GST: The Overseas
Experience ...
Chartered
accountants Mann Judd sounded its worldwide affiliates in
a recent survey and found that some form of GST is the international
rule rather than the exception. In fact, according to accounting
giants Coopers & Lybrand, Ghana, Jordan, the Solomon Islands,
Botswana, Pakistan and Swaziland are the only other financial
powerhouses to mirror Australia's non-GST system.
With this
in mind, Mann Judd asked its global network how a GST was
perceived in different countries and what financial, social
and political impact it has had.
Some interesting
points emerged says Mann Judd chairman John Biddle. Although
a GST replaced some indirect taxes, generally income taxes
were unchanged. He adds that despite the tax rate consistently
going up, most respondents say a GST has been broadly accepted
and been of benefit to the economy. Here are some points the
survey uncovered.
Small Business Resistance
While initial
resistance was reported in some countries, it was mainly confined
to small business which saw themselves as unpaid tax collectors.
Small business also appeared to be hardest hit in terms of
the extra work involved in compliance and reporting.
Inflation
Respondents were
generally unconcerned about short-term economic effects, such
as increased inflation, believing that other factors were
more to blame than the introduction of a goods and services
tax.
Tax Offsets
Tax offsets
were introduced as part of many GST packages. Taxes removed
or reduced included: wholesale sales tax, personal income
tax, stamp duties, purchase tax, and manufactured goods tax.
The most common tax removed was, therefore indirect taxation.
However, not every country included these and in some a promised
tax reduction failed to materialise.
Exempt Areas
Most countries
offered some form of exemption for essential services. Sectors
in the exemptions and lower rates bracket included: health,
education, water, financial services, public transport, rent,
children's clothing, raw agricultural produce and agricultural
equipment, food, real estate, legal fees, wages, welfare and
charities, magazines and books, and sporting and cultural
activities.
Elections
The introduction
of a GST was not a factor in swaying government elections,
said most respondents, although whether this would be the
case in Australia is a moot point.
Rates
In most
countries the tax rate had increased since introduction and
current levels tended to fall somewhere between Singapore's
low 3 per cent and Denmark and Sweden's high 25 per cent.
There were some exceptions where the base rate had been cut
but because other rates could have increased, the total tax
collected may also have increased.
Many GST
packages allowed different rates for different services and
products resulting in several tax rates. A practical approach
to tax-exempt goods and services was to legislate for these
to have a zero rate. However, a number of respondents mentioned
that exempt items and differential rates resulted in a unwieldy
system with high administration costs.
Drawbacks
Respondents
generally felt a GST drawbacks were minimal although several
said it was disliked by small business and some mentioned
growth in the black economy. The most common quibble of small
businesses was that they were doing the government's job by
acting as unpaid tax collectors.
Respondents
who remember the GST's introduction also complained that governments
could have done a better job of explaining its operation at
the outset.
If there
is a lesson for Australia, it is that any planned introduction
should be accompanied by a glut of information and an education
program alongside some sort of small business incentive to
increase compliance and tax accounting.
Other drawbacks
cited were a belief that a GST can contribute to inflation
and slower sales if introduced as part of general reform,
that it places a higher tax burden on low income earners and
an initial reaction from small business that it was costly
to administer.
Respondents' Comments
Generally
respondents believed the tax had been a good move, certainly
so as a revenue raiser for government.
Many respondents
agreed the GST package was a major economic benefit in the
long-term, with no lasting side-effects and a simplified administration
system because it was easier to control and pay. But the mood
was not all positive.
Others pointed
out that it initially affected retail sales, causing difficulties
for small businesses at first, and they also complained that
too many exemptions and differential rates could prove over-complex.
And many bore a grudge about the lack of information when
the tax was first introduced.
Lessons for Australia
It is important
to steer clear of a number of differential rates and exempt
items which make the system complicated, time consuming and
expensive to administer. New Zealand's across the board/one-rate
model "works" and is widely accepted.
Any introduction
should consider a guaranteed period during which there will
be no rise in the GST rate.
Political
risks can be managed; governments which recently introduced
the GST have not lost the next election.
< The impact
on small business must not be ignored. Small businesses resent
doing non-productive activities, particularly if they are
on behalf of Government, and if GST places an extra workload
on them some compensating measures should be considered.
