Revenue minister Todd McClay talks about the challenges with implementing the GST on online purchases.

Retailers are calling on the Government to act faster to bring all overseas internet shopping into the tax net after ministers approved plans to charge GST on imported digital products and services.

Revenue Minister Todd McClay released a discussion paper on Tuesday morning, which confirmed the Government plans to collect GST on the likes of Netflix subscriptions, iTunes downloads and e-books.

The paper said the change would raise about $40 million a year.

Shannon Stapleton Kiwis will start paying GST on imported 'services' such as e-books next year, the Government says.

A spokeswoman for McClay said legislation was likely to be introduced to Parliament before Christmas, but would not take effect until next year.

However, a decision on whether to extend GST to low-value physical imports, such clothes, printed books and consumer electronics, won't be made until at least October.

Retail New Zealand chief executive Mark Johnston said he was concerned the Government was proposing to deal with digital services ahead of goods.

READ MORE: Days of tax-free overseas bargains are numbered

Labour revenue spokesman Clayton Cosgrove gave his "cautious support" for the proposal to collect GST on imported services, while saying the party would reserve its "ultimate judgment" until it saw more detail.

Small businesses in New Zealand were on the back foot competing against foreign rivals, he said. "There is quite a competitive edge if you can buy a product from overseas with no GST."

Similar sales taxes on imported services, which are colloquially known as "Netflix taxes", have been introduced by South Africa, Norway, South Korea and Switzerland, and are in the pipeline in Australia and Japan.

The tax would be collected automatically but consumers who intentionally avoided paying GST on imported services, for example, by tricking suppliers into thinking they lived outside the country, could be fined up to $25,000.

The Government will separately consider whether to reduce the $226 to $400 thresholds under which physical goods can be imported tax-free.

The discussion paper said those thresholds were believed to cost the Government an additional $140m a year in foregone tax.

A document "specifically focusing on the GST treatment of low-value imported goods" will go to ministers by October.

The Netflix tax would force foreign companies that sold services to New Zealanders to register with the Inland Revenue Department and then collect GST on their sales on behalf of the taxman.

The Government is seeking submissions on whether small foreign companies that sold less than $10,000 a year of services to Kiwis, or alternatively less than $60,000, should be exempted.

Johnston said the Government could have forced overseas suppliers of physical goods to also collect GST on their sales.

"If the global e-commerce giants were registered for GST, then we think that would mean GST was paid on around 80 per cent of all low value goods entering the country," he said.

But McClay said such a move had not been attempted elsewhere and there could be "logistic issues" because of the number of foreign businesses that would be involved. Nevertheless, the Government would "take a good look at how it could be done", he said.

The Taxpayers' Union called for the Government to make clear what it would do with the money raised by the Netflix tax.

"While there is a genuine interest in levelling the playing field between online and offline retailers ... the extra revenue should be used to reduce other taxes," executive director Jordan Williams said.

Submissions on the tax change are due by September 25.

WHAT IT MEANS FOR YOU

Will the change mean I have to pay GST on all online shopping purchases?

No, or at least not yet. At the moment, you would pay GST on goods and digital products, such as printed books and e-books, that you bought from New Zealand shops and online suppliers.

But you wouldn't pay GST if you bought a book or e-book from an overseas supplier such as Amazon.

The tax change that is currently being proposed would mean you would pay GST on an e-book you bought from an overseas website. But you wouldn't pay GST if you imported the same book in printed form.

Does this mean I can expect the price of imported digital products such as e-books, iTunes downloads and Netflix and Spotify subscriptions to all go up by 15 per cent?

No, but you can expect them to go up in price by a lesser amount. Economists will tell you it is not in the interests of suppliers to pass on cost increases in full; this is especially true for digital products that tend to have very low incremental production costs.

Who will be the winners and losers?

The big winners are New Zealand suppliers of digital entertainment such as Sky Television and Spark, and the taxman.

Losers include foreign companies such as Netflix, Steam and Apple and those consumers who spend a lot on their services (Spotify already charges New Zealanders GST on its subscription music service).

Are foreign companies likely to kick up a fuss about becoming unpaid tax collectors for Inland Revenue?

Not necessarily. Overseas experience suggests big companies such as Netflix and Amazon will probably play ball with the tax change if the annual GST threshold for overseas suppliers is set at a low threshold, such as $10,000. But if the threshold is higher they will be more concerned about losing business to smaller competitors and their objections may increase.

The Government won't want to set the threshold too low, however, as the red tape involved in collecting GST could dissuade some small overseas businesses from selling to New Zealanders at all; an outcome no-one wants.

Will this mean Christmas shopping will be more expensive this year?

No. Even if digital products are on your shopping list, the tax changes won't kick in until next year.