Before the Budget announcement on May 20, it was already generally accepted that the GST rate would be increased to 15% from the current 12.5%, WHK tax consultant Jarod Chisholm says.
For most businesses it seemed to be a simple adjustment resulting in an increase in the price of most goods by 2.2%.
"The reality is that for most businesses, this change is not as simple as just increasing prices."
While sophisticated businesses such as the major retailers had the resources to manage the issues created by the change, most GST-registered businesses had a turnover of less than $250,000.
That meant the bulk of GST-registered businesses bearing the compliance cost of a GST increase were at the lower end of the income scale, he said. Those same businesses generated only one-quarter of the net GST take.
In addition to the compliance cost of the increase, businesses must work their way through the many issues created by the GST increase, Mr Chisholm said.
"Many of these will also impact on the end consumers and the amount that they must pay for goods and services," he said.
Many of the issues facing businesses regarding the increase in GST had little to do with tax but a whole lot to do with the bottom line.
"If you cannot pass on the increase in the cost, will you be able to afford to continue in business?"
When holiday leave was increased to four weeks, some businesses put a surcharge on public holidays to cover the additional staffing costs.
Businesses might need to consider similar solutions in relation to GST, Mr Chisholm said.
Otago Chamber of Commerce chief executive John Christie said the October 1 deadline would come around quickly and he urged businesses to start working through the practical aspects of the GST change.
With 85% of New Zealand businesses categorised as small and medium-sized enterprises (SMEs) employing fewer than 10 people, many would not have the advantage of "spare staff" running around getting ready for the increase, he said.
"Someone has to physically look at the business and the practical implications of the GST change. It will differ greatly from business to business."
Without a dedicated support staff member considering the implications, many small business owners could be caught out by the changes.
Some of the smaller enterprises might have to absorb the cost.
For instance, a coffee shop charging $3.50 for coffee was unlikely to put the same cup up to $3.57, Mr Christie said.
Businesses needed to set aside some time and resources to consider implications of pricing and quoting during the changeover period.
For those confused by the change, Mr Christie urged leniency from the Inland Revenue Department.
"I hope there is a reasonable amount of leniency for those getting it wrong."
It was not simple and would take time and work, he said.
Otago-Southland Employers Association chief executive John Scandrett polled his members on concerns they had leading up to the increase on October 1.
"Price points on certain items will become more critical and, in some cases, members will bear the increase themselves, to maintain the desired pricing levels. In other situations, they will pass it on," he said.
Getting it right across the product range would be "the trick". Keeping an item at $99.99 as opposed to having it on the shelf for more than $100 would be widely considered, although many small businesses were already struggling, he said.
There would be reduced demand across non-essential items and a shift in demand across essential items.
For larger retailers, there was recognition good management would be the key. There was a need for constant review of product levels to ensure variable sales would not generate unfavourable inventory levels.
Where seasonal product ordering was concerned, an urgent review should be made of existing orders, he said.
"Have the right selection choices been made? Can we place pressure on suppliers to adjust their pricing terms and levels so that we have a better chance of holding margins and volumes?"
Members expected a wide range of supplier response on those and related issues, Mr Scandrett said. In some cases it might be better to lift the pricing of selected items now. This could mitigate the effect in many cases when the new GST rate started.
Business owners should look closely at existing overall pricing strategies, especially on "best sellers" and recognised price-sensitive product lines. It was vital to keep cash flow momentum in good health, he said.
Finally, Mr Scandrett recommended that all buying staff and front-line staff were well educated on the tools and processes associated with the increase.
Staff would need ready reckoners, the appropriate spreadsheets and briefings on how to handle supplier and customer reactions and queries, he said.
• HOW IT WORKS
Increasing GST from 12.5% to 15% is not an increase of 2.5%. It is a rise in GST of 2.2%. If something costs $100 now, divide it by 112.5 to get 0.889. Multiply 0.889 by 115 to get $102.23. That is what the item would nominally cost at the new GST rate of 15%.
