Sales Tax in Canada - Case Study Example

Sales Tax in Canada of Sales Tax in Canada Introduction The influence of government in the economy is of a great magnitude given that they issue policies and impose taxes (Bird, 2009). Taxes serve different functions in the economy and one of their critical uses is raising revenue for the government (Bird, 2009). There are various types of taxes such as the income tax, sales tax, import tax and export tax but the discussion in this paper will be based on the sales tax and its impact. Sales tax is levied by a city or state on retail prices of items (Kesselman, 2011). This tax is usually imposed by governments and collected at point of sale with the retailer to collecting and passing the tax to the state (Kesselman, 2011). There are three kinds of sales taxes levied in Canada namely the provincial sales tax PST collected by provinces; goods and services tax which is collected by federal government, Lastly, there is the harmonized sales tax (HST) which combines both PST and GST and is levied in various provinces and then shared out to participating provinces (Sherman, 2009). The rate of sales tax levied is based on various factors which include the product and the place they are being shipped; for instance, publications shipped into any Canadian destination are levied a 5 percent GST although they are not subjected to PST (Smart, 2011). The costs incurred in shipment and cargo handling expenses are also subjected to sales taxes. This paper will present three products subjected to sales tax in Canada and evaluate who bears the burden from this budgets. Products subject to sales tax in Canada On 1st July 2010, the harmonized sales tax (HST) was adopted which did away with payment of sales taxes to two governmental levels (Smart, 2011). Previously, eight percent sales tax was paid under the PST while 5 percent was levied by the federal government for various products. Despite the harmonization of the sales taxes, products that were previously not subjected to sales tax remained unaffected as the total sales tax become aggregated (Smart, 2011). The products which are never subjected to sales tax include prescription drugs, basic groceries and municipal transits (Roukhkain, 2011). Clothing and footwear are subjected to sales tax in Canada (Chetty, Looney, and Kroft, 2008). Under HST, clothing for adults is subjected to 13 percent in Ontario. The aggregate tax rate is equal to the cumulative sales tax levied before July, 2010 where GST was 5 percent and the PST was 8 percent. Clothing for the children is subjected to a 5 percent sales tax as was the case before HST was adopted as they were exempted from 8 percent PST rate (Roukhkain, 2011). Furthermore, footwear for children are subjected to 5 percent sale tax as shoes beyond size six have a 13 percent sales tax levied on them. The tax system on clothing is based on the age group of their users and it is lower for children clothing to ensure that they are cheap and affordable thereby guaranteeing quality life for them (Smart, 2007). Although not all food products and beverages are subjected to sales tax; others have the tax charged (Smart, 2007). Basic groceries such as meat, vegetable, dairy and canned products are not subjected to sales tax and this has been the case even before HST was adopted. However, snack foods for instance chips and pop corn are charged a 13 percent sale tax. In addition, meals sold in restaurants for more than $ 4 have a 13 sales tax levied. Similarly, alcoholic drinks are also subjected to 13 percent sale tax. These products have a tax levied on them given that they are considered as luxuries and therefore a person enjoying them is well off in the society (Duff, 2003). On the other hand, no tax is levied on basic groceries as they are usually needed for maintenance of life and if sales tax is levied on products in this category, they would become expensive and unaffordable for the poor (Duff, 2003). Motor vehicles and their spare parts are the other products subjected to sales tax in Canada. Car spares are subjected to 13 percent and this rate is also levied on tires, cars purchased from dealers and recreational vehicles (Smart, 2011). For gasoline and diesel, the sales tax levied is usually 5 percent while car insurance is not taxed although the other services that go with cars are taxed (Smart, 2011). In case an individual wants to resell a car, a 13 percent sales tax is levied in contrast to the 8 percent sale tax which was charged under the PST in Ontario (Smart, 2011). Impacts of Sales Tax on Consumers The impact of sales tax on different products hurts the final consumers the greatest given that the producers, distributors and retailers only pass this tax onto the consumers (Roukhkain, 2011). The impact of sales tax charged to a product affects the consumer based on the level of elasticity of demand and supply of the product. The law of demand postulates that buyers purchase more when the price of a product is low but when the price increases, they will consume lower quantities (Field and Pagoulatos, 1997). However, it is important to understand the difference in quantity purchased depending on the changes in price. For some products, changes in prices regardless of whether it is a reduction or an increase does not result in change in demand and this are mostly the basic commodities such as salt (Isvilanonda and Kongrith, 2008). However, there are some products where a small change in prices leads to a significant change in demand and these are described as having an elastic demand. Elasticity of demand is described as the responsive of consumers to changes in the price of the products (Kinnucan and Zheng, 2004; Kafka, 2006). Demand elasticity is calculated by dividing the percentage change in quantity demanded (∆Q) with percentage change in price (∆P). On the other hand, supply elasticity of is described as the change in quantity supplied following a change in price. The basic law of supply postulates that quantity supplied increases with increase in price but the increase in supply is different for different products (Green, Malpezzi, Mayo, 2005). Price elasticity of supply is determined by how close an industry is reaching full capacity and is usually larger in long run given that firms get enough time to adjust to changes in technology (Kafka, 2006). Sales tax is always transferred to the consumers and they bear the tax burden. However, the pinch that felt by consumers after sales tax is factored into the price of commodity depends on the elastic of demand for the product (Kesselman, 2011). In case of a basic commodity such as clothing, the elasticity of demand is lower given that consumers have to purchase them regardless of the market price. Consequently, increasing the sales tax on clothing means that consumers have to pay more for a product that they cannot do without. Moreover, most of basic products do not have close substitutes and therefore they cannot switch into depending on other goods. The impact of sales tax on consumers is usually higher for products that do not have close substitutes (Smart, 2011). For instance if a high sales tax is implemented for sugar, consumers will feel a great impact since they cannot substitute sugar with another product and they have to continue purchasing the product at higher price. In contrast to basic commodities and those that lack close substitutes, luxury products have high elasticity of demand and therefore the impact of high sales tax means that their consumption reduces (Duff, 2003). For instance, restaurant meals have high elasticity where increase in price leads to lower consumption which in-turn leads implies that the business sells less quantities of the product. This ultimately means that sellers unlike buyers bear the burden of tax by having lower revenue. Moreover, products having close substitutes or complementary products have a large elastic demand which means that consumers have options to switch from their use in case the tax burden is high. An example of this product is where a consumer may decide not to purchase a car but instead use public means of transport (Duff, 2003). Consequently, the sellers in such an industry feel the impact of high sales tax by a reduction in sales given only that only well off customers who purchase their products. Based on elasticity of supply, changes in sales tax may affect consumers or sellers depending on the type of product. This result from changes in levels of consumption but the unit revenue from a product earned by a seller remains unchanged (Kafka, 2006). When the sales tax of a basic commodity increases, the supply does not change given that the quantity demanded is unchanged. In this case the impact is only felt by the consumer since the supplier transfers the tax burden to the consumer. On the other hand, when the sales tax for a luxurious products or goods having higher close substitutes increases, the supplier feels the impact given that consumers reduce consumption of these products (Green, Malpezzi, Mayo, 2005). However, if the sales tax is reduced; their consumption increases to the advantage of the seller who gets more revenue at no additional production cost. It is critical to understand that sales tax does not affect the production costs and only affects the seller through either selling more or fewer units of a product (Green, Malpezzi, Mayo, 2005). The impact of increase in sales tax to consumers is dependent on whether there are changes on the income level of the consumer. Where there is increase in the real income of the consumer; increased sales tax does not affect the quality of life of the consumer (Smart, 2007). However, where the real income of the consumers remains constant or is reduced, then the impact of sales tax is high to the consumer and may affect their quality of life. The Canadian Food and Beverage Industry The food and beverage industry is a critical sector in economy given that it deals with basic commodities and therefore it concerns every member of the society (Nguyen, Wilcock and Aung, 2004). There are thousands of food companies in Canada which are categorized into different subcategories such as processed foods, meat products, companies dealing with seafood, dairy products among others. The food and beverage industry in Canada has been going through major transformation most of which is fuelled by foreign firms having subsidiaries in the country (West and Vaughan, 2011). The transformations have resulted from recession, trade liberalization, technical and economic developments. The total sale from the food retailers was approximated to be $ 84 billion in 2010 and is expected to increase at 4.6 percent yearly until 2014 given that more Canadians prefer to eat at home (Roukhkain, 2011). This is explained by demand for more healthy foods and less processed foods. Moreover, the higher sales tax of restaurant foods makes these foods more expensive which can be solved by reliance on groceries which are exempted from taxation and therefore cheaper. There are 21,200 retail food stores in Canada which are divided into chains which are found in the supermarkets and independent food stores. There was a rapid growth in the food industry at the beginning of the millennium but this slowed down due to increased competition, competitive pricing and economic recession (Roukhkain, 2011). Canada being among one of the developed countries in the world has a relatively well off society. However, between 2000 and 2007, food consumers only appropriated 9.1 percent of their total income on food which is considered as being among the least in the world (West and Vaughan, 2011). This further reduced to 8.1 percent in 2010 due to economic recession and less and lesser consumers eat out compared to those who eat at home. Spending on foods comes third after what is spent on transportation and shelter although spending varies depending on the household. Given that the food and beverage industry is big in Canada, consumers can cross over from buying the products of one company another that is offering competitive price and quality. However changing to use of a product from another company is constrained by the fact that most companies operate as chains having branches all over the country and therefore essentially there are few suppliers having many branches and therefore the price may be the same (Roukhkain, 2011). Conclusion In Canada, sales tax may either be levied under the goods sales tax, provincial sales tax or the harmonized sales tax. However, harmonized sales tax is gaining ground especially after July 2010 when it was adopted in Ontario. Sales tax is usually transferred to the consumers and the responsibility of retailers is just its collection. Consequently, the consumers shoulder the greatest burden of this tax but the impact depends on the elasticity of demand of the product in question. For products having inelastic demand, the impact of sales tax is higher compared to those products that have elastic demand. Moreover, suppliers may experience the impacts of introduction of sales tax on the products they supply where they may either have increased revenue for products that have elastic supply or unchanged revenue for products having inelastic supply. The food industry is critical in the economy and introduction of sales tax for products from the industry determines how they are consumed. There are many firms in this industry in Canada and therefore consumers have a variety of choices. Given the high tax levied on restaurant foods and desire to eat healthy, most Canadians prefer eating at home instead of eating out. References Bird, R. (2009). Visibility and accountability-Is tax-inclusive pricing a good thing? Canadian Tax Journal 58 (1), 63-76. Chetty, R., Looney, A. and Kroft, K. (2008). Salience and taxation: Theory and evidence. American Economic Review 99, 1145-1177. Duff, D. G. (2003). The federal income tax act and private law in Canada: Complementarity, dissociation, and Canadian bijuralism. Canadian Tax Journal, 51(1), 1-1. Field, M. K., & Pagoulatos, E. (1997). The cyclical behavior of price elasticity of demand. Southern Economic Journal, 64(1), 118-129. Green, R. K., Malpezzi, S., & Mayo, S. K. (2005). 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