Seanad Éireann - Volume 73 - 18 July, 1972
Value-Added Tax Bill, 1971 (Certified Money Bill) : Second Stage.
Question proposed: “That the Bill be now read a Second Time.”
Parliamentary Secretary to the Minister for Finance (Mr. Lemass) Noel T. Lemass
 Parliamentary Secretary to the Minister for Finance (Mr. Lemass): The purpose of this Bill is to replace, with effect from a day to be specified by order, the existing wholesale tax and turnover tax by a value-added tax. It is the intention that the changeover will take place on 1st November next.
The reasons for changing over to a value-added tax can best be understood in the context of the historical development of sales taxation in this country and the impact of developments abroad, especially in the European Economic Community. The introduction of the sales taxes to this country—the turnover tax in 1963, followed by the wholesale tax in 1966 —was one of the most significant measures in the tax field in recent decades. The increased flow of revenue deriving from these taxes has helped to finance the acceleration of the economic and social development which has taken place during the last decade. In 1964-65, the first full year of its operation, the turnover tax yielded £13½ million, equal to about 6 per cent of total Government revenue. This year, the sales taxes combined are expected to produce about £90 million, or up to 14½ per cent of total Government revenue.
The present sales taxes were introduced in order to provide a broader base for indirect taxation than had been afforded by the traditional sources —mainly tobacco, beer, spirits and hydrocarbon oils—which had, up to then, provided the bulk of indirect tax revenue. In 1962-63, the year before turnover tax was introduced, receipts from this narrow base accounted for over 40 per cent of total Government revenue and there was an ever-present possibility that the Exchequer's finances could be seriously upset by a sudden fall in the yield from any of these commodities. The turnover tax, on the other hand, extends to almost the whole range of consumer goods and services at the retail level and, since 1st May, 1970, is charged at the rate of 5 per cent on the price inclusive of tax.
The selective wholesale tax was introduced in 1966 in order to give greater flexibility and a degree of progression to the system. It does not  apply, for example, to the necessities of life such as food, fuel, clothing and medicines or to services. Neither does it apply to goods such as beer, spirits, tobacco and petrol, which are subject to substantial excise duties. The rate applicable as from 1st January, 1969, was 10 per cent on tax-inclusive wholesale prices. However, in May, 1969, a further degree of progression was introduced by increasing to 15 per cent the rate for a narrow range of less essential items such as motor cars and television sets. With effect from 1st November, 1970, this rate was raised to 20 per cent. All these rates are expressed to apply to a tax-inclusive base, so that the effective rates are, in fact, somewhat higher when related to a tax-exclusive base.
While compliance by traders in the operation of these taxes has generally been very good the fact that such a large amount of revenue is now involved has raised doubts about the adequacy of the relatively simple administrative machinery of these taxes. The Government have been considering for some time what improvements in the collection machinery could be introduced.
One of the biggest disadvantages of sales taxes, such as our wholesale and turnover taxes, is that the duty of remitting the tax to the Revenue falls on one section of the business community only. The value-added tax, on the other hand, has, as its principal feature, the spreading of the tax collection over the whole process of production and distribution. We were also aware that the EEC had prescribed a common form of value-added taxation for adoption by all member States. Under the Treaty of Accession to the EEC we will, as members, be expected to introduce a similar type of tax not later than 1st January, 1974.
The form of value-added tax designed by the EEC and incorporated in two directives on the subject issued in April, 1967, was aimed at eliminating those features of existing turnover taxes in the Community which were acting as a barrier to the full implementation of the Treaty of Rome. All the EEC countries have now adopted sales tax systems based on these directives  with the exception of Italy which, after some postponements, is due to make the changeover next January. Among the three countries, apart from Ireland, that are acceding to the EEC, Norway and Denmark already have a value-added tax on the general lines of the EEC model and Britain is adopting a value-added tax as from April, 1973, in replacement of the existing purchase tax and selective employment tax.
Apart from our EEC commitment the Government are satisfied that the value-added tax is the form of sales taxation most suited to our needs and I shall now refer to its main advantages for us. Firstly, with a minimum of disturbance to the existing incidence of taxation and to prices, payment of the tax can be spread over a wider sector of the business community than at present. The tax proposals represent little more than a change in the method of collection and their incidence and impact on prices should be broadly similar to the incidence and impact of the present sales taxes.
Secondly, value-added tax makes evasion more difficult as the system provides a cross-check by means of the invoices which will be required for all sales between accountable persons. Since the amounts shown on these invoices will enter into the calculation of the tax liability of both the seller and the buyer it will be in the interests of both parties to ensure that correct amounts are shown. Evasion will also be less rewarding that under a single stage system, as the tax collection will be spread over all stages of production and distribution and the fractional amount which has to be paid at each stage is small thus reducing the incentive to evade liability. Anything that makes for better compliance is in the interest of the general body of taxpayers.
Thirdly, the changeover will remove almost completely what little double taxation exists in the present system. For instance, while wholesale tax is at present borne by a firm on such requirements as office furniture and certain building materials, under the value-added tax double taxation of this nature, which in total is estimated at £3½ million a year, will be eliminated.  Value-added tax on these items, in common with virtually all other such tax charged to a firm by means of invoices, will be deductible against the firm's own liability to value-added tax on its sales.
The Bill provides for a general sales tax to be charged at all stages of production and distribution at rates which correspond as closely as possible to the effective rates of sales tax at present in force. As I have already mentioned, firms whether manufacturers, wholesalers or retailers will pay tax on their sales, but in doing so can deduct the prior stage tax which they have been charged on their purchases. Thus, although tax is charged a number of times before the goods reach the final consumer it is borne once only and so no duplication occurs. A corresponding tax will be levied on imports to put them in the same position as home-produced goods.
I have already referred to the fact that the present sales taxes are chargeable on the price of an article including the addition made for tax. The rates of value-added tax are, by contrast, to be applied to the price before tax, so that, if the same amount of tax is to be collected as before, the nominal rates of the new tax must be somewhat higher than the existing rates. This is the reason why the rates proposed in the Bill are 5.26 per cent, 16.37 per cent, 30.26 per cent and a special rate of 11.11 per cent for dances compared with the present rates of 5 per cent, 5 per cent plus 10 per cent and 5 per cent plus 20 per cent respectively, and in the case of dances 10 per cent. Exports will be completely free from the tax. This will be achieved by applying what is described as a zero rate to exports and by refunding any tax charged at an earlier stage prior to export. Despite the fact that neither turnover tax nor wholesale tax applies to exports directly, there is a possibility that these sales taxes could be incurred indirectly at a stage prior to export. The mechanism of the zero rate will ensure the elimination of all value-added tax incurred at earlier stages. The zero rate will also apply to one or two other items to which I shall refer in a moment.
 The Bill provides special arrangements for the agricultural sector whereby farmers and fishermen will not be obliged to register unless engaged in specialist activities such as market gardening, the commercial production of poultry or eggs or fish-farming. Those who remain outside the system will not have to pay tax on their sales or to keep detailed records. Such farmers will not, of course, be entitled to a refund of tax on their farm inputs, such as machinery and seeds, but they will be compensated for the tax element involved by increasing appropriately the selling price of their produce. This special addition to the price can be claimed as a tax credit by a registered purchaser against his liability on his own sales.
This tax credit will be at the flat rate of 1 per cent of the tax-inclusive price of agricultural and fishery produce and is calculated to be sufficient to recoup the average farmer for the value-added tax which he will have borne on his purchases. There have been numerous representations from farming interests to have farmers' raw materials exempted entirely from tax. I have examined this matter very carefully and have been able to meet a substantial part of the case by zero rating processed animal feeding stuffs, fertilisers and fishing nets. I am also taking power by order to enable repayment to be made to unregistered farmers of tax suffered in relation to their farm buildings and land reclamation work and to fishermen of tax suffered on the purchase of their fishing boats. The arrangements I have now outlined are the best that can be devised to protect farmers' interests, and the 1 per cent flat rate addition to prices will be adequate compensation for the balance of tax remaining in all farm inputs.
The Bill provides an arrangement whereby cattle marts and cattle dealers will be relieved of accountability on their sales of livestock where they opt for arrangements analogous to the simplified scheme applicable to farmers. The mart or dealer will be entitled to pass on the appropriate flat rate credit to a registered purchaser.
In the course of consultations, particularly with the manufacturing interests,  it had been strongly represented to me that the original proposals in the Bill under which the taxable period would have been a calendar month and the tax would be payable by the 19th of the following month would cause serious problems in regard to liquidity for some firms. It was suggested that either the taxable period should be increased substantially or that a longer period should be allowed for payment. In considering these matters I was very conscious of the fact that the yield from VAT will be approximately the same as the yield from the present turnover and wholesale taxes and that, therefore, changes in liquidity should be very much a matter for adjustment between traders themselves. Any worsening of liquidity at the manufacturing stage is likely to be counterbalanced by an improvement at the wholesale or retail stage.
In those circumstances, since it was not considered feasible to have different taxable periods or different due dates of payment for different classes of persons, I have thought it proper to strike a balance between the position of manufacturers who are requesting total relief for their liquidity problems and the position of many wholesalers and retailers on whom a substantial benefit will be conferred by the change to the VAT system. Following acceptance by the Dáil of an amendment proposed by me the Bill now provides that the taxable period should be two months instead of one but that the latest due date for payment, that is the 19th day of the month following the end of the taxable period, should remain unaltered. This amendment should go a long way towards meeting the problems of manufacturers, and since it will at the same time improve the liquid position of most wholesalers and retailers it should make a considerable contribution towards the stabilising of retail prices.
The Bill has been drafted to conform, as far as possible, to the directives of the EEC. These directives do not lay down standard rates for the tax and, in other matters also, permit of a degree of flexibility in the systems to be adopted nationally. It may be found  that some minor modifications to our system will be required to bring it fully into line with the EEC directives. The Community have agreed to our request for a transitional period of one year from the date of accession in order to effect any necessary changes.
It has been stated from time to time that the value-added tax has resulted in severe inflation in the continental countries which have adopted it and that similar results may be expected here. I should like to emphasise again that what we are doing is limited almost entirely to a change in the method of collecting tax. All of the countries which had unhappy experiences on the changeover were attemptting to do much more. In some cases, the incidence of the tax being replaced was being substantially altered. For example, the rate of tax on food, which in some cases was very low or nonexistent, was generally raised to 50 per cent or over. In other cases, the value-added tax was being used to increase substantially the revenue from indirect taxation as part of a general tax reform.
In our case the changeover will not significantly affect the revenue and, as I have already indicated, the incidence of tax will broadly remain unchanged. There will, therefore, be no ground for an increase in prices generally, though there may be some minor changes, which will balance out in the aggregate, because of the fact that it is not possible to ensure precise alignment at all points between the old and the new system. The relief from the double taxation existing in the present system, which I have referred to already, will accure to manufacturers and distributors and should help to counteract any tendency for prices to rise at the retail level.
With a measure as complex as this it is to be expected that unforeseen problems will arise for industry and trade from the transition to the new tax. So as to ensure that any such problems will be brought to notice and, as far as possible, solved, I intend to set up an Advisory Council on the Transition to Value-added Tax to advise me on these matters. The committee, which will be in existence for the three-month preparatory period before the commencement  of the value-added tax and a further three months thereafter, will be representative of manufacturers, wholesalers, retailers, farmers, consumers, and the accountancy profession.
Together with the Bill, an explanatory memorandum has been circulated to Senators which contains a detailed description of the various provisions. I will be glad to give any further explanations or information that Senators may require during the course of this debate. I commend the Bill to the House for a Second Reading.
Mr. Alexis FitzGerald Mr. Alexis FitzGerald
Mr. Alexis FitzGerald: I should like to compliment the Parliamentary Secretary on the lucid speech he has just made. This is a Bill, as he said, which justified an explanatory memorandum. On reading the Bill I saw the significance of the statement of one writer that value-added tax was a simple tax in the end but a little complicated on the way. Certainly, reading the Bill, I found it more than a little complicated on the way. How soon we are going to be on that way on Committee Stage I just do not know, neither do I know how long we will stay on the way when we get to Committee Stage—but let us hope not too long.
Despite what the Parliamentary Secretary said with regard to this being basically a change in the two forms of sales tax we have at present, I think we should recognise frankly that, viewed with rigid objectivity, no one could claim that the advantages and disadvantages of value-added tax are so clear-cut that we would necessarily be adopting the value-added tax in isolation from other factors. Indeed, the White Paper which considered the operation of the turnover tax, and which was issued in June, 1968, gave very mild encouragement to any idea that great advantage was to be gained from a change in our present system to the value-added tax system. The Parliamentary Secretary is right in saying that we must set this development in the context of the historical development of sales taxation in this country and, he might have gone on to say, in other countries, because value-added tax was almost compelled on the EEC  countries because of double taxation inherent in their cascade systems of taxation in both France and Germany. It was to get themselves out of a mess that they finally opted for what is, in fact, a very brilliant form of taxation.
We were not in this mess and we did not have this kind of approach and here I should like to make this first important point with regard to value-added tax. This type of taxation is regressive. It is felt worst by those with least. In so far as anyone has a margin out of which he can save he clearly has a margin which enables him escape from the regressive effects of value-added taxation. This point can be more significantly made in Britain where the change in introducing value-added tax is much greater than the change here. To say, however, that something has been regressive is not an excuse for continuing something that is regressive and to say that we have had a regressive system of taxation ever since we introduced the turnover tax—it was introduced at 2½ per cent in November, 1963, and increased to 5 per cent in November, 1970—is not to justify it if it be regressive and if there be not other measures taken to make good by transfer payments of a suitable kind to those who can be found to be suffering most from this form of taxation. It is not sufficient to say in reply that this is not a change in its fundamental impact. It is not a change in its fundamental impact; it is a change in the method of collecting. But the pair is the same; it is essentially a tax on the consumer and the consumer will, with this type of indirect taxation, undoubtedly suffer most according to the adequacy or otherwise of his means. This is an important point in relation to any consideration of the flow of revenue from indirect taxation and direct taxation.
The Parliamentary Secretary, in his opening speech, spoke about the impact on prices. It is true that Germany managed to introduce value-added tax without an increase in prices but the timing of the introduction of value-added taxation there was right. It was a time of stagnation and there was not an inflationary situation then in existence which would give rise to any significant  increase in prices. The position was different in the Netherlands. A 12 per cent rate, introduced in the Netherlands, led to a 5 per cent increase in prices and forced the Government to adopt stringent price controls to deal with the situation. The increase in Denmark—I allow the Parliamentary Secretary that point—did not exempt food. Britain has exempted food and has significantly borne this in mind in relation to the introduction of value-added tax next spring to lessen the impact on prices.
I would ask the Parliamentary Secretary to tell the House that the overall impact on the whole wages/price nexus has been considered by the Government with regard to the timing of the introduction of value-added taxation. I am not very impressed by being told that all the countries of the EEC, including some countries that are about to enter, have value-added tax already or, as in the case of Italy, will have it next year. Italy will be a member of the EEC for 14 years by the time it introduces value-added taxation. There is no requirement on this country to introduce value-added taxation, if I understand the position correctly, until 1974. We, therefore, have to consider whether, in the overall effect this will have on the national pay agreement, this is a justifiable time to change the method of taxation.
I accept that there are certain advantages which value-added taxation has over the present systems of sales taxation in so far as the figure of £3½ million in double taxation, which went into and inflated business costs, and which will get caught by the introduction of value-added tax to replace it. The position of our country, vis-àvis exports, from a macro-econometric point of view, is most important.
I do not think that the Parliamentary Secretary has correctly informed us when he says that this system will prevent all taxation from affecting our export prices. For example, in so far as we do not exempt cars and petrol from this and, in so far as the taxation on cars and petrol will be paid, and not received back, then the tax costs of  utilisation of cars in business will be tax costs which will be borne by the exporter, if I understand the position correctly. In so far as there is an excise duty on hydrocarbon oils, this is part of the cost of producing goods that are exported and this tax element is not excluded from having an effect on our export prices and, finally, on our export turnover.
There is an admirable improvement effected in this Bill since it went to the committee of the Dáil which has been referred to by the Parliamentary Secretary. To some degree he is right. We could not fail to recognise that what was unfortunate about the change at this time was that it was going to create liquidity problems for manufacturers, while relieving wholesalers of their liquidity problems or improving their liquidity position. This was always something which had, to some extent, to be worked out in the trading relations between the two parties. I think the extra month given is very useful but it still leaves us, vis-à-vis the exporter, in the position that the exporter has to pay the taxation on his imports and does not get it back until he exports. Therefore, if I correctly understand it, there is a species of enforced loan by exporters to the Government. This is not universal in the EEC. France does not have it. As the Parliamentary Secretary must know, France allows exporters to import, free of tax, raw materials determined by their exports from the previous year. So, under that regime, they are to that extent forced to pay to the Government in loans by way of taxation anything other than the increased business they generate.
I should like to return to what I mentioned about cars and petrol: Denmark allows a deduction to be made by manufacturers for their cars, petrol and oil consumption, and the utilisation of them. To the extent that the value-added taxation forces exporters to get supplied, whether by debt finance, or equity, or any other form, with hired working capital, to that extent it is a permanent addition to the costs of the exporter. In so far as this has any carry-over effect through prices on wages, it would be  an additional cost borne by the exporter also.
The rate of tax does not tell you the full impact of the taxation on the taxpayer. It is finally paid by the consumer. But along the line of the complications of this method of taxation additional people must be employed. As I understand the differences between our position and that of Britain, a great many more people will be required to do work involved in this taxation in Britain over the number that are required to do it in relation to purchase tax at present. The extra number here will not be significantly greater, if I understand it correctly; the additional book will have to be kept only at a few extra points. However, I would like to know what estimate has been made of the additional business cost of using this particular method of taxation. I would like to know what is the estimate of the additional administrative cost, viewing it from the point of view of collection. Undoubtedly, it is a justification to adopt value-added tax to prevent evasion. It is in the interests of everyone in business to prevent tax evasion because, if tax evasion is practised by one man along the route, he is evading the tax at the expense of the other man and, therefore, all are hired to assist the tax collector in preventing this.
I should like to refer to one or two other points. How are seasonal businesses, in particular, going to be affected in relation to the timing, which is 1st November? Will they not be building stocks in preparation for the Christmas season? What will be the effect of this on their liquid position? I would like the Parliamentary Secretary to explain to me what will be the effect of the interest on registered users of taxed goods, for example, on service contractors? What will be their position in relation to their running down of stocks in preparation for the changeover?
I would also like to be told, if the Parliamentary Secretary can do so, where does this flow of revenue go? I understand that it is part of the autonomous revenue of the community and I would like to know how is this community finance-wise treated?
Mr. Crinion Mr. Crinion
 Mr. Crinion: This Bill is one of those enactments that we must comply with for our entry into the Common Market and I believe it will be a much better system of taxation than turnover and wholesale taxes. We can see the great difference there has been since it came in first; there is an increase from £30 million to £90 million over the period. I always believed it was a pity that there was such political activity against the turnover tax that the Government had to bring in the wholesale tax which, in effect, made prices much higher. But there was never a word about it. They could have got the same revenue with a much lesser turnover tax in 1966 but there was such a campaign mounted against it because people did not really examine it properly that the wholesale tax had to be introduced. It went through without any trouble. This is a much better type of taxation. It will correct any tax evasion that has been going on and I think tax evasion has been fairly widespread. Perhaps I should not say “widespread” but there was some evasion.
Mr. Reynolds Mr. Reynolds
Mr. Reynolds: By whom?
Mr. Crinion Mr. Crinion
Mr. Crinion: Recently I read in an article that an electrical firm went out of business because the smaller men were able to evade the tax which was up to 16 per cent. It was not much comfort to the man to know that the Revenue Commissioners were bringing the people who put him out of business to the cleaners, but they have caught up on them. But there was evasion and that meant that the one person was paying it. The shopkeeper had to keep the record and pay the tax. Now there will be a better check on it because it is being carried across on a wide section from the manufacturer right through to the retailer.
Senator FitzGerald mentioned that the poor will feel it most. In this connection the Government will always increase social welfare benefits to enable increased costs to be met. When the turnover tax was introduced and later the wholesale tax social welfare benefits were increased by more than the tax and, knowing the generosity of the Government, I know they will increase the  social welfare benefits to cover whatever extra costs may occur as a result of value-added tax.
There will be only one system of taxation. The only thing is the rates are at a peculiar level—5.26, 16.67, 30.26—but I presume those figures are designed to fit in with the existing rates. It is not, I think, easy of calculation. I would like the Parliamentary Secretary to give the reasons why these odd figures were arrived at; it would be easier if even figures were given.
Anything which will get rid of tax evasion is good for the community. The Government will get the revenue calculated and there will not be people evading tax. It is disturbing when one person is paying and has an idea that another person is getting away without paying his share. Most of the farming community will welcome the compensatory clause. Existing tax is going on to the materials and the kinds of machinery the farmers need but the compensatory clause will allow 1 per cent by way of compensation. Very few farmers will lose out on it. The only people I could possibly see losing out would be those who have to buy a good deal of machinery each year for tillage, but, by and large, they will not lose out on it.
The Parliamentary Secretary mentioned that farmers need not register to get the benefit offered, but he says that a person buying would have to be registered. As we know, most farmers sell cattle. They also buy cattle. Will this mean that they will have to be registered to enable them to buy cattle? Most farmers would prefer not to have to do paper work. They would prefer not to have to do any registering. It is not clear whether they have to register for the buying of cattle. The 1 per cent will adequately compensate the farmer. Most of the book work will be done by the buyer or the sales-yard and by the creamery where he will sell his milk.
There is nothing in it regarding the sale of cattle on the land. This used to be widespread some years ago, but at the moment it is rarely done. With regard to the sale of pigs it is different.  There would be from 5 per cent to 10 per cent of pigs bought by people coming to farmers, particularly to the small farmers, and I want to ensure that they will get their 1 per cent afterwards. I am glad that animal feeding stuffs, fertilisers and fishing nets have got a zero rating. These three items cannot be used for anything else.
I see that professional fees have got a zero rating. Some of these could have been caught in the net, I agree, but it is seldom that the professional man does not charge something.
Mr. Nash Mr. Nash
Mr. Nash: Surely the ultimate payer is the person who employs the professional man?
Mr. Crinion Mr. Crinion
Mr. Crinion: Yes, but professional fees should be caught in the net.
This Bill will cover existing taxation and give a fairer distribution of the tax structure. A new tax levy can cause an increase in taxation. Quite a number of manufacturers hold back the price increase until the new tax is introduced. Each year publicans hold back price increases knowing it is likely that the Minister will introduce new taxes in the budget. They then tell the customer the increases are due to the budget increases.
There is danger that retail manufacturers will hold back price increases to correspond with the introduction of this Bill. Safeguards should be taken to offset this. Manufacturers should not be allowed increases in prices for at least one to two months after the introduction of the Bill. This would allow an opportunity of seeing if the new tax causes an increase in prices.
Mrs. Desmond Mrs. Desmond
Mrs. Desmond: The purpose of introducing value-added tax is to bring the country into line with EEC requirements in so far as taxation is concerned. It is proposed to replace the existing turnover and wholesale taxes, which have operated as taxes on expenditure, with a value-added tax system.
The Minister intends imposing VAT in order to obtain from this new tax the same amount of revenue which he collected from the wholesale and turnover taxes. When turnover tax was first introduced we, in the Labour Party,  opposed it vehemently, because as a tax on foodstuffs it hit hardest that section of the community which were least able to bear it. It was completely contrary to everything the Labour Party stood for. It was not in line with our concept of justice and equality for the poorer section of our community. We are being consistent now in opposing the application of VAT to foodstuffs, so we ask the Minister to exempt these items. I will limit my remarks to the taxation of these products and at this late stage, I appeal to the Minister to exempt them. This is his opportunity of redressing the wrong which was done when turnover tax was applied to foodstuffs.
We are in the grip of inflation. Prices are rising and causing hardship to all sections of the community. The lower income groups and the social welfare beneficiaries suffer unbearable hardship as a result of inflation. These people spend a higher proportion of their incomes on food than any other section of the community spend on it. They have no money for luxuries. What they can spend goes on essentials.
Our consumer price index rose by 8 per cent over the last 12 months, but food prices rose by 11 per cent. We maintain that the poorer sections of the community will pay a disproportionately high share of their income under this form of taxation. I share the belief expressed by other Senators, particularly Senator Alexis FitzGerald, that the figure of 5.26 per cent would be difficult to operate. It will prove unfavourable to the poorer sections of the community. Tax will be imposed on each article as it comes off the shelf. It would be difficult to apply 5.26 per cent to an article priced under 10p. On the introduction of other taxes, and particularly with regard to decimalisation, our experience has been that, even with exhortation to round up and down in order to balance out, the housewife came out on the losing end. The Government will admit that decimalisation was used as a device for profiteering. This could happen with the introduction of value-added tax, especially in regard to food.
With the ever-changing prices and  small-price commodities, this tax will be almost impossible for the shopkeeper to operate. Since I entered public life seven years ago, the cost of living has gone up by 50 per cent. The main item contributing to this has been the cost of housing. This imposes a very heavy burden on people in the lower income bracket who are endeavouring to buy a house.
Food prices have risen by the colossal figure of 43 per cent in that period. I feel it would not be the wish of the Minister to add to this spiralling of food prices by the imposition of a tax of this nature. We know from experience the effect of the imposition of new taxes on foodstuffs. The consumer price index for mid-February as shown in the Irish Statistical Bulletin which all of us received today indicates that from November, 1971, to February, 1972, food prices rose by 1.6 per cent and were responsible for 60 per cent of the increase in the cost of living during that three-month period. I put this to the Minister as an argument in favour of exempting foodstuffs from this taxation. If we examine the increases in foodstuffs we will find that the costs of high protein value foods, so essential to growing children, have increased at the greatest rate. Even home-produced items, like butter and cheese, have increased in price. Anyone who talks to a housewife will find that the prohibitive price of meat is always a subject for discussion. The introduction of a new tax on meat, butter and cheese would be detrimental, not alone to those in the very low income groups but also to those with young families.
Last week members of the Labour Party sought to have the most vital foodstuffs exempted from value-added tax in face of the determined attitude of the Minister to adhere to his intention to apply the tax on foodstuffs in general. I would ask the Minister, if he is not willing to forgo the full £15 million which he estimates value-added tax will bring in, to at least forgo the tax on basic items such as tea, bread, sugar, butter, margarine and some fruits. To forgo a tax on these essentials would cost something in the region of £4 million. The Minister has  told us that bringing within the tax net those people who up to now had been evading taxation will increase the revenue available to him by a sum of from £3 million to £4 million. If the Minister were to exempt these essential food items he would be compensated because people would no longer be able to evade taxation under the new system. That is not too much to ask. We are dealing with a budget of nearly £600 million. All that is concerned here is less than 1 per cent of the total budgetary expenditure. If it is not the policy of the Minister to give a figure so small as this as relief to the very needy sections of the community who are paying more than their share of taxation, he should say so. I appeal to him tonight to reconsider his attitude.
I agree with other Senator who have mentioned the figure of 5.26 per cent and the other figures. However, I am confining my remarks to foodstuffs. This figure of 5.26 per cent is a ridiculous one. It will be very difficult for anybody who is selling foodstuffs to operate with any kind of justice to the consumer. I have read a great deal recently on the subject of value-added tax and have come to the conclusion that we have a rather strange system here. In an article on value-added tax in the Economist on 25th March, 1972, it was stated that of all the countries in Europe Ireland was the most peculiar in that it has produced three rather extraordinary VAT figures. If a magazine as influential and reliable as The Economist describes the Minister's proposals as peculiar and extraordinary he can bear with me for repeating the criticism. It appears that these figures have been worked out so that the yield will be precisely the same as that from wholesale and turnover tax. This is not good enough. It is not going to produce the results which the Minister hopes.
I should like to make another point with regard to the introduction of VAT on food. It is obviously an unjust tax because it bears no relation to the capacity of the person to pay. We are all highly critical of some aspects of income tax, but at least there is some concern for the capacity of the individual  to pay. The principle of equity is at least taken into account. The value-added tax is the same for an old age pensioner as for a millionaire who could spend as much on one meal in a first-class hotel as the pensioner would have to live on for a week. That is not justice. It is a very powerful argument against the application of VAT to foodstuffs. When one speaks about people with children who will have difficulty in paying for high protein foods as a result of high taxation, the Minister may say that they will be compensated by increased children's allowances. Old age pensioners and those in very low income groups will not benefit from these children's allowances. The rich as well as the poor will receive the increased children's allowances.
We are not opposing value-added tax in principle. We understand the Minister's position in that he has no alternative but to introduce this new form of taxation because of our entry into the Common Market. The Labour Party feel that this Bill gives him an opportunity of redressing in some way the injustices done to the poorer sections of the community with the introduction of turnover tax some years ago. We are not advocating blindly following Britain but in this respect we would be well advised to follow her with regard to the application of VAT to foodstuffs. To apply it would be to push up prices of foodstuffs beyond the capacity of so many people to pay. It is something which in the last analysis would not be acceptable to the consumer. The Minister must be aware that the question of prices is the biggest and most burning topic among the Irish people. Last week I spoke to a housewife who told me she had to choose between getting a doctor for her child and buying food for the following day's dinner. I am not saying that in any emotional sense. It is true. There is a great deal of hardship imposed on some housewives. Therefore, I make a final appeal to the Minister to exempt foodstuffs from the value-added tax.
Ruairí Brugha Ruairí Brugha
Ruairí Brugha: This method of tax which the Minister is introducing is almost identical with that introduced  in a couple of the European countries —one of them being France—both in the levels of tax and the manner in which it is spread. The main argument in favour of a value-added tax system, apart from a need for a system of this kind, as an expected member of the European Community, is that it spreads tax collection over the whole process of production. In this sense it is in effect a tax on spending or consumption at different levels from the minimum of 5.26 per cent on essential goods to 16.37 per cent and on to 30.26 per cent on luxury goods.
I hope the Minister is not being too optimistic when he says that the instant impact on prices should be broadly similar to the instant impact of the present sales taxes. I would hope that this is so. Frequently in the past, we found that changes gave people opportunities to add on in undesirable ways. I shall touch on that in a few moments.
Our existing tax system on consumption—that is, our wholesale and retail taxes—provides us with a working system which paves the way for the value-added tax. Other countries are not so favourably placed. Under the existing system of retail turnover tax and wholesale tax, some appreciation should be expressed of the many thousands of traders who are, in effect, acting as tax collectors at no cost to the taxpayer. It is one way of collecting tax without having to spend a lot of money on its collection.
Whilst I am not enamoured of the prospect of different levels of taxation —none of us is enamoured at having a tax on food—we have to bear in mind that our economy unfortunately is very different from that of Britain. We have not got the buoyancy in tax revenue nor have we the spread for tax yield in our economy. We have to accept the need for a minimum level of tax if we are to maintain the level of social and educational services which we have at present.
I foresee some difficulties in the operation of this tax system. One will be faced with the problem of having goods for sale with taxes at 5.26 per cent and 16.37 per cent in the same  establishment, and possibly even the 30.26 per cent. This will not be easy for retailers and traders. Judging from experience in the past, it will be essential to try to ensure that there is a proper display of the level of tax applicable to each range of goods. It is possible that some shopkeepers may apply the wrong level, but it is very important that the consumer, particularly the housewife, should be satisfied that the correct level is being applied. I see a difficulty where the level of VAT is 5.26 per cent in one area and 16.37 per cent in another area. I am not suggesting that there will be additions to prices, but it is very important that the Minister for Finance consult with the Minister for Industry and Commerce to ensure that the rates of tax will be made known to the public by the retailer who will have to display those rates of tax.
I hope this new tax will work out to the benefit of the economy in general. I wish the Minister well in that respect.
Professor Quinlan Professor Quinlan
Professor Quinlan: We have little option at the moment but to agree to this taxation as it is required by our EEC membership commitments. In some ways it is fortunate that in making the changeover we are changing from the base of the wholesale and retail tax system which we already have. I urge on the Government the greatest possible restraint in introducing this tax in its first year of operation so as to make possible a smooth transition from one system to another and to avoid the inflationary effects of this tax system. They should ensure that it is not expected in the first year of operation to raise any more revenue than has been raised in the last year by the retail and wholesale tax.
We all know the inflationary effect that these consumer taxes can have. We are positive about the effects of our existing wholesale and retail taxes. If this is their contribution to inflation over the past seven or eight years, since they were introduced in 1963, it would be well worth an independent study. It is debatable whether our present position would have been improved if we had relied more on the old dependables  of beer, wine and spirits and less on the wholesale and retail tax over the past few years, especially in inflationary situations where these taxes provide the pressures for increased wage rounds. I know that with increased social welfare benefits and so on the money must come from somewhere. Obviously, this source of revenue, which in the current year is yielding approximately £90 million, is playing a major part in the funding of the social welfare programmes.
I do not think the people need worry too much about the third decimal place of 5.123 per cent increase. In future budgets this figure will be rounded off at least to the first decimal place, if not to whole integers as the figure is increased to 6 per cent, 7 per cent and so on. This is inevitable. It is no great gift of political prophecy to see that this will happen.
My main plea is that this taxation should not be increased this year. If we want to increase taxation in the coming year we should rely on the old dependables. Let this system become established before it is used to raise more than the £90 million which it is doing at present. With the increased buoyancy in the economy at present, the yield will rise even though wages remain stationary.
I am puzzled about there being no value-added tax on exports. I should like to ask the Minister if this is part of the EEC directive and if it will apply to all EEC countries.
Ruairí Brugha Ruairí Brugha
Ruairí Brugha: The others are doing it.
Professor Quinlan Professor Quinlan
Professor Quinlan: It confers an unfair advantage on the importers. If an article is manufactured and sold in this country it is liable for value-added tax. A competitor in Britain producing the same article, if it is exempt from this tax, is provided with a subsidy to compete in our market. This is unfair competition and should be remedied, unilaterally if possible, in order to give the home producer an even break.
What is the position as regards imports? The value-added tax for each increment of value added is taxed and  paid for but while you can put tax on the costs of retailing and distribution, you cannot put it on the f.o.b. price. This is the difference between the imported and exported article. I am rather concerned about this matter and I should like if the Minister would discuss it in some detail in his reply.
The arrangements for agriculture— presumably the 1 per cent—are to ensure that agricultural exports and foodstuffs, produced on the farms and consumed at home, will be free from value-added tax and will be refunded by means of the 1 per cent tax credit given to the handler of those products. I do not have any particular comment to make on this provision. I take it that if any particular section of the community is prospering in the years ahead—for example, the farming community—the Government will find ways of securing a fair amount of the increase for the Exchequer. I take it therefore that value-added tax will not mean that the State will not equalise tax burdens between agriculture and any other group.
We must ensure that within the next five years, whatever teething troubles we have in adjusting to Common Market conditions, we will face the problem as a community, consistent with the vote which indicated that five out of six of our people wanted to join. Therefore, the gains and losses will need to be equalised. We must stand together to bolster up one another. If the agricultural section is doing well it must help itself and other sections of the community to adjust accordingly.
Apart from urging the necessary restraints, there is not much more to say on this Bill. I welcome the Minister's decision to have an advisory council on the transition to value-added tax to advise on these matters. He said the council will be representative of manufacturers, wholesalers, retailers, farmers, consumers and the accountancy profession. I would ask the Minister to show his confidence in those professions by seeing that two-thirds of the council are selected by him from nominations by these bodies; to ensure the active co-operation  of those bodies in making a smooth transition to the value-added tax system. If we are to make this change, this Bill provides for it adequately. I support the Bill.
Mr. Nash Mr. Nash
Mr. Nash: Nobody really welcomes a Bill relating to taxation. None of us likes to be taxed. If we could have everything without tax it would be splendid. Like sin, unfortunately, taxes are always with us.
The taxes introduced by this Bill, fortunately, do not alter the present system. There is much to be said in favour of it as compared to direct taxation. It will mean that one will pay tax only on what one spends. One will not pay tax on what one saves. What one saves can be used, and is used, either by banks or by the Government in national loans and in the expansion of capital generally. The extravagant man is the man who will have to pay the most tax. The man who will pay the most for any article will be the man who will pay the most tax under this system.
Value-added tax is somewhat similar to and produces the same rate of tax as what we have at present. In my view, even if it were not essential for us to make the changes suggested in this Bill by reason of joining the Common Market, it would have been desirable. It is much more systematic and a much more accurate method of collecting tax. Senator Desmond made a very strong plea that food should be exempted from value-added tax. In the ordinary course of events it is difficult not to see the strength of her arguments but, on thinking it over, it is rather facile to say that food should be exempted. As Senator Mrs. Desmond stated, the millionaire may spend more on one meal than a poor person may earn in one year. If he spends an exorbitant sum on one meal he will pay as much value-added tax on that meal as the poor person will pay in the year.
I do not think that removing food from taxation is the answer. First of all, we have a 5 per cent tax on food already and I do not think there is anybody so naïve as to assume that if value-added tax was not imposed on  food shopkeepers would reduce the price of the loaf by one-twentieth, the price of a pound of tea by one-twentieth, the price of a pound of butter or of a pound of meat by one-twentieth. It would mean that shopkeepers would have, and would continue to retain for themselves, this extra 5 per cent as their special perquisite.
Mr. Reynolds Mr. Reynolds
Mr. Reynolds: The Senator is not a shopkeeper.
Mr. Nash Mr. Nash
Mr. Nash: No. As a result the loss in revenue and the gain to the shopkeepers, on the present basis of calculation of 5 per cent, would be approximately £15 million. That is a sum that would have to be collected otherwise. If it is not put on food it must be placed on other articles. Where can it be put? Should we put it on building materials, on clothing, on footwear or on any other item which comes within the purview of this Bill? Each of those items in its own way is essential and it is difficult to say that one is less important than the other. If the rate of tax on those items has to be increased to collect the £15 million it will have the same effect. Perhaps some people would say that it should be placed on the hardy annuals of beer, tobacco and so forth, but I have come across figures recently which indicated that the percentage of his wages which the working man spends on beer and tobacco is relatively high. Nobody wants to deny him his reasonable relaxation or his reasonable luxuries so I do not think that is the answer either. The method of getting over the difficulty, in my opinion, would be to give higher social assistance to those people who are poor, to those people of whom Senator Desmond spoke, to the old age pensioners, to poor families and to all social welfare beneficiaries.
Fears are always expressed that tax, even when it is not proposed to increase it, will be inflationary. Again the shopkeepers use every opportunity and every excuse for inflationary tactics. There is no reason why the changeover to decimal currency should have proved inflationary but it did. Shopkeepers added on to prices right, left and centre.
Mr. Reynolds Mr. Reynolds
 Mr. Reynolds: What did the shopkeepers do to the Senator?
Mr. Nash Mr. Nash
Mr. Nash: Fortunately, we have coming in at the same time as this Bill the Prices and Incomes Bill, passed by us today, which gives much more power and discretion to the Minister to ensure that profits will be kept at reasonable levels. Like most other Senators and in much the same spirit of never welcoming taxation but facing facts and reality, I think in the interests of the country it is essential that this Bill should be accepted.
Mr. McDonald Mr. McDonald
Mr. McDonald: I am totally opposed to this Bill mainly because it has been pushed forward by the Government spokesmen and by the Minister. We were told that value-added tax was a necessary requisite for our joining the EEC. However, we now find that some of the founder member countries of the EEC have not yet introduced the system of value-added taxation. The Bill, to my mind, is not designed for ease of operation by the new unpaid collectors but is solely designed to rake in the highest amount of money in the widest possible net. Surely this is not a just or equitable way to collect the taxes necessary to keep the State going.
A reasonable case has been made, especially in the Dáil for the exempting of food. My party have put forward realistic amendments indicating how this can very easily be done and it is something at which the Government and the Minister for Finance should have a second look. When the turnover tax Bill was introduced here some years ago it was pushed through the Oireachtas on the pretext that it was the greatest and the ultimate in taxation techniques. Yet the masterminds of finance have come up with this even better way of raking in the greatest possible amount of taxation.
In his introductory speech the Parliamentary Secretary said that tax on sales of goods would only be borne once. I am not convinced that this applies to the farming industry. The entire proposals on VAT are not at all clear when looked at from the farmer's point of view. This is quite disturbing.
 For instance, section 16 is unrealistic. It is impractical to expect a farming community of 700,000 smallholders, who in the main do not keep accounts, to set up a system of account-keeping and to be able to present to the Minister's inspectors records going back six years. Surely that will be impossible for any Government to implement. Referring to section 16, with the penalties in section 26, it will be found that perhaps next year or the year after some small farmer will be obliged to pay a fine of £20 plus £20 a day for each day he cannot find a particular document or receipt. Those of us in public life or who are members of local authorities are often asked to help our farmers with a grant or loan. When they are asked for a receivable order or rate demand note, in 99 cases out of 100 it will be found that the ordinary demand note—possibly only a few months old—cannot be found. This is not a reflection on the individuals concerned, but these people have not been trained to keep any type of accounting system. It is foreign to them and if the Minister for Finance thinks that, with the wave of a magic financial wand, he is going to turn 200,000 smallholders into book-keepers, just because it says so in this Bill, he will have to think again.
In the Dáil debate I noticed the Minister said that they had reached substantial agreement on these matters with the agricultural organisations. On reading the debates, it is not very clear where the farmer stands in this regard. The entire thing is ambiguous. If there are exemptions in livestock and marts, I could not find them in the appropriate sections. The Minister stated in the Dáil that there was agreement with farming organisations and other interested persons with whom he had discussions. I would have been much happier if these had been written into the appropriate sections so that we could all see them.
In the Third Schedule, paragraph iv, live animals will be charged at the rate of 5.26 per cent. If, as the Parliamentary Secretary stated, these will be chargeable at the rate of 1 per cent only, it appears to be quite complicated. The farming community will  experience great difficulty in reclaiming—if that is the word—their abatements in this regard. In the Third Schedule, subsection (e), we find that the polythene film or covers that are commonly used for the sealing of silo pits are being taxed at 5.26 per cent. This may appear small but it is an additional cost and is something with which the farming community will have difficulty. I think it will be impossible for them to get, as the Minister promises, a rebate on this particular service.
As far as the agricultural contractors are concerned, the Bill is not at all clear on how these people stand vis-à-vis the issuing of dockets and receipts. Under section 16 the onus is on the contractor to issue a receipt for the work done. What has created a doubt in my mind is the fact that, while the Minister states that this is exempt, at the same time it is written in that the onus is on the contractor to issue a receipt which includes the tax at the 5.26 per cent rate. At what stage the farmer will reclaim this at 1 per cent is difficult to follow.
In the Third Schedule, paragraph (ii), it is proposed to apply the value-added tax to wool as well as to other items. It is one commodity that should have been zero-rated, because the wool industry certainly has had its ups and downs during the past two years. It has a constant problem in its battle against synthetic fibres. At present there is an emphasis on clean wool and high standards. In order to give a little fillip to the new Wool Board, which has only recently been established, this industry could well have done with a zero-rating, especially as the price of wool over the last few years has tended to fall rather than to increase. Therefore, it is regrettable that the Minister did not see fit to zero-rate wool.
There appears to be a conflict between subsection (viii) of the Second Schedule and paragraph (i) of the Third Schedule, vis-à-vis animal feeding stuffs. Am I to read this as follows: “Animal feeding stuffs in quantities of less than 10 kilograms are to be charged at the rate of 5.26  per cent”? Perhaps I am reading it wrongly. Paragraph (vii) of the Second Schedule reads:
any feeding stuff (within the meaning of the Fertilisers, Feeding Stuffs and Mineral Mixtures Act, 1955), compound feeding stuff (within the meaning of the said Act) or mineral mixture (within the meaning of the said Act) —
(a) which is delivered in units of not less than 10 kilograms and is not...used for pets...
would be zero-rated. In the Third Schedule which sets out the goods that will be chargeable at the rate of 5.26 per cent you have animal feeding stuffs other than medicines or feeding stuffs which are otherwise designated for the use of dogs, cats, cage birds or domestic pets. I am not clear about those two. Perhaps I am not reading the proper sense into it. The Parliamentary Secretary might explain exactly where we stand there. I agree that the Department had difficulty in setting out such comprehensive lists of items on which they propose to charge the 5.26 per cent value-added tax. One would need a sharp mind to be able to pick out the items that will be charged at the 16.37 per cent rate.
In regard to “medicines for human use excluding goods which are, or are described or marketed as soaps, shampoos, detergents, bleaches, germicides, insecticides, antiseptics or disinfectants”, the Minister and his Department have gone splitting hairs too finely on this. On reading paragraph (xvi) of the Third Schedule am I to take it that the Minister's rule of thumb might be that medicines for oral use would be charged at the lower rate of 5.26 per cent? Am I right in assuming that all other medicines would be left at 16.37 per cent value-added tax? Ointment for a gumboil would be used orally and I suppose a chemist would be justified in sticking on 5.26 per cent tax on that, whereas if somebody with another internal complaint, such as piles, were to look for a remedy would the chemist charge him 5.26 per cent, or, as the remedy was not used orally, would he be charged the 16.37 per cent? This is where the Department  have gone too close on splitting hairs. It will be difficult for the ordinary shopkeeper, whether he be a chemist or anyone else in the retail trade, to keep accounts separately.
In the country where you would have the ordinary family business the method which the Department have used will present difficulties. It is all right for the civil servants here in Dublin to sit back in their offices, but the operation of these different types of taxes will cause unnecessary hardships to the ordinary operator. It will not be easy from an accounts point of view for shopkeepers, if they have to handle commodities to which are attached the lower rate of 5.26 per cent on the one hand and the 16.37 per cent on the other. They would need to have two cash registers but these cost several hundred pounds each. The Government are unfair to expect a free tax collection service, as all our retailers now appear to provide, to go on indefinitely. The agro-chemicals are in for the new rate of tax. This will be an added cost to the present overtaxed farming community.
I want to refer to the Second Schedule, that is the list of goods and services that have been zero-rated. I want to draw the attention of the Parliamentary Secretary to subsection (x). It reads—
the construction, repair, maintenance and improvement of roads, harbours and sewerage works by the State, local authorities or harbour authorities.
This seems to leave out from the zero rating road and sewerage and water schemes, which are designed and constructed by the co-operative or group method.
We find from figures of the Department of Local Government that this co-operative or group method is certainly catching on. In this way a tremendous amount of work is done each year. It would be most unfair of the Minister and his Department to discourage this excellent type of public endeavour by specifically having the activities of co-operative group  schemes taxable whereas the more expensive schemes operated by the county councils are not, even though it is exactly the same work but by virtue of the fact that there is a different structure involved the actual capital cost is dearer when it is carried out by the local authority. I would ask the Parliamentary Secretary to consider between now and Committee Stage tabling an amendment which would include works carried out and organised by the co-operative system.
I was glad to note that among the services that are exempted is the letting in the course of carrying on a hotel business and the provision of board and lodging otherwise than in the course of carrying on a hotel business. This is an excellent provision. It is giving this hard-pressed industry some chance in this difficult period. Much more should be done by the Department of Finance in this direction. The more fashionable Mediterranean beaches are becoming polluted increasingly each year. Therefore, in the next few years our amenities will be looked at in a different dimension because of their relative purity in this regard. I would compliment the Minister in exempting this industry and perhaps in some small way acknowledging their difficulties at present. Sections 13, 16 and 18 worry me most. I will have an opportunity on Committee Stage to get more information about them. Too little has been said to date on them. It is not clear to me that the farming community will be able to surmount the difficulties which are being put before them. If possible, the concessions announced by the Parliamentary Secretary should be written into this Bill.
The proposal in section 16 that the farming community should be forced to keep accounts and records for six years is preposterous. This is something for which they would need training and by no stretch of the imagination could the Government hope to achieve this. It is not right to enact laws if there is not a reasonable chance of their being properly implemented and respected.
I should like to ask why the orders made under section 11 (8) (c) are only  being laid before the Dáil. Is it because they would be Money Bills or because the entire Oireachtas is not to be included?
The Parliamentary Secretary could perhaps clarify the position of the agricultural contractor, the man who provides an agricultural contracting service. What will be his future relationship with his clients and his obligations to comply with the terms of this Bill?
Mrs. Farrell Mrs. Farrell
Mrs. Farrell: On reading through this Bill I am puzzled as to its application to the more unfortunate section of the farming community. I refer to those engaged in the commercial production of poultry and eggs. Poultry does not seem to be fish, flesh or a good red herring. In section 8, reference to the farming or fishing business does not include
(a) the operation of a nursery or garden for the sale of produce,
(b) commercial production of poultry or eggs,
(c) fur farming, or
(d) fish farming.
At the beginning, a definition of “livestock” is “live cattle, sheep, pigs and horses” but there is no mention of live poultry.
Turning to the Third Schedule, Part I, which deals with goods chargeable at the rate of 5.26 per cent, one finds that live animals are charged at this rate. There is again no mention of poultry in this yet it is specifically mentioned under section 8. There is a branch of the industry which may not be known to the Department of Finance but which is known well to the Revenue Commissioners. I am referring to the production of day-old chicks for sale to producers of laying stock and broiler chickens. There is no mention here of an exemption for these producers or of what tax they are to charge. This will cause considerable difficulty as you cannot classify a day-old chicken as food unless you are going to serve him on toast. Neither can you say it is a live animal. What is it? Perhaps its classification is hidden somewhere in the Bill and when we are considering the Bill on Committee I will raise this matter again.
Mr. Reynolds Mr. Reynolds
 Mr. Reynolds: I should like to answer some comments which have been made about merchants and shopkeepers. I sympathise with Senator Nash, as somebody must be blamed for the increases in the cost of living, but the blame should not fall on the shopkeeper. When turnover tax was introduced, the shopkeepers walked the soles off their shoes in Dublin in an endeavour to stop the Government from introducing this tax. I can see the same thing happening with value-added tax.
The income from turnover tax in the year in which it was introduced— 1964-65—was £13½ million or the equivalent of 6 per cent of the total income of the Government. When the tax was increased in 1969 to 5 per cent, the revenue increased to £90 million, which was 14½ per cent of the total income of the Government. The shopkeepers at the time were hoping they would get reductions in other places, such as income tax, taxes on lorries or on some other type of revenue. Instead of that, the cost of living has soared for the shopkeepers as much if not more than as for anyone else.
I should like to explain how turnover and wholesale tax affected the shopkeepers. For the first £100 instead of paying 50s., or now £2.50; all the shopkeepers have to pay is 50p. They are allowed £2 per month for the staff they must employ, the paper they use and the time they lose in order to collect this tax. Does Senator Nash think this is fair or reasonable?
I wonder to whom people are referring when they speak of evasion? Do they realise that merchants are checked by representatives of the Revenue Commissioners? I, as a businessman, have had experience of these people. I pay them the tribute of being most mannerly and accommodating and they advised me of the type of book keeping system that would help me to deal with turnover tax. Senator Nash made the point earlier that most of us on this side of the House and, indeed, on every side of the House, are anxious that essential foodstuffs would not have to bear this value-added tax.
The point has been made that if  essential foodstuffs were exempted from value-added tax no shopkeeper would reduce the price of bread, butter, cheese, flour or any other commodity by one-fifth. Reference was then made to the prices and incomes policy which we discussed earlier. The answer is a simple calculation. If the prices and incomes policy means anything surely it will protect the public against this. I do not think the public need protection. Competition is a protection.
Other Senators have commented that it is unfair. One can read in the daily papers and hear in advertising announcements on the radio that no wholesale tax is charged in certain big shops. If the public are foolish enough to be taken in by gimmicks it is not fair to blame the merchants. The merchant is the person who has got a raw deal due to the turnover and wholesale taxes. He has to collect tax and make his returns. His situation will not improve with the implementation of value-added tax.
The Parliamentary Secretary made the point that when the wholesale tax was introduced in 1966 the Government exempted the necessaries of life. He mentioned foodstuffs, fuel, clothing, medicines and other services. In 1965, when the same Government were introducing turnover tax, it could not be got across to them to exempt essential foodstuffs. Later they did exempt them. We are now back again to square one where they will not exempt them from value-added tax. Surely if it was right to exempt them in 1966 it is more than essential that they should be exempted from value-added tax in 1972. The Parliamentary Secretary made references also to the fact that the wholesale tax was not applied then to beer, spirits, tobacco or petrol. Why should it? Since we gained our freedom those items have been a target for every Government to make sure that people who were fortunate or unfortunate enough to drink, smoke or use petrol paid a very high price.
With regard to the collection of value-added tax, the Parliamentary Secretary said that the big difference  would be that we would have three rates, 5.26 per cent, 16.37 per cent and 30.26 per cent. The decimal point will make it very awkward for merchants to collect it, particularly under three different headings. The Government would have been better advised, in the interests of everybody, to have accepted Deputy Garret FitzGerald's proposition in the Dáil. Goods exempted from turnover tax have been a problem. Certain goods are to be exempted from value-added tax. Senator McDonald mentioned feeding stuffs, fertilisers and other commodities, where one has to apply to the Revenue Commissioners to get a refund. All this helps to complicate the matter further.
Payment of taxes on invoice is an unfair way to collect tax. If a merchant buys two dozen fridges and only succeeds in selling one dozen in that particular year, he is caught for the tax on the two dozen. The total amount of the invoice plus the percentage of profit is deducted from his turnover at the end of the month. Under turnover tax he was paying shortly after a month. Now he has got an extra month. It is not enough time. People might not be so critical of shopkeepers if they realised their position. Most shopkeepers in the retail business up to the past 12 months or two years, enjoyed four months credit from their suppliers. That was reduced to three months. Now it is down to two months and it will be further reduced to one month next year. Returns have to be made to collect the tax. Goods may be left lying on a shopkeeper's hands when he has paid the supplier and the tax. At the same time his credit with the bank is being tightened. It would be reasonable enough if the money were collected when the goods were sold. If the tax has to be collected before the goods are sold it means that the merchant has to find the money somewhere. The only place he can find it is in the bank. He now has to pay 9¼ per cent interest in the bank. If he goes over seven years this could go up to 11, 12 or 13 per cent. If this tax continues it could drive a number of small merchants out of business in the future. That would not be a good situation to bring about.
 I would like to add my voice to the case already made by other Senators that foodstuffs should be exempted from the value-added tax. With one family in every seven living on an income of less than £7 per week these people should be exempt. It would be utterly impossible to exempt them and the only way there can be anything done for them is by levelling out the other taxes, charging a higher rate to give the same income to the Exchequer, but to exempt completely the essential foodstuffs such as bread, butter, tea, sugar et cetera. If calculations were made it would be found that people who are living on the £7 per week spend 40-45 per cent of their income on essential foods. I certainly think that the Minister at the next Stage of this Bill should have a look into this.
Parliamentary Secretary to the Minister for Finance (Mr. Lemass) Noel T. Lemass
Parliamentary Secretary to the Minister for Finance (Mr. Lemass): I listened with great interest to this debate and I feel that the Bill is generally welcomed by Senators as a timely reform of the sales tax system which will reduce evasion and spread the task of collection more evenly over the entire business community though there might be some reservations about individual provisions. In my view this is a highly technical and complicated Bill and, therefore, lends itself to much more useful debate during Committee Stage. Where some doubts or uncertainties appear, these can certainly be dealt with by question and answer on Committee Stage. The Minister will be here tomorrow to deal with that Stage himself.
I should like to refer to some of the points which might help Senators in their approach to the Committee Stage tomorrow. I should like to say to Senator FitzGerald that there is no evidence that I know of that sales taxes are regressive. In any case it is the regressiveness or progressiveness of the tax system as a whole which counts. In this regard one must also reckon what is taking place in the social welfare system to help reduce the inequalities of wealth in the community.
The main advantages of this Bill are that it spreads the burden of payment  better between the various traders engaged in production and wholesale and retail distribution; it eliminates the element of double taxation, which amounts to £3½ million, existing under the present system; it lends itself to better control and, consequently, evasion is more difficult and, indeed, far less profitable.
I should like to make it clear to Senator FitzGerald that although the normal taxable period will be two months, the Revenue Commissioners will be prepared to accept claims for repayment at monthly intervals from importers and others who may be entitled to regular repayments. A similar arrangement is in operation for income tax under which persons entitled to repayments may be put in interim claims. The same thing will apply to the value-added tax.
I would also like to refer to the question of stocks held at the changeover date. In this respect, relief may be claimed for the element of turnover tax and/or wholesale tax on such stock held. This should have the effect that there will be an incentive to run down stocks prior to that date.
There was also a question raised about farmers and cattle purchases. I understand that the price of cattle will rise by about one per cent on the introduction of VAT. The price will be the same irrespective of whether the seller is registered or not, or indeed whether the buyer is registered or not.
We have the question about the awkward rates of tax. I think everybody understands the reason for these strange looking rates. It is not that the Government are anxious to make things difficult for the public, but to avoid as far as possible a change in the tax as it at present applies. The Government are aiming at getting the same amount of revenue from the new taxes as they are getting from the present wholesale and turnover taxes.
I explained in my opening speech that the rate of 5.26 per cent on a price excluding the tax is exactly the same as the 5 per cent turnover on a price including the tax. Similarly the 16.37 per cent rate is an arithmetical combination of the existing 5  per cent turnover tax and the 10 per cent wholesale tax. These awkward rates have been introduced to fulfil the undertaking given by the Minister that the Government will not try to make money “on the quiet” as a result of the changeover. It has been designed to bring in the same revenue.
A question was asked about our contribution to the EEC. As part of what is called “own resources system” adopted by the EEC, it is envisaged that part of the Community's funds would derive from a percentage levy on the value-added tax not exceeding ½ per cent of the base of the VAT in each member country. Before this can operate, it is only fair to say that there will have to be some sort of harmonisation between the various countries. The intention is that eventually a percentage of your VAT will make up your contribution to EEC.
Like the other elements of the own resources system, the VAT contribution will form part of the general funds of the EEC and will not be referrable to any specific purpose. The main item in the EEC budget at present is expenditure from the agricultural fund.
The question was raised also as regards administrative costs of the tax. The present turnover and wholesale taxes are administered in conjuction with income tax. Consequently, it is not possible to give accurate figures for the cost of the administration of the individual taxes. By far the greater part of the joint administrative cost relates to income tax, and it is estimated that the additional cost attributable to turnover tax and wholesale tax amounts to about £250,000 per annum, representing approximately 0.3 per cent of the yield of those taxes.
Value-added tax will also be administered in conjunction with income tax. There will be some increased costs, particularly in relation to an increase in the inspection staff, but it is estimated that the cost of administration calculated on the same basis as that applied to turnover tax and wholesale tax will still be less than 0.5 per cent of the yield.
 The question was also asked as to whether business will suffer any additional costs. This matter was considered by the National Prices Commission. In their Report No. 5 of March, 1972, the commission found —in paragraph 17—that there would be certain transitional costs associated with classification of goods subject to the different VAT rates, machine and programme conversion, purchase of new stationery and so on. The finding was that these costs are likely to be very small and they would not be significant relative to turnover.
Senator Quinlan asked whether the Minister would have regard to the views of the trade bodies when appointing the advisory council on the transition to value-added tax. I can inform the Senator, without any shadow of doubt, that all the members will be nominated by the bodies concerned with trade, industry, agriculture and the consumer.
Senator Quinlan also asked about the treatment of exports and imports. Under the “destination principle” adopted by the EEC, consumer goods are taxed at the rate appropriate in the country of destination. In the case of exports, the exporting country removes VAT as the goods leave the country. The importing country, however, will tax these goods when imported or sold at the same rate as applies to domestic goods.
In our case the tax will not be levied on goods imported by registered businesses but will be taxed at the appropriate rate when sold by the business. The reason for not levying the tax on imports by registered businesses is that it would be a waste of effort since these businesses would be able to set-off this tax against their liability on their sales.
Senator McDonald raised the question of farmers and fishermen. A farmer or fisherman may stay outside the VAT system. In that case he need not keep any records whatsoever. If he wishes, he can opt to be registered and if he does he will be treated as an ordinary trader. Those engaged in specialist activities, such as market gardening and poultry production, will be treated as ordinary traders if their  sales are in excess of £6,000 per annum.
The major theme running through this debate, despite the assurances given as to the reasons for the peculiar rates on which VAT will be applied, is that there is some sort of insinuation that food prices will be affected. The experience in other countries in this regard is not relevant to this country. In Ireland we already have a tax on food. VAT will apply to food at exactly the same rate—5.26 per cent— as at present. In Britain, however, food is not liable to purchase tax at present. If VAT were to apply to food there, food prices would rise by approximately 10 per cent. In Ireland zero rating for food would mean an actual tax reduction of £15 million. There would be no guarantee of corresponding price reductions for food.
I should like to expand further on this particular aspect. Sometimes one feels that, despite the assurances given, people will still repeat the same thing over and over again in the hope they will be believed. There will be absolutely no reason for food prices to be disturbed at the changeover. The same situation will apply as far as possible to most other consumer goods and services.
The avoidance of destabilising price changes was one of the main reasons for making the changeover to VAT at existing rates of sales taxation. The proposals for the removal of tax from food and certain other goods would, on the other hand, have repercussions, which in some cases could be quite serious, in the form of compensating tax increases on almost the whole field of industry, commerce and agriculture.
Almost every non-food purchase made by the consumer would cost from 1¼ per cent to 7½ per cent more. Even then there would be an unfilled revenue gap of over £4 million for which no provision is made. Items which would be affected at the lower range of increases include new houses, electricity, coal, gas, clothing, beer, tobacco and cigarettes.
At the upper range, the price of household goods, such as delph, cutlery, furniture, carpets, beds and bedding,  stationery, hardware and household appliances could rise by up to 7½ per cent. Apart from any effects on the industries concerned, such increases would be a great hardship to young married couples setting up a new home. Price increases would extend to a variety of farmers' requisites including tractors and other farm machinery, seeds, equipment and machinery repairs.
The proposal that part of the increased tax would be built in to a wholesale price could not be accepted. Apart from various technical objections, there is the very real danger that retailers would apply their normal profit margins to the higher wholesale price with the consequence that that price would rise by more than the increased tax.
The most serious objection to the proposal, however, is that there is no inbuilt guarantee that food prices would fall by 5 per cent so as to bring about the relief to the poorer families which we are all seeking. Despite assurances from RGDATA and other trade organisations that they would not increase their margin, there is no certainty that these organisations can assure compliance by their full membership. In addition, certain large supermarket chains at present claim that they do not charge any turnover tax. Whether these claims be true or not, there is the possibility that some of them might not feel obliged to reduce food prices if the tax were removed.
The price surveillance machinery in the Department of Industry and Commerce is geared primarily to the control of price increases by manufacturers and there is little or no experience of enforcing general price reductions, especially at a retail level.
I should like to refer to the statements made by Deputy FitzGerald. When he made this case last week in the lower House he could not guarantee food price reduction. In the Dáil Special Committee discussions he limited his remarks to the assertion that food prices would, at some time in the future, settle at a level 5 per cent lower than they would be otherwise.
An Cathaoirleach An Cathaoirleach
 An Cathaoirleach: The Parliamentary Secretary will appreciate that it is not in order in this House to discuss proceedings in the other House in such detail.
Mr. Lemass Mr. Lemass
Mr. Lemass: Even granting that the prices might settle at 5 per cent lower than they would be otherwise, which is doubtful, the retail and wholesale trade would, in the meantime, be the beneficiaries of a £17 million tax reduction. The Exchequer and the housewife might well be the losers.
If even a significant part of the tax reduction is not passed on to the consumer the proposals could result in a greater tax burden on the poorer and larger families. This is why the Minister is convinced that the problem of helping the less well-off sections can  best be dealt with in a redesigned social welfare system, including a more selective children's allowances scheme which would channel an increased flow of help to the truly needy.
I repeat that this is a very complicated and technical Bill. I am glad to say that the Minister will be here tomorrow to handle the Committee Stage. It can be much more usefully dealt with on Committee Stage. A Special Committee of the Dáil have already examined this Bill but it may be in need of further exploration.
Question put and agreed to.
Committee Stage ordered for Wednesday, 19th July, 1972.
The Seanad adjourned at 10 p.m. until 3 p.m. on Wednesday, 19th July, 1972.
Seanad Éireann 73 Value-Added Tax Bill, 1971 (Certified Money Bill) : Second Stage.