The Optimal Threshold for GST on Imported Goods

• DOI: http://doi.org/10.1111/1467-8462.12204
• Date: 01 June 2017
• Published date: 01 June 2017
• Author: John Creedy

The Optimal Threshold for GST on Imported Goods

John Creedy*

Abstract

This article examines the determination of the

optimal threshold value for goods and services

tax (GST) for imported units arising from

Internet orders. The concept of an optimal

threshold is wider than simply the maximisa-

tion of revenue net of administrative costs. At

the optimal threshold, the marginal cost of

funds from GST is equated to the ratio of the

marginal value of public funds to their

marginal social value, ref‌lecting the value

judgements of a decision-maker. The marginal

cost of funds allows both for compliance costs

and the marginal excess burden arising from a

small increase in the threshold. Illustrative

numerical values are reported, showing the

sensitivity to administrative costs, the demand

elasticity and, importantly, value judgements.

1. Introduction

The aim of this article is to examine the

optimal threshold relatingto the value of

imported goods arising from orders placed

with overseas suppliers and passing through

customs control, above which import duty

and/or goods and services tax (GST) must be

paid. Although the NZ context is considered

here, the general approach is more widely

applicable. The thresholdis, in fact, usually

def‌ined in terms of a de minimis, which refers

to the minimum duty and/or GST payable. In

New Zealand, duty is applied to clothing,

shoes and accessories and the de minimis is

currently set at $60.

1

The (NZ) Minister of

Customs (2016) reported that, in 2015, there

were over 16 million consignments valued

below $1,000, implying a foregone gross

annual revenue of $140 million. The impor-

tance of such low-value imported goods is

rapidly increasing; for example, the Minister

of Customs (2016) suggested that the 5 year

average number of units is growing at an

annual rate of 14 per cent.

In those cases where GST is payable on low-

value imported goods, it is applied to the value

of the goods, plus any applicable duty, plus

postal/courier and insurance charges. For a

discussion of mainly administrative issues

relating to taxation of cross-border services

and goods, see Inland Revenue (2015). To

simplify the analysis, the present article

considers only GST. Hence, with a GST rate

of 0.15, the threshold unit value is $400 since

the tax liable, 0.15$400, is equal to the

de minimis of $60.

The exemption of low-value imports

provides one of the few deviations from

theverybroadbaseoftheGSTin

New Zealand. Financial services are not

subject to GST, along with goods produced

* New Zealand Treasury and Victoria Business School,

Victoria University of Wellington, Wellington 6011 New

Zealand; email <john.creedy@vuw.ac.nz>. I am grateful

to Eina Wong and Norman Gemmell for discussions during

the preparation of this article. I should also like to thank

Matt Benge, Steve Cantwell, Penny Mok and two referees

who provided helpful comments on an earlier version.

The Australian Economic Review, vol. 50, no. 2, pp. 169–80

°

C2017 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

Published by John Wiley & Sons Australia, Ltd