Few taxes have been as politically fraught as the GST. The deal, brokered by the-then Prime Minister John Howard, was not only controversial for its political ramifications, but for the economic debate that ensued.
The Australian goods and service tax (GST) began in July 2000 and was designed to eradicate a number of state taxes and charges and to reduce tax avoidance through the cash economy. Now nearly 15 years later the debate starts all over again.
Businessmen Gerry Harvey and Solomon Lew led an initial campaign by the retail industry to abolish the $1000 tax-free threshold on imported goods. After many years of campaign, it appears others are now lending an ear. Politicians and economists are now adding their voice to the criticism. What started with the call for abolishment of the "loophole", has led to a much wider debate. While many experts agree that an overhaul in the GST legislation is necessary, many also express caution in regards to cost of collection and wider implications to the economy and the household budgets.
What aspect of changes are being discussed?
- Broadening the tax to include educational services and supplies, fresh food and beverages and some other items
- Closing the "loophole" of no tax on online purchases (from overseas) below the price of $1000.
- Increment in the tax rate.
Broadening the tax
At present, the GST exempts educational services and supplies, fresh food and beverages and some other items (refer table 1 below). The suggestion is that these make up a significant part of the Australian economy and hence should also be taxable for GST.
|Table 1: GST base exemptions and revenue loss ($ billion in 2010-11)|
|Items exempt||Revenue cost|
|Water, sewage and drainage||0.7|
Source: The Treasury, Tax Expenditure Statement, 2012, Commonwealth of Australia, Canberra
John Mangan, Professor and Associate Dean, Faculty of Business, Economics and Law at The University of Queensland, argues that Any form of tax exemption encourages inefficiency and misallocation and adds complexity and transaction costs to a system. The tax system should be a revenue generating mechanism, and therefore should be kept as simple and transparent as possible and cheap to collect. The potentially regressive nature of the tax should be compensated in other, more efficient ways, such as targeted social services rather than the exemption of a list of arbitrary selected products. This type of policy often leads to perverse outcomes. For example, processed food and fast food, which is more likely to be eaten by lower socioeconomic income groups, attracts GST while fresh food does not.
John Freebairn from the faculty of Business and economics in the University of Melbourne says, Bringing these services into the GST net for the efficiency and simplicity reasons noted above will require a proportion of the extra GST revenue to be recycled. Importantly, these subsidies will be more transparent, direct and better targeted at meeting the reasons for government intervention – namely, correction of external benefits and equity of opportunity.
Closing the "loophole"
At present shoppers do not currently pay GST for anything they buy online from overseas that is worth under $1000, which accounts for a majority of online transactions. The argument by many, led by retail giant bosses, is that this exemption makes for an uneven playing ground for the Australian retailers to compete in.
While this has been great news for Australian consumers who have access to a greater range of products at cheaper prices than ever, arguments are mounting for retailers, already struggling with weak consumer confidence and high labour rates, are an unfair disadvantaged to their offshore rivals who can sell things like books or auto parts up to 50 per cent cheaper.
A Productivity Commission report released in 2011 found dropping the online GST threshold to $100 would raise $500 million in revenue but administrative costs would outweigh any gains. The retail industry and a growing number of politicians are now arguing these figures are no longer relevant because of changes in technology, which means it is cheaper to process the tax. “It raises important questions about how we respond to the growing digital economy”, Frydenberg told The Australian Financial Review. “Let’s just see where the discussion leads after consideration of all the arguments and most up to date data” .
Many have come swinging at the current GST "loophole" for the loss of many jobs and the closure of many small busineses. However, Tom Godfrey, Head of Media and Spokesperson for CHOICE raises a good point, their survey shows the top reason Australians buy online is so they can shop at the times that suit them, followed closely by the convenience of getting products delivered to their door. Begs the question is GST - or lack of it (in terms of overseas online retailers), the only factor in the loss of jobs and closure of many small businesses? Besides, consumers can already buy products such as books and auto parts for up to 50 per cent cheaper online. So will an additional 10 per cent in GST really make a great deal of difference to consumer spending patterns and lead to a sudden boon for local retailers?
Increment in the tax rate
At present the GST in Australia is charged at a flat rate of 10%. John Freebairn from the faculty of Business and economics in the University of Melbourne says, another reform option increase the current rate of GST from 10% to say, 12.5 or 15 per cent and use the additional revenue generated to reduce more more-distorting taxes like state stamp duties on insurance and property transfers, and even federal income taxation.
John Mangan, Professor and Associate Dean, Faculty of Business, Economics and Law at The University of Queensland, on the other hand argues, it was an error at the time of introduction to set a “fixed rate”, whereby the government put strict conditions on any altering of the rate. This reduced the revenue-raising potential of the tax and made it difficult to use as a policy weapon.
Increasing the rate of the GST is, at face value, a simple and very effective way to boost government revenue. Based on 2014-15 data, each 1 per cent extra on the GST would raise about $5.4 billion (increasing to $6.4 billion in 2017-18), meaning a hike in the GST rate from the current 10 per cent to, say, 15 per cent would add more than $25 billion per year to government revenue, escalating to more than $30 billion per annum within three years - if nothing else changed.
But how is the government really going to use the additional revenue generated?
Affects of changes
There is no doubt all of the measures of expansion of the GST, will increase the cost of goods and services and affect the household budgets. But some measures will clearly affect some household budgets more disproportionately in comparison to others. The affects on the household budgets will translate to them being able to purchase less having to choose, which in turn will affect the economy. The expansion to GST legislation clearly has to be considered as part of more wider shake up of the tax and social service systems, both short term and long term.
As one media writer put it, "the beauty of the GST is that it is a transparent tax that is well understood and widely accepted by both business and consumers. The downside of the GST is that it is regressive, meaning that those on lower incomes are hit with a larger proportionate share of tax on a given basket of goods and services than is a rich person buying the same basket of items." John Mangan says, "used properly, it can reduce the cash economy, spread the incidence of tax and give some tax relief to PAYE taxpayers. The immediate issue to face would be the inflation effect on food prices and any distorting effect this would have on interest rates."
Even if the government is able to convince the Australian public the need for changes in GST legislation, there remains an emotional war to be won. How the government is going to redistribute additional revenue might be the key to winning the emotional war.
While all these have been thrown around, we don't really know what is being considered until the Government's taxation white paper comes out this year. However there seems to be little evidence that any changes, to the GST at least, will not come in to affect till after the next elections.