THE GOODS AND
THE GOVERNMENT'S ADMINISTRATION COSTS
AND ADMINISTRATION COSTS OF THE GST
A. Startup Costs
B. Current Administration
OF ADMINISTRATION OF THE GST
of Different Goods and Services
B. Tax Rates
Number of Registrants
D. Frequency of Filing
THE GOODS AND
THE GOVERNMENT'S ADMINISTRATION COSTS
In 1987, the federal government
undertook the reform of the federal Manufacturers' Sales Tax (MST) that
led to the introduction of the Goods and Services Tax (GST) on 1 January
1991. Since that time, the GST has been continually and sharply criticized
from all quarters. Many people think that the GST has not fulfilled its
promise and has come nowhere near meeting the two principles of public
finance on which the federal government based its introduction: (i) the
tax should not hinder the efficiency of the economy; and (ii) the tax
should minimize compliance costs for business and administration costs
This paper, will focus on
the administration costs of the GST. First, we shall establish what these
costs comprise and, since the GST was introduced relatively recently,
examine startup costs. Second, we shall look at ways measuring the effectiveness
of administration of a tax, and compare the administration of the GST
with that of the former MST and of value added taxes (VATs) in other countries.
Lastly, we shall examine the factors that determine the administration
costs of a tax, how they affect the GST, and how they could be reduced.
ADMINISTRATION COSTS OF THE GST
Well before the GST came
into effect, officials were already laying the foundations for administering
it. Once the design of the tax was completed, capital expenditures were
necessary for developing information systems and purchasing additional
equipment, such as desks and computers. Officials then had to identify
potential registrants so that each one could collect the tax and be eligible
for the credits.
All these activities contributed
to the startup costs of the GST. Although several departments were involved
in introducing the tax,(2)
Revenue Canada was by far the most important. According to the department,
its own startup costs amounted to $320.3 million. This figure assumes
that only costs incurred before 1 January 1991 were for planning
and preparation. In the 1992 Report of the Auditor General,(3) Auditor General (AG) Denis Desautels refined
this definition, explaining that some of the administration costs incurred
after 1 January 1991 were also startup costs; for example, registering
registrants had begun before 1 January 1991 but continued after that
date. If such costs are also taken into account, the AG estimates Revenue
Canada's startup costs to be $678 million. If expenditures by the other
departments are included, the AG's estimate amounts to $820 million.
The variance between Revenue
Canada's figures and those of the AG can be attributed to their different
definitions of startup costs, rather than to an underestimate by Revenue
Canada. Still, as the AG noted in his 1992 report, although the startup
expenditures for the GST were reported each year in the budgets of the
participating departments, these costs should have been consolidated and
reported to Parliament together.(4)
B. Current Administration
The 1991-92 fiscal year
marked the first full year of operation of the GST. Initial forecasts
of its administration in 1989 had been $200 million annually.(5)
The question was: were the administration costs of the GST more or less
than anticipated? In 1991-92, administration costs for all departments
involved amounted to $486.1 million. Table 1 shows where these expenditures
were made. Administration and collection of the GST took 3,960 person-years,
half of which were assigned to the compliance activity.
At first glance, the amount
spent on administration seems high. However, it must be borne in mind
that some expenditures were one-time costs that will not recur. It should
also be noted that, in light of the short period from the time the GST
received Royal Assent (17 December 1990) and the time it came into
effect (1 January 1991), Revenue Canada had to spend enormous sums
to deal with the huge influx of registrations and requests for information.
For the 1992-93 fiscal year, the administration costs of the GST could
have been expected to be much lower, since the GST had by that time reached
its "cruising speed." However, this was not the case, as is
shown in Table 1. Administration costs went from $486.1 to $518.1, an
increase of $32 million. Costs for Customs and Excise climbed by
nearly $60 million.
CANADA - Customs and Excise
· Systems development
· MST refund program
administration and collection costs
· Policy development
· Client information and
· Program management, systems
CANADA - TAXATION
· Administration of income
* Most of these expenditures were
related to facilities (Public Works) and changes to systems (Supply and
Source: Revenue Canada,
Customs and Excise, internal data.
OF ADMINISTRATION OF THE GST
It cannot be determined
whether or not the administration costs of a tax are acceptable until
they have been compared to the revenue the tax generates. The GST system
includes an income tax credit and refunds to businesses of the GST paid
on inputs; these features account for nearly half of the gross revenue
from the GST. Because of this considerable difference, it is all the more
important to compare administration costs to net, rather than gross, revenue.
Table 2 shows the details for 1991-92 and 1992-93. In 1991-92, the government
collected $15.2 billion by means of the GST, and the administration costs
for the tax stood at a little more than $486 million. For each dollar
collected, the GST cost 3.2 cents. The same calculation for 1992-93 shows
a cost of 3.6 cents for each dollar collected.
collected by Customs and Excise
collected by departments and agencies
paid out by departments
tax credit for low income earners
REVENUE less administration costs
* Includes 50% of
the administration costs of the Quebec provincial sales tax. Under the
Debt Servicing and Reduction Account Act, administration costs
are not part of this Account.
Source: Revenue Canada,
Customs and Excise, February 1994.
One of the arguments put
forward by the Department of Finance to justify replacing the MST was
the old tax was too complex to administer; it is interesting, therefore,
to compare the cost of the MST with that of the GST. There is no doubt
that these two taxes are completely different, but it is still important
to compare them from the perspective of maximizing resources and simplifying
During the last year of
the MST's existence (1989-90), the government spent $90 million on administration
costs for this tax, which generated $17.768 billion in net revenue:
each dollar collected cost the government 0.5 cent. That means that the
GST costs six times more to administer than the MST.(6)
Some observers might argue that the GST costs more than the MST for each
dollar collected because the recession has resulted in lower-than-anticipated
revenues. If we assume that the GST could have generated $20 billion in
1991-92 (a generous assumption), each dollar collected would still have
cost 2.4 cents in administration costs, or five times more than the MST.
Since other countries have
also introduced taxes similar to the GST, it would be tempting to compare
their administration costs and revenues with ours, and to come to conclusions
about the effectiveness of the respective administrations, based on those
figures. However, such figures are not necessarily comparable. Another
country's tax, with the same ratio of administration costs to revenue
as the GST, but with several rates to apply instead of only one, would
actually be more efficient than ours, because that tax system would be
more complex. The fact that administration costs may be defined differently
also makes comparison difficult. However, for comparison purposes only,
we note that in 1986-87 the administration costs of the VAT in the UK
accounted for 1.03% of revenue collected.(7)
This percentage represents the ratio of administration costs to gross
revenue. For Canada, this ratio was 1.64% in 1991-92 and 1.70% in 1992-93.
There is another way to
determine the efficiency of administration of a tax. Appearing before
the Public Accounts Committee on 25 March 1993, Revenue Canada Deputy
Minister Pierre Gravel noted that "a key indicator of a nation's
efficiency in administration of value added taxes, recognized around the
world, is the calculation of the ratio of person-years [employee] to registrants."(8)
This ratio is established by the International Monetary Fund (IMF) and
is currently one person-year to 250 registrants (1:250). Table 3
shows the ratio of person-years to registrants in various countries.
* Tait, Alan T.,
Value Added Tax: International Practice and Problems, IMF, p. 250.
** Public Accounts
Committee, Third Session, 34th Legislature, Issue 47, p. 10.
When he appeared before
the Public Accounts Committee, the Deputy Minister did not anticipate
that this ratio would increase over the next few years. Using the criterion
of the ratio of employees to registrants, then, the Canadian federal government
would appear to be fairly efficient. The fact that the Department's employees
look after more registrants than the average, does not necessarily mean
that they are more productive, however. Nor, in fact, can it be said that
a country with one employee for 100,000 registrants would be still more
efficient. A higher ratio of employees to registrants can mean that the
audit levels are not very high and that each employee can therefore look
after more registrants. For example, in Italy, where the ratio of employees
to registrants is 1:726, the underground economy accounts for 40% of total
economic activity. At the opposite end of the scale, in the UK, with one
employee for 149 registrants, the underground economy accounts for no
more than between 2 and 4% of total economic activity.
A high ratio of employees
to registrants, then, does not always guarantee efficient administration.
The point is to find a compromise between the level of resources assigned
to audit and other activities and potential lost revenue. Governments
must also ask themselves how they can make the tax easier and less costly
to administer. It is generally agreed that, in its present form, the administration
of the GST is expensive. In the next section, we shall provide an overview
of the factors that affect these administration costs.
of Different Goods and Services
The larger the tax base,
the easier a tax is to administer. For various reasons, however, governments
often want to make certain goods and services either zero-rated or tax
exempt, and this drives administration costs up. In Canada, zero-rated
goods and services are mainly prescription drugs and groceries. In addition,
the groceries category includes exceptions that are costly to administer:
for example, some grocery items are taxed only if fewer than six of them
are purchased. Tax-exempt goods and services include financial services,
day care services and educational services.
B. Tax Rates
Several countries apply
more than one tax rate. In general, one rate applies to most goods and
services, and the other rates apply to a limited group of goods and services.(9)
Some believe that multiple tax rates are very costly to administer and
considerably reduce the additional revenue they generate. Most countries
that have recently introduced a VAT more have imposed a single rate and
countries with more than one rate are tending to reduce the number.(10)
In Canada, the GST has a single rate (7%),(11)
which is in line with the general trend.
Number of Registrants
Businesses and organizations
that are obliged, or choose, to register for the GST are called registrants.(12) In theory, a government must seek to register
as many businesses as possible, since these registrants collect the GST
on behalf of the government. While registrants must declare the GST amounts
they collect, they may claim a credit for the GST they themselves have
paid on purchases necessary for their provision of taxable goods and services.(13)
These refunds amounted to over $11 billion in 1991-92 and a little more
than $12 billion in 1993-93. In practice, a government may wish to limit
the number of registrants, for example in a case where the cost of processing
a registrant's file is higher than the tax the registrant would pay. It
was also clear that some businesses (especially the smallest ones) could
not comply with the requirements because of the additional cost the tax
would impose on them. Like the government, these businesses have compliance
costs equal to or even higher than the tax revenue generated for the Treasury.
Several studies have shown that compliance costs are inversely proportional
to the size of a business; they decrease as business size increases.
Bearing this in mind, Revenue
Canada decided that registration would be optional for businesses with
annual sales of less than $30,000. Nevertheless, 400,000 businesses(14)
with annual sales under this threshold registered, for various reasons.
Some of these businesses did not know that registration was optional or
feared that sooner or later Revenue Canada would require them to register.
Others registered because their customers wanted to pay the GST in order
to claim the input tax credit. Still others registered in order to obtain
the input tax credit on purchases from their own suppliers.
Savings could be made, then,
if Revenue Canada were to set up an incentive program encouraging some
registrants to de-register. It should be possible to convince businesses
that the input tax credits for which they would be eligible might be lower
than the compliance costs they would incur. Revenue Canada could even
require some businesses to de-register if incentive programs did not work.
The authors of a study on the compliance costs of businesses, of which
one part discusses businesses in New Zealand, note that the number of
registrants has become excessive; they urge the government to make the
conditions of de-registration easier and thus encourage de-registration
by businesses and organizations whose total compliance costs are more
or less equal to their GST payments.(15)
Frequency of Filing
Any business with annual
sales of over $30,000 must register. Each registrant must file a return,
with frequency of filing depending on the amount of annual taxable sales.
Registrants with sales of over $6 million must file returns monthly; those
with sales of between $500,000 and $6 million must file returns quarterly.
Other registrants are encouraged to file quarterly returns, but are allowed
to choose the frequency that is convenient to them.
Administration costs depend
on the number of returns. According to Revenue Canada, 7.1 million returns--a
considerable number--were filed in 1991.(16)
Measures could be introduced not only to cut down the number of registrants
who need to file returns, but also to encourage registrants to file returns
annually rather than quarterly. In the opinion of the Auditor General,
if half of eligible registrants had opted to file returns annually, approximately
2.4 million returns would not have had to be processed.(17) Following these observations,
Revenue Canada encouraged more small businesses to file returns annually;
the department reports that, after two months, 40,000 small businesses
had responded. Businesses may now file a joint GST and income tax return,
and Revenue Canada feels that this arrangement will encourage even more
businesses to select this option.(18) However, if the results are not satisfactory,
Revenue Canada may have to consider making annual filing compulsory.
Although the Conservative
government intended to set up a tax that would be simple for both businesses
and government to administer, the result has been quite different. The
third anniversary of the coming into force of the GST was 1 January 1994.
Although since that time several initiatives have been introduced aimed
at simplifying the administration of the tax, it is still considered complex
and costly to administer.
The new government has said
that it intends to replace the GST in order to make it simpler for everyone.
It will have to ascertain the administration cost of each component of
the tax. For example, what does it cost to make certain goods zero-rated?
When the GST was introduced, the government had decided not to tax basic
groceries. While that decision may have been popular, it has resulted
in additional administration costs for government and businesses. Administration
costs should also be more fully disclosed; the information now published
in the various sources of information (the Public Accounts, the
Estimates) is not very detailed.
In developing a new tax,
the government must take better account of its administration costs. This
implies examining compliance costs, since government decisions to increase
or decrease some services in administering the tax will have a direct
influence on business. For example, some businesses could be obliged to
hire an accountant, if they could no longer obtain assistance from Revenue
Canada. According to the Canadian Federation of Independent Business,
private sector compliance costs amounted to $4.5 billion in 1992.
There is also worldwide debate over whether businesses should be paid
to collect taxes on behalf of the government. In Canada, a Supreme Court
decision in August 1992 denied vendors the right to be reimbursed for
costs incurred in collecting the GST.
costs cannot be decreased by increasing compliance costs for businesses.
Ideally, solutions must be found that will reduce total administration
costs (those of both government and business). Before introducing a new
tax or changing the present one, the government should evaluate the effect
of each component or change (such as unrestricted registration, the registration
threshold and indexing of it, single or multiple rates, and a broader
tax base) on total costs. From the point of view of efficient administration,
a business should collect the GST only if its compliance costs together
with the government's administration costs, come to less than the tax
that the business collects and remits to the government.
If the government decides
to replace the GST, any new tax should be simpler to administer and should
take efficiency into account.
(1) Canada, Department of Finance, Sales
Tax Reform, June 1987.
(2) For example, the Department of Finance worked
closely with Revenue in designing the GST, and Public Works Canada was
responsible for office space.
(3) 1992 Report of the Auditor General,
Minister of Supply and Services, Ottawa, p. 491.
(5) Department of Finance, Goods and Services
Tax: An Overview, August 1989, p. 33.
(6) 1991-92 data for the GST; 1989-90 data for
(7) Plamondon et Associés, GST Compliance
Costs for Small Business in Canada, Department of Finance, December
1993, p. 103.
(8) Canada, House of Commons, Public Accounts
Committee, Third Session, 34th Parliament, Minutes of Proceedings and
Evidence, Issue 47, p. 10.
(9) In most cases, low rates apply to essential
goods and high rates to luxury goods.
(10) Alan T. Tait, Value-Added Tax: International
Practice and Problems, IMF, Washington, 1988, p. 249.
(11) In theory, there are two rates: 0% for
zero-rated goods, and 7% for other goods. In practice, 0% is rarely considered
a rate. Also, the tax is effectively reduced by rebates on the purchase
of new houses valued at $450,000 or less.
(12) Canada, Revenue Canada, Customs and Excise,
GST: Guide for Small Business, April 1992, p. 1.
(14) As of 31 December 1993 there were 50,000
(15) Plamondon et Associés (1993), p. 116.
(16) 1992 Report of the Auditor General
(1993), paragraph 20.65.
(18) Canada, House of Commons, Public Accounts
Committee, (25 March 1993), Issue 47, p. 17.