GST refunds

 

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There has been a lot of brouhaha about the shortfall in the trust account for GST refunds.

When companies sell their goods and services, they charge GST which they collect on the Government’s behalf (let’s call A). Companies pay A to the Government.

In order to produce the goods and services, the companies bought raw materials which they paid GST on (let’s call B). B is to be refunded to the companies within 2 weeks after A is paid.

So, B is actually the companies’ money. Only the net (A-B) belongs to the Government.

As B does not belong to the Government, B is set aside in a trust account where it sits until it is paid to the companies. Strangely, many companies did not get the refund, even up to years. Of course, when it comes to tax, there will always be disputes on whether the claim for refund is allowed (just like disputes whether certain expenses are tax deductible when calculating corporate tax). Let’s set that aside.

Now it looks like only some of B was transferred to the trust account. The rest stayed in the Government’s Consolidated Account as its revenue, which was spent. Oops!

It will take the Government time to build up the funds for the GST refund. In the meantime, the companies suffer cash flow constraints and turn Government lender.