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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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