, you may need to contact the supplier to obtain a new tax invoice, so that you can claim the correct amount of GST.

Careful reviews of tax invoices should be completed, especially around the time of any rate change, to ensure the invoice has the correct rate. If you need to return stock, purchased before the change in rate, but you are returning it after the rate change, any credit note or discount should be based on the original GST rate, ie, 12.5%. If the GST rate was to increase to 15%, then the fraction to calculate the GST component on a GST inclusive invoice will be 3/23. For example, the GST content of a $100 invoice is $13.04.

A review will need to be completed of all pharmacy systems to ensure they can be changed and still operate efficiently with a change of the GST rate. These systems include, but are not limited to, the Point of Sale software and any accounting software. We recommend you are proactive in this regard and trial any changes before the implementation date.

At present, an increase to the GST rate has not been confirmed although indications are it will increase to 15%. There is also uncertainty when any increase in GST will be applicable from and it may be as early as 1 October 2010. The Budget on 20 May 2010 will provide more details.

Published by Jess Gilmour, Markhams Auckland, Pharmacy Today, February 2010

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