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43. Chapter 27 Taxation of Goods and Services

27.1. The discussion of broad principles in Chapters 3–5 reached the general conclusion that the taxation system should place greater reliance on taxes on goods and services by the inclusion of a broad-based tax. In this chapter the Committee looks at these levies in some detail.

27.2. Section I examines the existing excise duties and sales taxes and comes to the conclusion that excises have an eventual role of a limited kind. The rates at which they are imposed should be related to specific purposes which justify their retention and which would need to be evaluated following analysis not presently available to the Committee. In Section II, various kinds of broad-based taxes are discussed and a value-added tax covering a wide range of goods and services is recommended. Section III describes the transitional problems accompanying the introduction of this tax.

I. Existing Taxes on Goods and Services

27.3. The present structure of taxes on goods and services rests on two main taxes: the wholesale sales tax, which is a single-stage tax designed substantially to fall on sales to retailers by manufacturers and wholesalers; and excise duties, including the equivalent component of customs duties levied on imported commodities subject to excise duty when home produced. These are important taxes, excises accounting in 1973–74 for over $1,555 million (14.2 per cent) and sales tax for $969 million (8.9 per cent) of the Australian Government's tax revenue of $10,938 million.

27.4. Excise duties are levied at a rate per unit of quantity, not on an ad valorem basis. The total amount raised therefore depends on the rate of levy and the volume of production, not on price. Ninety-eight per cent of all revenue raised from excises is derived from six products: beer, potable spirits, tobacco, cigars and cigarettes, diesel fuel and petrol. Commodities in these groups bear a heavy weight of tax as is shown by the figures in Table 27.A. In addition 1970–71 total expenditure on tobacco products estimated at $547 million had a tax content of $285 million and total expenditure on alcoholic drinks of $1,306 million a tax content of $436 million.

27.5. The wholesale sales tax is imposed on an ad valorem basis, so that, conveniently in a time of inflation, the revenue yield adjusts automatically to changing prices. The share of the wholesale sales tax in total revenue has declined since 1953–54, largely because of the rapid rise in collections of personal income tax, and partly because of continual narrowing of the sales tax base. In the last twenty years, exemptions and reclassification of goods to lower rated categories have significantly reduced the base on which the wholesale sales tax rests.

27.6. The wholesale sales tax structure, described and evaluated at greater length in Appendix A to this chapter, is designed so that all goods produced in, or imported into, Australia bear the tax at the general rate, currently 15 per cent, unless they are specifically exempted from it or required to bear tax at a rate different from the general rate. Exemptions and classifications of goods bearing different rates are shown in four schedules to the sales tax legislation:




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TABLE 27.A: TAXES ON GOODS AND SERVICES, BY CATEGORIES OF EXPENDITURE AND ESTIMATED SPLIT BETWEEN EXCISE DUTY AND SALES TAX, 1970–71

                                       
Total excise duty (b) and sales tax  
Category   Expenditure $ million   Excise duty (b) $ million   Sales tax $ million   $ million   Percentage of total  
Personal consumption expenditure (a)— 
Food  3,850  21  21  1.2 
Tobacco  547  285  285  16.4 
Alcoholic drinks  1,306  436  (c) 27  463  26.7 
Clothing, footwear  1,790  0.1 
Chemists’ goods  564  26  26  1.5 
Electrical goods  559  44  44  2.5 
Furniture, carpets etc.  478  0.5 
Hardware  390  30  30  1.7 
Newspapers, books  331  0.4 
Toys, sporting and travel goods  530  57  57  3.3 
Operation of motor vehicles  1,009  62  74  136  7.8 
Purchase of motor vehicles  1,025  124  124  7.2 
Other personal consumption services  7,076 
19,455  783  419  1,202  69.3 
Business and capital expenditure  n.a.  319  (d) 214  533  30.7 
Total  n.a.  1,102  633  1,735  100.0 
note note note  

  • the First lists items that are exempt, including virtually all food and clothing;
  • the Second lists certain consumer durables such as television sets, record players and other items such as jewellery, cosmetics and furs: the rate on items in this schedule is 27½ per cent;
  • the Third lists furniture and household equipment which items bear tax at 2½ per cent;
  • the Fifth, there being currently no Fourth, lists motor cars designed principally for the transport of persons, on which the rate is 27½ per cent.




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27.7. A general picture of the impact of the two taxes is given in Table 27.A which shows the tax imposed on various categories of goods falling within the ambit of personal consumption expenditure. The message of the table is clear. Motor vehicles and parts, together with the main excise items, yield about 80 per cent of the total paid by persons, while representing only 16 per cent of net personal consumption expenditure. The remaining 20 per cent comes chiefly from categories like chemists’ goods, electrical goods, hardware and toys and travel goods which represent a further 10 per cent of net personal consumption expenditure. Sixty per cent of personal consumption expenditure, including virtually all that on food, clothing and services, is not directly subject to tax.

27.8. Most countries levy an extra burden of tax on those commodities that produce the bulk of the revenue from excise and sales taxes in Australia: alcoholic beverages, tobacco products and petrol. A case for differential treatment of these goods is widely admitted. The first two have been taxed for centuries in Europe. There have been relatively few submissions to the Committee criticising them. They excite less antagonism among the taxpaying public than most other taxes. To some extent this may be attributable to their relative invisibility and taxpayer ignorance of their magnitude.

27.9. In 1971, among OECD countries, the excises imposed on alcohol, tobacco and petrol, at all levels of government, produced percentages of total tax revenue varying from about 9 per cent in Austria, Belgium and the United States, up to 17 per cent in the United Kingdom and 30 per cent in Ireland. Australia's figure of 13 per cent puts it in the middle of the list, being in the upper half as far as the excises on tobacco and alcohol are concerned and near the bottom in the case of petrol.

27.10. Excises excel in administrative simplicity and ease of enforcement. They are currently the least expensive to collect and administer, per dollar of revenue collected, of all the taxes in the Australian armoury. There is much less simplicity in the wholesale sales tax, and the Committee has received a number of submissions about points of administration to which further reference is made in Appendix A. But even with the variety of rates it embodies, it appears to operate smoothly.

27.11. Though they bear such a large share of the load, excises are, by contrast with their simplicity, among the most inequitable and non-neutral of taxes presently levied. If, as is generally agreed, the demand for products subject to excise is relatively insensitive to price changes, the tax will fall predominantly on their consumers: to assess their impact, it is sufficient to look at the consumption pattern of those goods. Some complications are however unavoidable. Petroleum products, raising about one-third of total excise revenue, are consumed directly and also affect the cost of production and distribution of many other consumption goods. Thus the excise on petrol is borne partly by consumers of goods which use petrol as an input, and the total incidence of the tax will reflect the consumption pattern of these goods, as well as that of petrol itself. In this sense, the petrol excise is partly reflected in higher food prices, higher prices of travel and so on.




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27.12. Information is not available about the consumption patterns of individual commodities subject to excise duties. However, the 1966–68 Macquarie survey referred to in Chapter 4 throws some light on the subject. In lower income groups, at the time of the survey, the excises on tobacco and alcoholic drinks amounted to over 4 per cent of income, a figure which declined to less than 2 per cent in higher income groups. Similarly the taxes on motor vehicle operation declined from about 0.8 per cent of low incomes to about 0.25 per cent of high incomes. The conclusion is inescapable that excise duties are regressive, falling more severely on lower than on higher incomes.

27.13. The greater part of sales tax is levied, as Table 27.A shows, upon goods concerned with motoring and thus far shares the inequity and non-neutrality just ascribed to the excise on petrol. The remaining sales tax is scattered in small packets over other categories of consumption expenditure and constitutes a small but uneven levy upon them, too modest to deserve much consideration. Outside the area of motoring, drink and tobacco, taxes on goods and services at the Federal level can be dismissed as a trivial relic.

27.14. It will be seen later that the Committee does not regard the existing excises and wholesale sales tax as a foundation upon which the broad-based taxation of consumption goods and services can be erected. But it does consider special taxation of motoring and drinking, and, with less conviction, smoking, to be fully justifiable as deliberate non-neutralities in the tax system, designed for specific purposes of intervention. This is a field for what have been called ‘efficiency taxes’ in Chapter 3.

27.15. There is an overwhelming case in principle for the taxation of motoring, whether by levies on petrol or on vehicles or by registration fees or some combination of all three, on the grounds of charging for the use of roads (a most expensive publicly-provided facility), for their policing, for limiting congestion and accidents (which cost the community great sums), and as an anti-pollution measure. But the form and the scale of such taxation must be considered in relation to its adequacy and its efficiency for these specific ends, and not simply as a matter of revenue-raising. This is an area in which some calculations can be made with reasonable accuracy and others (such as valuations of the cost of accidents and pollution) in only very arbitrary fashion. Nor would it be easy to suggest the right distribution of charges. The Committee has not explored this difficult area in detail, and does not consider itself qualified to undertake the task. But it recommends that decisions involving any great change in existing revenue from motoring should be made in the light of such special studies.

27.16. Similar considerations apply to the taxation of alcoholic drinks. It cannot be doubted that drinking imposes substantial costs upon the community as a whole in terms of health, road toll, crime and disturbance of the peace. But again the form and level of imposts designed to meet their costs, or to prevent some of them arising, are most difficult matters to decide, and the Committee has no specific recommendation to make other than that expert studies are desirable before any substantial change is introduced.




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27.17. The costs to the community of tobacco consumption are as hard to assess as those of motoring and alcohol. From such surveys as have been made, however, it is clear that a substantial amount of ill health and consequent absenteeism is due to smoking. Quantification of costs awaits further studies outside the Committee's scope, and any large variation in the volume and method of tobacco taxation should be decided on the basis of these studies.

27.18. The Committee therefore recommends that special taxation should continue in these three areas; but that its eventual form and level should be reviewed in the light of the specific purposes it serves. If a broad-based consumption tax, on the lines to be next discussed, is introduced, it would of course be necessary to take account of the level of that tax on these activities. Steps that might be taken are outlined in paragraph 27.40.

II. Broad-Based Taxes

27.19. In considering a broad-based consumption tax it is as well to start with a reminder of how personal consumption expenditure is divided between various categories of goods and services. As the figures in Table 27. A show, out of the total in 1970–71 of some $19,500 million, about $7,100 million was spent on services; of the remining $12,400 million, excisable goods together with motor vehicles and their operation accounted for about $3,900 million. If these goods are thought to be sufficiently taxed, there remain various retail categories of which the most important are food ($3,850 million) and clothing ($1,790 million). Broadening the base of the tax compels us to face the problem of including food and clothing.

27.20. As these figures indicate, the exemption of food and clothing would significantly reduce the base, with a consequent loss to revenue. Furthermore, if the tax is to have as wide a coverage as possible, exemptions must be kept to a minimum: once they are allowed, a precedent is set and pressures will develop to apply them on a wider scale. To keep all goods in the base and to apply a uniform rate are aims not to be relinquished.

27.21. While the taxing of food has raised much debate in the past, its acceptability has gradually increased. European countries in the main levy taxes on food and clothing, sometimes at concessional rates but not uncommonly at a standard rate applying to most other goods. The majority of American States tax food uniformly at the retail level. Where, as in Australia, food has not been taxed, problems of classification are unavoidable when items such as nuts and confections, vitamin tablets and dietary foods are being considered. Exemption of food causes difficulty in retail outlets, especially in those providing meals on and off the premises, for the provision of restaurant meals rarely fails to attract tax. Food exemption is also discriminatory in favour of those families who spend a high proportion of their incomes on such foods as are in no sense necessary for a reasonable living standard. The same arguments apply to clothing. The Committee therefore recommends that food and clothing be taxed at the uniform rate.




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27.22. Apart from tangible commodities, personal consumption expenditure has a large services component. The composition of this component is shown in Table 27.B. It covers medical and hospital expenses, rent (including an imputed figure for owner-occupiers), gas and electric power, fares, postal services, education, life insurance, entertainment, and other services such as hairdressing, restaurant meals and hotel accommodation. If tangible goods are taxed, services connected with such goods should logically be taxed also. If services are taxed, it would again be desirable that the base be as broad as possible, though some items would undoubtedly need to be excluded.

TABLE 27.B: ESTIMATED PERSONAL EXPENDITURE ON SERVICES AT RETAIL LEVEL, 1970–71

                           
$ million   Per cent  
Medical, hospital and funeral expenses  810  11.4 
Imputed rent of owner-occupiers  1,810  25.6 
Other rent  734  10.4 
Gas, electricity, fuel  485  6.9 
Rail, tram and bus fares  245  3.5 
Other fares  410  5.8 
Postal and telephone services  203  2.9 
Education  173  2.4 
Life insurance  161  2.3 
Entertainment  310  4.4 
Other services  (a) 1,735  24.5 
Total  7,076  100.0 
note note  

27.23. In considering any individual tax, account must be taken of its place in the tax structure as a whole. If a broad-based tax covering food and clothing introduces an element of regressivity, that element can be counterbalanced by increasing the progressivity of other taxes in the system. The Committee is satisfied that, either by special measures by way of transfer payments or by other more progressive taxes, or by a combination of both, the progressivity of the structure as a whole can be maintained or adjusted to the required degree.

27.24. Given that the tax is to be as broadly based as possible, there are four forms which it might take. These are:

  • (a) turnover tax
  • (b) wholesale sales tax
  • (c) retail sales tax
  • (d) value-added tax.

27.25. The arguments against taxes on turnover throughout the whole range of manufacturing and distribution are strong. A turnover tax is not neutral because it falls differently on different products according to the number of steps in their manufacture. A commodity that has only one stage in its manufacture will bear the tax


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once, while another that has two stages will pay tax at both stages: at the second stage tax will be levied on a total value including the tax levied at the earlier stage. The final weight of tax thus varies greatly from commodity to commodity. The tax has been replaced in most countries where it was once levied.

27.26. A new broad-based wholesale sales tax merits serious consideration. Unlike the turnover tax, tax is levied only once in the total production-distribution process, and the tax on tax problem and the associated incentives towards vertical integration are minimal. One primary virtue, which would be shared by a manufacturers sales tax, is that the number of firms legally obliged to collect the tax is smaller than under a retail sales tax, and these firms are in most cases better equipped administratively to handle the tax commitment. It has been argued that Australia has extensive experience of the operation of wholesale sales tax, and good reasons are needed to change it.

27.27. The disadvantages of levying a broad-based tax at the wholesale level are twofold. The more serious is that because a wholesale sales tax explicitly excludes the value added at the retail stage it will both encourage a relocation of activity to the retail level where it will escape tax, and also discriminate between goods according to whether a large or small proportion of their value is added at the retail level. The importance to be placed on this problem depends very much on the rate at which the broad-based tax is imposed. If the tax is to be levied at a rate high enough to permit a significant change eventually in the tax mix towards taxing goods and services, then the issue is important enough to provide a case against the wholesale sales tax.

27.28. A second somewhat related disadvantage is that a number of goods and services do not have a wholesale value in any market sense. This is especially true of services. If services are to be treated in the same way as goods traded at the wholesale level, some wholesale value must be imputed to them. To do this would involve arbitrary judgment and considerable administrative difficulty. A tax on services would have to be levied at the retail stage and the rate should be lower than the wholesale sales tax rate to preserve neutrality between the two.

27.29. A broad-based tax on tangible goods at the wholesale level does not fit comfortably with a tax on services at the retail level and, on the face of it, an improvement might lie in also levying retail sales tax on goods. While it is assumed that any sales tax ultimately comes to rest on the member of the public consuming the taxed good or service, a tax confined to the retail level raises administrative and compliance problems not found when a tax operates only at an earlier stage: the number of taxpayers increases and small traders unused to making returns are required to do so.

27.30. For revenue purposes, a tax at the retail stage is to be preferred to one that stops short of it as retail margins increase the base. Single-stage retail taxes are by no means uncommon and are the most significant source of State tax revenue in the United States. The system is usually based on the registration of all traders selling at retail, together with the licensing of businesses that buy goods for business use or resale so that the retailer has to keep separate records of sales to licensed buyers. The system is open to evasion: the licensed buyer would be able to apply to private consumption goods bought free of tax as though for business use or resale. The temptation to evasion grows as the tax rate increases; and if the broad-based tax is to play an important part in raising revenue, the Committee believes that its collection should start at an earlier stage than the retail.




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27.31. To overcome some of the defects described above, value-added tax (VAT) has been adopted by many countries particularly in Europe and South America. Only an outline of the main attributes of the tax can be given here. It is a way of levying an ad valorem tax on final consumer spending. The whole of the sales value of consumption goods and services, less those that are specifically exempt, is taxed by stages as the goods and services pass from one supplier to the next in the chain of production and distribution. Each supplier pays the tax, calculated at the VAT rate, on his sales during a period, claiming as a deduction VAT invoiced to him during the period. The final consumer, not being a supplier, bears the whole tax and can claim no deduction.

27.32. To illustrate the way VAT works, let it be supposed that the VAT rate is 10 per cent in a simple sequence of goods supplied to manufacturer (M), to wholesaler (W), to retailer (R), and to consumer (C). The set of figures below shows that the supplier to M, selling at a basic (i.e. VAT-exclusive) price of $100, is required to pay $10 VAT to the government. The supplier charges M the VAT-inclusive price of $110; and when M comes to sell the goods to W he has a credit of $10 to deduct from the VAT he is liable to pay on the VAT-exclusive price appearing on his invoice. W and R proceed in similar fashion.

             
VAT— exclusive price   VAT at 10 per cent   VAT payments to government  
M buys goods for  100  plus  10  VAT of 10 already paid by M's supplier =  10 
M sells goods to W for  160  plus  16  M pays VAT of 16 less credit of 10 = 
W sells goods to R for  200  plus  20  W pays VAT of 20 less credit of 16 = 
R sells goods to C for  250  plus  25  R pays VAT of 25 less credit of 20 = 
Total VAT paid  25  25 

The example shows that each supplier pays to the government tax on his output less tax on his input. M's supplier, together with M, W, and R, are known as ‘taxable persons’. They are liable for tax at successive stages, but they are reimbursed for the tax they pay in the price they charge and, in the outcome, the consumer bears the whole of VAT. The taxable person acts as an agent for collecting part of the ultimate tax incurred on the goods sold to consumers.

27.33. Some countries have found it necessary to give special treatment to a limited number of goods and services and to certain traders, through either ‘exemption’ or ‘zero-rating’, to use the British terms. For example, consider again the sequence in the last paragraph. If the retailer had only a small annual turnover (less than £5,000 in the United Kingdom), he would qualify to be exempt from VAT and he would then not have to make a VAT charge of $25 or lodge a return with the VAT authority; but at the same time he would not be able to obtain a refund of prior-paid tax. If the wholesaler had exported the goods, he would not be required to charge $20 VAT, exports being zero-rated, and could claim from the government the $16 VAT component in the price of the goods he had paid to the manufacturer. So he could sell the goods free of VAT for $200 in the export market rather than for $220 on the home market. The concept of zero-rating complies with the rules of the General Agreement on Tariffs and Trade that amounts of identifiable tax may be eliminated from export


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prices. This method of dealing with VAT thus increases the competitiveness of exporters.

27.34. Table 27.C indicates how rates of VAT vary in some European countries, the date of introduction, taxes replaced and percentage of total tax revenue and social security contributions raised by VAT in 1971.

TABLE 27.C: VALUE-ADDED TAXES IN EUROPE

                               
Tax rates (a)(b) 
Country   Date of introduction   Taxes replaced   Standard   Lower   Intermediate   Upper   Contribution to total revenue(c) 
Per cent  Per cent  Per cent  Per cent  Per cent 
France  1968  various indirect  20.0f  7.0  17.6  33.3  25 
Germany  1968  turnover  11.0  5.5f  16 
Italy  1973  various indirect  12.0  1.0–6.0f 
Belgium  1971  various indirect  18.0  6.0f  14.0  25.0  22 
Netherlands  1968  turnover  14.0  4.0f  16 
Luxembourg  1970  turnover  10.0  2.0–5.0f  12 
Denmark  1967  purchase tax  15.0f  18 
Norway  1970  retail sales tax  20.0f  23 
Sweden  1969  retail sales tax  17.65f  3.09  9.89  14 
Austria  1973  turnover  16.0  8.0f 
Ireland  1972  sales taxes  19.5  6.75  11.11  36.75 
United Kingdom  1973  purchase tax; SET (d)  8.0  (e) 
note note note note note note  

27.35. Much been published about the operation of VAT which need not be summarised here. The countries of the European Economic Community aim to harmonise tax rates, but there is still considerable diversity. Goods and services that do not bear VAT are however kept to a minimum everywhere, and in most countries food is taxed though usually at a lower rate than the standard one.

27.36. The tax charged on purchases made by a trader must be shown on the invoice supplied to him, and this invoice is evidence for the trader to claim a credit. The invoice is an important instrument in control and enforcement and the prevention of tax evasion.

27.37. VAT is seen to have many advantages over other systems described if widely based at a uniform rate. Its chief disadvantage is that the large number of suppliers to be covered increases the administrative task, which would be modified if small suppliers of goods and/or services, as mentioned above, are exempt from VAT.

27.38. In some countries certain government services are exempt; but where there is competition between these services and private ones subject to VAT, equity can be maintained only if all are liable. Financial institutions are invariably exempt because of the difficulty of applying VAT to them: in its place in some countries a separate profits tax is charged to preserve equity between those who use such institutions and those who do not. Services rendered by schools, doctors, and hospitals are often


  ― 520 ―
exempt, though it could be argued that where charges are made they should bear VAT. Special regulations may be necessary in connection with hire-purchase arrangements, second-hand goods and charitable organisations.

27.39. While the Committee recognises that the introduction of VAT would have to be preceded by further discussion of the exact base and by a lengthy government information campaign, it has concluded that, despite its cost of administration, VAT is the most appropriate type of broad-based tax on goods and services.

III. Level of Vat and Transitional Problems

27.40. To achieve simplification of the tax system by the development of VAT would take some time. It would be possible to make the first moves in this direction by widening the wholesale sales tax and gradually making uniform the present varying rates, a retail sales tax restricted to services being brought in at the same time. But it would be preferable to introduce VAT as soon as possible, the simultaneous steps being to:

  • (a) cancel wholesale sales tax and introduce VAT on a wide base at a comparitively low level;
  • (b) adjust duty on excisable goods so that when VAT is levied on them at prices embodying excise the combined effect of excise duty and VAT on the prices of the goods in question is equal to that of current excise duty; and
  • (c) impose an excise tax on motor vehicles so that when VAT is imposed on vehicles which have already paid excise duty, the total levy is equal to current wholesale sales tax.

27.41. The aim of these steps would be to obtain from excise duty and VAT at least as much revenue in toto as excise duty and sales tax together raise at present, and not to increase the total revenue from currently excisable goods. After the change to VAT, the price of excisable goods would remain unaltered, the prices of some goods such as those as in the electric and hardware categories would be reduced, and the prices of others, particularly food and clothing, would increase. A possible exception to the unchanged price of excisable goods might be made in the case of beer, which may be thought now to carry an unjustifiably high amount of excise duty.

27.42. If all tangible goods and all other personal consumption expenditure except rents and certain financial services were to be taxed, the base would be equivalent in 1970–71 to about $16,000 million at retail level, excise duty and wholesale sales tax included. If VAT were to be levied at a uniform rate of 5 per cent, very approximate estimates indicate that, on the basis of the steps in paragraph 27.40, $2,000 million would be raised from it and excise duties—an increase of $250 million over the revenue raised from wholesale sales tax and excise duties in 1970–71.

27.43. The above estimates are based on the assumption that the supply of goods and services in different categories would not be affected. As the change will increase personal consumption expenditure—$19,500 million in 1970–71—by less than 2 per cent overall, any inaccuracy in the assumption may be ignored for this discussion.

27.44. VAT on goods and services puts those on low incomes at a disadvantage and some countervailing measures would have to be taken. Purely by way of illustration, let it be assumed that a family consisting of husband, wholly dependent wife and two children spends its entire after-tax income of $100 a week, plus child endowment of


  ― 521 ―
$1.50 a week, on goods and services that rise in price by 5 per cent when VAT at that rate is imposed. To maintain the family's consumption level, expenditure on an annual basis will need to rise from $5,278 to $5,542, an increase of $264. One way of ensuring that the family is not made worse off would be for the husband to receive an extra $407 a year in pre-tax income, assuming 1974–75 income tax rates apply. A second way would be to reduce the amount of income tax the family has to pay from $604 to $340 by adjusting the income tax scale. Alternatively, the same income tax relief might be given by lifting the dependant allowance for wife and children from $832 to $1,494. Another possibility is to increase child endowment for two children from $78 a year to about $340, for example by raising the weekly rate for the first child from 50 cents to $3.00 and for the second from $1.00 to $3.50. (Were child endowment to be made taxable in the father's hands, the amount of endowment for two children would have to be increased still further.) The choice of compensating measures is obviously wide.

27.45. VAT has some common ground with payroll tax and with company income tax. When VAT was introduced in Britain in 1973, it replaced purchase tax, which was a wholesale sales tax, and selective employment tax, a type of payroll tax based on the wages of certain categories of employees and paid by employers. In Australia payroll tax was handed over to the States in 1971; at the current rate of 5 per cent on all payrolls, it could raise as much as $1,000 million in 1974–75. The introduction of VAT might need to be accompanied by discussions between the Australian Government and the States about the future of payroll tax. A VAT running alongside such a tax would involve an element of tax on tax that would be difficult to avoid.

27.46. The effect of VAT on company profits will depend on the extent to which VAT can be regarded as an addition to wage costs and be shifted forward in the price of goods and services. In some VAT systems, it is mandatory for VAT to be shown as the stipulated percentage of the selling price. Any absorption of the tax, leading to a lower selling price and to less revenue for the government, would necessitate reduced profits or reduced payments to suppliers. VAT can be beneficial to exporting firms: as noted earlier, VAT is an identifiable tax which the General Agreement on Tariffs and Trade allows suppliers to deduct when goods for export reach the border.

27.47. Under the aegis of a prices and incomes policy a government introducing a VAT, with or without other tax changes affecting suppliers, can estimate justifiable price changes and control them. The control should be seen to work in both directions for some prices might be capable of reduction in circumstances of other tax decreases. In the absence of a prices and incomes policy, a government can advertise prominently how the prices of certain categories of goods should be affected by the measures being taken. In much the same way, a government can state to the arbitration authorities and to the public in general how it expects wages to be adjusted in the presence of any alleviative measures taken at the same time. As VAT is meant to be a tax on private consumption expenditure, prices of goods and services are expected to increase; but in that the contribution of VAT to revenue may be balanced by a reduction of other imposts, the effect of the whole restructuring of the system need not be inflationary. Should the government require increased revenue in otherwise stable conditions and the imposition of VAT is the only measure taken, adjustments to prices and social service grants would be unavoidable.

27.48. In the preceding paragraphs the discussion has centred on the problems of the initial introduction of VAT, and a very low rate of tax has been used in the illustration. But the whole trend of the Committee's argument presupposes that, thereafter, it


  ― 522 ―
should be steadily raised with concomitant upward adjustments to social service payments and downward adjustments to the income tax. The Committee sees VAT as doing much more than helping to remedy the defects of the existing taxes on goods and services: its prime role lies in allowing, in turn, a major switch from existing direct taxation and a large-scale simplification of the whole taxation system. It believes that once Australian taxpayers become used to a VAT, and once its teething troubles are over, they will see its advantages and be willing to encourage its extension.

27.49. As and when a broad-based consumption tax was raised from its initial low rate, it would of course continue to be imperative, for the preservation of vertical equity, to adjust social service grants and personal income tax rates in a compensating way. But it would become increasingly difficult to achieve greater simplification of the fiscal system—the prime objective of the increase—through these means as personal income tax virtually ceased to be levied on persons earning up to little more than minimum wages. Further progress in this direction might only become possible if the regressive effect of an increasing VAT were recognised as justifying specially favourable treatment to low-income earners in the wage awards handed down by the Arbitration Commission and in other wage negotiations. There may be sound reasons why, in such negotiations, questions of tax should usually play only a minor role. But if the government were engaged upon a deliberate and explicit restructuring of the taxation system for widely accepted and welcomed ends of simplicity and efficiency, it would not, in the Committee's view, be in any way inappropriate for employers, unions and the Commission to assist by eliminating obstacles arising from considerations of equity. This seems to the Committee one of the areas in which objectives of tax reform call for the co-operation and understanding of non-government agencies.

27.50. The introduction of any major new tax such as VAT is a major task for government, and the Committee is under no illusions that its proposals in this chapter are administratively easy. The opinions of those who have written submissions on the subject of sales taxes in general have been divided and no clear view emerges. The somewhat extreme opinion that a VAT cannot be administered in Australia has, however, to be rejected.

27.51. The unavoidable difficulties accompanying the introduction of VAT will be reduced if the Government makes its intentions clear well in advance. Once an official decision has been made, staff has to be recruited and trained and a widespread education programme will be necessary to prepare the public and the business community. It is to be hoped that in the preparatory period much ill-informed criticism would be quelled and the ancillary benefits of VAT become increasingly appreciated. There is much evidence of overseas experience to show that, after initial troubles, VAT can become a readily accepted tax and be allowed to play an increasing part in revenue-raising.




  ― 523 ―

44. Chapter 27: Appendix A: Sales Tax as a Continuing Tax

27.A1. The Committee has recommended that the existing wholesale sales tax be replaced with a broad-based VAT. But at least a brief review of the present levy is called for, since there can be no certainty that this recommendation will be acted upon in the immediate future.

I. Tax Base and Rates of Tax

27.A2. Sales tax was initially a broad-based levy; over the years, however, the base has been eroded through the granting of exemptions. A single rate of tax was imposed from 1930 to 1940, when the Second and Third Schedules were included in the Sales Tax (Exemptions and Classifications) Act. At present there are three rates of tax (see paragraph 27.7).

27.A3. In paragraph 27.40 the Committee has expressed the view that VAT should be introduced as soon as possible. But in the meanwhile certain transitional steps might perhaps be taken, including widening the base of the existing sales tax and bringing rates of sales tax into greater uniformity. However, while steps of this kind would serve to cushion the impact of VAT at the time of its adoption, any withdrawal of exemptions and realignment of tax rates as an interim measure would no doubt be criticised as discriminatory and unfair by those adversely affected: in the result, an unnecessary degree of hostility to VAT might be engendered in the preliminary stages.

27.A4. Where the range of exemptions and the classification of goods under the different schedules has been allowed to vary over the years in piecemeal fashion, it is inevitable that anomalies will occur. There are difficulties, however, in reversing the process by stages. While gradual reversal would correct some of the anomalies and inequities, there would inevitably be complaints of discrimination by those first affected, whatever the order of reversal adopted.

27.A5. The widening of the base of the present tax and unification of rates should be important objectives if a change to VAT is not to be made in the foreseeable future. But the Committee would not favour the gradual reversal of exemptions and a move towards uniformity of tax rates solely for the purpose of facilitating transition to VAT.

II. Structure and Administration of the Law

Simplification of the Law

27.A6. The sales tax law comprises nine assessment Acts and regulations, nine rating Acts, an exemptions and classifications Act and regulations, and a procedure Act and regulations. When first enacted, the nine assessment Acts each contained schedules of exempt goods, while the nine rating Acts levied a single rate of tax on all taxable goods. In 1935, with the increase in the number of exempt items, the exemptions were removed from the assessment Acts and included in the Sales Tax Exemptions Act. Later, when different rates of tax were applied to particular classes of goods, schedules of such goods were included in the Act and its title was changed to the Sales Tax (Exemptions and Classifications) Act.




  ― 524 ―

27.A7. The Sales Tax Procedure Act was introduced in 1934 primarily to simplify procedures relating to the classification of goods and recovery of tax under nine assessment Acts. Provisions were subsequently added setting out the circumstances under which refunds of tax are permitted and authorising the remission of tax in cases where the Commissioner alters a ruling he has previously given.

27.A8. It was thought necessary at the time to enact nine separate assessment Acts because of the requirement of the Constitution that a law imposing taxation shall deal with one subject of taxation only. This remains one of the reasons for not amalgamating the present enactments; another is that a restatement of the law using different words would create new problems of interpretation, the meaning of the law as expressed in the nine assessment Acts being now well settled. The Committee is therefore not prepared to recommend any change in the present structure of the law.

27.A9. It has been suggested in submissions that procedures would be simplified and collection costs reduced if sales tax were converted into a manufacturers tax. The Committee does not favour such a step: it would reduce the base of the present tax by omitting the wholesaler's margin of profit, thus conflicting with the principle that a commodity tax should have as broad a base as possible.

Time for Lodgment of Returns

27.A10. Persons liable to pay sales tax are required to lodge a sales tax return within twenty-one days of the close of each month disclosing the sale value of goods sold during that month and the tax payable on them. Tax is also payable within the same twenty-one days, remittance of tax normally accompanying the return. There are similar requirements regarding the lodgment of returns and payment of tax where goods are applied to a taxpayer's own use or, in the case of a manufacturer, are transferred by him to stock for sale by retail. It has been said that these requirements are unfair and that the time for payment of tax should be considerably longer than the twenty-one days now allowed. The contention is that taxpayers should not be required to pay tax before they have received payment for the goods sold. With a levy of this nature, however, it is inevitable that taxpayers will be called upon to pay to least part of the tax before being reimbursed by their customers: this, after all, is a feature of most commodity taxes. Granting wholesalers further time to pay tax will not assist retailers who, in many instances, have to hold tax-paid goods for considerable periods before selling them and obtaining reimbursement of the tax component in the price paid by them to the wholesaler.

27.A11. The suggestion has been put that returns should not have to be lodged until twenty-eight days after the end of the month and that payment of tax should not become due until sixty days later. However, the administrative problems of collection and recovery of tax would be substantial if both these requests were granted. The Committee nevertheless sees some merit in extending the time for lodgment and payment to the last day of the month following the month in which the taxable transactions occur.

Objections and Appeals

27.A12. Sales tax, being a self-assessed tax, does not normally call for the issue of an assessment. However, where a taxpayer is dissatisfied with the amount or value of sale value upon which he is required to pay tax, the Commissioner will issue an assessment enabling the taxpayer to exercise his rights of objection and to refer the Commissioner's decision on objection, if unfavourable, to a Board of Review. Objection may be taken within forty-two days of the first day on which a taxpayer is required to


  ― 525 ―
pay sales tax. This period differs from the time allowed for lodgment of objections against income tax, estate duty and gift duty assessments. The Committee has recommended in Chapter 22 that the time for lodgment for objections and appeals under all relevant enactments be made uniform.

27.A13. One ground of objection is that the goods have no sale value under the Act: it may be argued, for example, that goods are not ‘goods’ as defined in the Act. However, objection cannot be taken on the ground that the goods should be exempt or taxed at a lower rate because they come within a description of an item in one of the schedules of the Sales Tax (Exemptions and Classifications) Act.

27.A14. Where reference to a Board of Review involves a question of law, the Commissioner or the taxpayer may request the Board to refer the matter to the High Court for its opinion. Either party may appeal against the Board's decision if a question of law is involved.

27.A15. The Acts do not make an assessment conclusive evidence of liability. Therefore, instead of following the appeal procedures, a taxpayer may refuse to pay the tax and raise the point of his objection before a Court when he is sued by the Commissioner for recovery of the tax. This is what a taxpayer must do if he wishes to contest a ruling by the Commissioner bearing on the classification of goods: for example, where the Commissioner denies a taxpayer's claim that the goods are exempt from tax or that they should be taxed at a lower rate of sales tax.

27.A16. It was suggested in several submissions that taxpayers should be given the right of objection and reference to a Board of Review against decisions of the Commissioner concerning the classification of goods. There are practical difficulties, however, in extending the right of reference in such cases.

27.A17. A large staff of taxation officers is employed in classifying goods. The procedure then followed is that, if there has been no previous ruling, a ruling in writing is given to the taxpayer by a Deputy Commissioner. If the taxpayer is dissatisfied with that ruling, the Deputy Commissioner in turn will refer the matter to the Commissioner who will review the Deputy Commissioner's decision and give a final ruling. By this time all the taxpayer's submissions will have received thorough consideration. Apart from this the Commissioner reviews all cases where competitive anomalies are involved. Each Deputy Commissioner is required to submit such cases to him as they arise.

27.A18. Many thousands of rulings are given to taxpayers each year. Only a relatively small number are referred to the Commissioner, who is accepted by most taxpayers as the final arbiter. Occasionally, however, official rulings are disputed before a Court when action has been taken to recover the tax.

27.A19. Because sales tax affects day-to-day transactions, rulings as to the classification of goods must be given expeditiously. If rulings were subject to review by a Board of Review there would inevitably be delays and uncertainty. The failure of a commodity tax law to provide for an administrative review of the classifications of goods by an independent tribunal is not unusual: the same is true, for example, of customs and excise classifications. While it might be fairer if these decisions were referred to a Board of Review, substantial practical difficulties would be involved.




  ― 526 ―

Freight Charges

27.A20. In contracts for the sale and delivery of goods, the sale value will include any delivery charges. Thus where goods are sold by wholesale to a retailer, tax is payable not only on the price charged for the goods but also on other charges such as freight and insurance incurred up to the time delivery takes place. If a retailer purchases goods ex factory or ex warehouse and makes his own arrangements for the delivery and insurance of the goods, the cost of delivery and insurance will not form part of the taxable sale value.

27.A21. Taxpayers and consumers in districts that are at a considerable distance from the main manufacturing and importing centres claim that they are unfairly treated by the inclusion of freight and other charges in the sale value. The complaint goes deeper than merely the inclusion of delivery charges where goods are purchased, with tax included, from a manufacturer or a wholesale merchant in the capital city. What is also objected to is the increase in sale value where goods are supplied to country retailers by country wholesalers who take delivery charges from the city to their country depots into account when fixing a wholesale selling price for the goods sold in the country.

27.A22. If freight were to be excluded from the sale value of a taxable sale by wholesale only in those cases where the cost of delivery is separately charged, the exclusion could not apply where a country wholesale merchant sells goods ex warehouse in the country. If it were desired to exclude his cost of delivery from the city to his country warehouse, problems of identification and apportionment would arise, since a wholesaler normally buys in bulk and sells in smaller lots. He would be required not only to identify the inward consignment from which the goods were taken, but also to show that the amount to be excluded was an appropriate proportion of the delivery cost of that consignment. Further complications would arise if a wholesale merchant purchased goods from another wholesaler in a country centre or from the country warehouse of a manufacturer who had freighted the goods from a city.

27.A23. If delivery charges were to be excluded from the sale value of goods it appears that under section 51(ii) of the Constitution, which prohibits any discrimination in tax laws between States or parts of States, such exclusion could not be limited to deliveries made in only certain parts of a State: it would have to be applied to all delivery charges made both in the city and the country. In a number of industries, mostly located in cities, manufacturers and wholesalers make deliveries in their own vehicles. Delivery costs are reflected in the price for which they sell their goods and are absorbed in their general overhead costs. It would be extremely difficult for these taxpayers to allocate a cost of delivery to such sales.

27.A24. In the Committee's view equity cannot be achieved in the matter of freight charges without sacrificing simplicity and certainty and unduly increasing compliance costs and the costs of collection of the tax. It therefore does not recommend any change in the present law.

Avoidance of Tax

27.A25. A wholesale sales tax tends to encourage activity at the retail level with a view to minimising tax. For example, if an importer sells goods to retailers, he accounts for tax at the price for which he sells the goods; but if he sells by retail himself, under Sales Tax Assessment Act (No. 5) he accounts for tax on a lower sale value: the value for duty of the goods plus duty plus 20 per cent. By making arrangements for retailers to sell the goods as his agent, he thus pays tax on a sale value substantially lower than the net proceeds (exclusive of tax) he receives from the retailer:


  ― 527 ―
the equivalent of the amount that would have been the sale value had there been no agency arrangement.

27.A26. A similar advantage can be obtained by a manufacturer or wholesale merchant who makes some sales by wholesale at lower prices than he is prepared to charge when he sells goods to retail merchants generally. If these retailers are made his agents, he will pay tax on notional sale values based on the lower wholesale prices in respect of all sales made through them.

27.A27. While no objection can be taken to agency sales by retailers where the arrangement between the taxpayer and the retailer has a proper commercial basis, arrangements entered into for the sole purpose of avoiding sales tax require scrutiny. Taxpayers who do not enter into agency schemes could be placed at a competitive disadvantage compared with those that do. The Committee takes the view that where sales from stocks in a retail store purport to be agency sales, the law should lay down conditions which will ensure that there is a true commercial relationship of principal and agent. Where those conditions are not complied with, the law should fix a sale value equal to the money proceeds the taxpayer receives for the goods sold (i.e. the tax exclusive retail selling price less costs of selling including the agent's commission).

27.A28. Another arrangement which purports to have the effect of reducing sale value is undertaken by manufacturers who advertise their products nationally and in some cases carry out after-sales service. Under this arrangement a separate company is formed, which invoices charges for advertising, delivery and after-sales service and certain other charges. The manufacturer excludes those costs from the price he charges for the goods when invoicing retailers and thus pays tax on a lower sale value. It is common practice for manufacturers to advertise their own products. If arrangements such as the one just described are effective in reducing sale value, those manufacturers undertaking such an arrangement will gain an advantage over their competitors. There would be problems of excluding the cost of advertising and warranty charges from sale value similar to those described in paragraphs 27.A20–27.A24 in relation to freight, and it would not be administratively practicable to exclude any of these charges from the sale value of a normal sale of goods by wholesale. In view of this, the Committee considers that in cases where charges connected with the sale of goods are invoiced by a separate company the law should specify that the sale value will be the same as it would have been had no arrangement been entered into.

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