Last week’s announcement by the BC government to replace the current GST/PST system with the Harmonized Sales Tax (HST) in 2010 came as a surprise for many British Columbians. The adoption of the HST has been advocated by industry and business associations for quite some time.
Following the announcement last week, Premier Gordon Campbell and Finance Minister Colin Hansen invited representatives from key business associations to a briefing on Friday, July 24. This meeting served to provide more background information on the new HST system, and to offer associations the opportunity to work with the BC government on the implementation.
The government was questioned over the timing of the announcement. Minister Hansen explained that there were two factors that influenced the timing of the decision. One was the adoption of HST by the Ontario government, and the second was an increased flexibility on the part of the federal government (for example, BC will be able to implement a 12% HST, whereas previously the federal government required it to be 13%). Furthermore, any HST agreements with the federal government had to be completed by September, hence the suddenness of the announcement.
In macroeconomic terms, the HST can be viewed as a shift of the overall tax burden toward consumption, and away from business production. While the PST, which is required to be paid on business inputs such as construction materials, office supplies, purchased energy, legal services, furniture, business vehicles, and most types of 'production' equipment (computers, etc.) cannot be reclaimed by business, the HST can. Input tax credits, similar to the GST returns filed today, will extend to the 7% provincial portion of the HST. This is positive for investment, productivity, exports, and real incomes.
However, by introducing the HST, the provincial government has to relinquish the longstanding fiscal instrument of PST exemptions, as the HST largely applies the same way GST does. The provincial government also has limitations on what it can exempt from HST. Under federal regulations, the total amount of exemptions cannot exceed 5% of the expected collection of the 7% provincial portion of the HST. The government has already announced a number of the exempted items, including motor fuel. As a result, some sectors, such as construction and hospitality, will see an increase of tax on their finished products. Similarly, services which were PST exempt under the current system but will now be subject to HST. The provincial government is offering some mitigation measures and is prepared to engage in discussions in the coming months. These may not come in the form of HST exemptions or rebates, but through other measures the province may be considering.
Weighing the benefits and challenges, the BCTIA believe the implementation of the Harmonized Sales Tax as good news for the technology industry. Not only will input costs decrease, the administrative burden of handling two separate tax systems will be eliminated. There is ample evidence in Canada and the rest of the world that a straight forward value -added-tax, which is the norm in industrialized countries, is more efficient and increases economic competitiveness and productivity, notwithstanding the political unpopularity upon introduction.
Please click here for a comprehensive analysis offered by the BC Business Council. This provides a balanced view of the benefits to be gained by the new HST system as well as considerations for the more vulnerable industry sectors to be affected.
President & CEO
BC Technology Industry Association