Ontario’s 2009 budget included a switch from a retail sales tax separate from the GST to a harmonized sales tax (HST). Superficially, this may seem like a trivial change because the retail sales tax was 8% and the provincial portion of the HST will also be 8%. However, there are two main differences that will affect Ontarians.
The first difference is known to most people: the HST will apply to more good and services than the retail sales tax does. The main change is that services will now be taxed at the 13% HST rate rather than just the 5% GST rate.
If this were the only change, then it would represent a substantial tax hike. But, there is another less well understood difference that changes the equation.
Businesses can now use input tax credits (ITCs) for the HST. A business that collects HST from its customers doesn’t have to give all this money to the government. The business deducts the HST paid on the products and services it purchases to run its commercial operations. This system was used for the GST, and now it will apply to the provincial portion of the HST as well.
The net effect of ITCs is that money cycling through the economy is taxed less often with the HST than it was with the retail sales tax. To summarize:
- Total sales tax remains 13%.
- HST will apply to more goods and services than the old retail sales tax did.
- Businesses only have to pay their net HST.
The overall effect is to lower the sales tax charged to businesses, on average. Of course, some businesses specializing in services (such as my consulting business) will pay more sales tax, but the average business will pay less.
In theory, lowering the sales taxes on businesses should lead to lower prices and a net lowering of costs for consumers. In practice, we’ll have to see how things play out.