Australia's Future Tax System

Final Report: Detailed Analysis

Chapter D: Taxing consumption

D2. The goods and services tax

D2–2 Alleviating compliance costs on some transactions

Treat some business-to-business transactions as if they were GST-free?

One approach to reducing business compliance costs within the existing GST system would be to allow more transactions between two registered entities to be treated as if they were GST-free. It would be necessary to target those areas where the compliance benefits of providing this treatment outweigh the additional complexity of introducing yet another treatment.

This approach would not require significant changes to existing accounting systems but would treat more supplies as if they were GST-free. It would avoid some of the cash flow costs associated with the GST — that is, additional finance would not be needed to pay the GST-inclusive price, only to have the GST component subsequently returned as an input tax credit. The impact on cash flow could be particularly beneficial for acquisitions of large one-off capital items.

Some supplies are input-taxed. A business acquiring goods or services that are input-taxed receives no credit for the embedded tax. This means that the tax 'cascades' through the supply chain, introduces biases into production decisions and ultimately results in higher prices for business consumers and exports. The ability to treat some 'input-taxed' supplies as if they were GST-free for business might reduce this bias, although it would increase complexity, and would require alternative arrangements to ensure that the household consumption is taxed (see, for example, Section D4 Taxing financial services).

Greater use of GST-free treatment would involve an increased risk to revenue, as more revenue would be collected at the final sale, at which point consumers have little incentive to demand a tax invoice. In addition, the benefits would need to be weighed against the additional complexity that would arise from introducing further classifications into the GST system.

Use reverse charging more widely?

An alternative proposal would be to allow businesses to agree to reverse charge a greater number of transactions (see Box D2–2). Reverse charging is currently used to tax some imported services. Making greater use of reverse charging would have cash flow benefits for the purchasing business. However, the reverse charge approach would not remove the compliance costs associated with identifying business-to-business transactions.

Reverse charging would be similar in effect to a retail sales tax, as some transactions within the supply chain would be excluded from GST, provided that the recipient is registered for GST.

Box D2–2: Reverse charging

Under a reverse charge mechanism, the recipient of a supply is responsible for remitting GST that would otherwise be remitted by the supplier. The recipient is also entitled to claim input tax credits where it has made a creditable acquisition. Thus at the time of acquisition the recipient will be liable to remit the GST and will be entitled to claim input tax credits. The two amounts, generally, would exactly offset one another, while maintaining the normal GST revenue result. The amount of GST charged is 10 per cent of the GST-exclusive price of the taxable supply.

Under the existing Australian system, reverse charging is limited to supplies made by non-residents. Practical difficulties in remitting GST may arise where the non–resident does not have a presence in Australia. To overcome this, the non-resident supplier and the Australian recipient may, subject to certain conditions, agree that the GST on the supply should be paid by the recipient rather than the supplier. In addition, a compulsory reverse charge regime operates for some non-resident supplies of services.

The non-resident supplier is not required to issue a tax invoice and the recipient is not required to hold a tax invoice in order to claim an input tax credit. The reverse charging arrangements are intended to reduce compliance costs for non-residents.

This approach might reduce some compliance costs associated with the current GST system. It also reduces the risk to revenue of paying input tax credits where no GST has been paid. Such an approach would shift the cash flow benefits that some suppliers currently enjoy (that is, collecting GST before it is due to be paid to the ATO) to the purchasing business. This would be of particular benefit in relation to large, infrequent transactions. However, it might disadvantage others, such as primary producers, who currently receive payment for their supplies before they are liable to pay GST.

While widespread entitlement to GST-free or reverse charging transactions runs the risk of raising compliance costs and increasing revenue risks, the benefits might outweigh these risks in particular, confined circumstances. A more detailed investigation would be necessary before either strategy could be adopted.

Recommendation 56:

The government should consider making greater use of GST-free business-to-business transactions or reverse charging, provided the potential compliance cost savings outweigh the additional complexity costs and risks to revenue.

Keep excise-inclusive prices in the GST base

GST is charged at 10 per cent on taxable goods and services. In the case of excisable goods such as petrol, beer, spirits and tobacco, GST is imposed on the market price, after the imposition of excise. This leads to a 'tax on tax' situation.

Removing this 'tax on tax' would narrow the consumption tax base, reducing overall efficiency by shifting relative prices between taxed and untaxed commodities. It would further increase the costs of complying with the GST, both for businesses that supply excisable goods and for those who purchase them. For example, if fuel excise were removed from the GST calculation, a business user of petrol would not be entitled to an input tax credit for that proportion of the price that is attributable to excise.

If a tax on specific product is used to set a price to consumers that reflects wider costs of consumption or production (as recommended in Section E Enhancing social and market outcomes), this price should be subject to GST to ensure equivalent treatment with other prices in the economy.

Finding

Excise-inclusive prices are properly included in the GST base. Charging GST only on the 'excise-exclusive' value of goods or services would add significantly to the complexity of the GST, and reduce its efficiency.