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Australia's Taxation System

Question:

Discuss About The Australia Should Raise The Rate Of GST?

Australia is one of the prominent taxing countries around the world. The Australian Taxation system comprises of around 125 taxes and is considered as one of the most convolutedglobally. It has adopted a dynamic taxation system which is a combination of direct and indirect taxes imposed by the Federal and State governments. The Australian Constitution entitles The Commonwealth to enforce duty and to formulate laws related to the same. It has the exclusive power to impose most important taxes like custom and excise tax, income tax and sales tax. However, in Australia, income tax is the most important base of revenue for Federal government. It is a direct tax which is imposed on individuals. As Australia’s taxation system is continuously growing, progressive tax rates and subsidiary rates are the basis on which income tax is paid by the individuals i.e. higher the income, higher the rate of the tax. It is also levied on individuals having a part in any trust or partnership.

On the other hand, the federal government announced goods and service tax (GST) on July 2000. It brought considerable changes by plummeting individual income taxes and benefitting pensioners and low income group with huge rise in government payments. The said tax is analogous to value added tax. It is levied not only on the trade (sale) of the majority of commodities and services in Australia but also on most of the products imported in the country[1]. The Current rate of GST applied in Australia is 10 %. However, certain supplies and services like food, education, health and monetary services are exempted from the said tax. It is mandatory for companies with yearly revenue of a certain sum to enlist for GST. Income generated from the main taxes by the Commonwealth significantly surpasses its disbursements. Hence, it largely supports the states monetarily.


Since income tax levied on individuals and company is the major source of revenue for Australia, it depends majorly on them than on consumption taxes. Although consumption taxes like GST are more cost effective as compared to any other tax. It has been proven that income taxes can alter country’s proficient viable activity which will in turn hamper its capacity to strive globally[2]. Australia’s budget deficit is forecasted to be worse in future. It is estimated that by the year 2030, The Federal government and States together will face yearly budget deficit of around $45 billion of which $35 billion will be because of expenditure on health[3]. Globally, many countries like New Zealand are reforming their tax structure by increasing consumption taxes to subsidize individual and organization taxes . In Australia, New South Wales Premier Mike Baird also suggested a rise in GST from 10 to 15% along with current exception on food, health, education and childcare and reimbursement to households with collective income less than $100,000.  The revenue generated from the same will fulfill Australia’s prospective health requirements. Currently, states are distressed and require funds badly as they are dominated by the federal government financially. So there is a serious need of tax reform in the country.

Goods and Services Tax (GST)

There has been a continuous debate over the issue of altering the tax structure i.e. to increase the rate of GST so as to lower personal income tax rates.

Goods and services tax (GST) is considered as one of the most efficient and minimal detrimental tax of all taxes. It will be favorable to increase the rate of GST as it is imposed on supplies and services and it is impossible for individuals to stop using them because of the tax. GST is an indirect tax which is imposed circuitously through manufacturer and merchandiser. Hence, mostly the customers are not aware of the said tax. Also a rise in the rate of GST will be easier and cost effective than imposing on product and services which are exempted from it like health, education, food and financial services. Hence, if efficiency is the criteria, it will be constructive for the economy of Australia to increase the rate of GST and lowering the personal income taxes.

Positive impact on individual personal assets is another outcome anticipated of the said exchange of the taxes. Also, GST is more productive as it is the only flat rate of tax. Not only will the rise in GST will reduce income tax but according to CPA Australia extra revenue generated from GST can also offer reimbursement to less earnings households and can be used to remove lot of unproductive state taxes like stamp duties. A net profit of 50 cents per dollar of tax income is expected if the stamp duties are substituted by higher GST[4]. Also from government point of view, the said change would be beneficial as it would result in more revenue for the government as the customers are bound to pay such tax unlike income tax which is taxed on individual, business and investment income. Hence, by lowering the income tax, consumers will save his income and the government can raise its revenue by increasing the tax to be applied on the commodities and services. The said change will also have a positive impact on the standard of living. Although the impact will be lesser but will be considerable. It will also decrease the duty load on asset earnings as the capital income will be taxed at a lower rate. With the above changes in the tax structure the states can reduce their dependability on The Commonwealth by growing their own self-source income. Lastly, with the said change there will be a rise in motility of funds globally[5]. However, one more argument has arisen that GST should be imposed on all items without any exclusion. According to CPA Australia, it has been estimated that by the year 2029/30, Australian wealth will be $27.5 billion larger if 15% GST is imposed without any exemption[6].

Pros of Increasing GST

Currently, there are a lot of arguments against the issue. Firstly, it is argued that although GST is cost effective and easier to manage but increase in GST rates will have a negative impact if we take into consideration fairness criteria. All the customers are required to pay GST irrespective of their purchasing power and equal sum has to be paid for a specified commodity or service. Hence, GST is regarded as a regressive tax[7]. It is also predicted that since GST is applied on fresh houses, it could increase the complexity in home affordability. Decrease in employment is another major issue against the said change. Clearly, increase in GST largely affects fewer income group more than high income group. Hence, they will not be motivated to work which will result in decreased employment especially amongst females who are already facing significant restraints related to work. Although compensation will be granted but presently government does not have required monetary ability to do so.

Also with an increase in GST and no subsequent reduction in income tax would make low income group more vulnerable as they will be spending more and earning less. Moreover, if compensation is granted for such an increase, it will not meet the purpose for which the said change was proposed which was to meet the future health and public safety needs. With regards to equality, raise in GST will be discriminatory for low income group as huge percentage of their proceeds are spent on basic needs. Moreover, income tax is levied on both income and investments which normally high income group possess. Hence, cutting income tax would be more approving for them than for the lower income class. Thus, increasing inequalities and will prove to be iniquitous for people in the economy which in turn will result in low labor output and productivity and will adversely affect country’s economic growth.

Conclusion

At the end, we conclude that there are many arguments in favor and against the issue. Clearly, Australia requires alteration in the tax structure to improve its economic growth and to meet its prospective needs. However, increasing the GST and reducing personal income tax will prove beneficial in terms of efficiency. This said change will also help the government in increasing its revenue. But at the same time it will create inequality and unfairness amongst diverse income group in society if there is rise in GST and no reduction in personal income tax.

References

Hall and Wilcox, A Guide to Taxation in Australia, 25 June 2015, <https://www.lexology.com/library/detail.aspx?g=5ebb4d78-d304-4d32-9cdb-9b26ba544b7e/>

Mallesons King and Wood, Rethinking Australia’s Taxation System, 31 July 2015, <https://www.kwm.com/en/au/knowledge/insights/rethinking-australias-taxation-system-20150330>

Chang Charis and AAP, Who are the winners and losers if GST is increased, 22 July 2015, <https://www.news.com.au/finance/economy/australian-economy/who-are-the-winners-and-losers-if-gst-is-increased/news-story/051f1f26fc4dad0a7a5b5c241a79f7c4>

 Freebairn John, How increasing the GST could boost our standard of living, 31 March 2015, <https://theconversation.com/how-increasing-the-gst-could-boost-our-standard-of-living-39495>

Irvine Jessica, Australian GST reform debate heats up, 01 December 2016, < https://www.acuitymag.com/finance/australian-gst-tax-reform-debate-heats-up>

Janda Michael, GST increase to 15 per cent would leave nation$27.5 billion better off: CPA, 18 February 2015, < https://www.abc.net.au/news/2015-02-18/gst-increase-would-leave-nation-better-off-cpa/6130664>

Piccolo Raffaele, The GST: Is an efficient tax a fair tax? , 22 April 2014, < https://independentaustralia.net/politics/politics-display/the-gst-is-an-efficient-tax-a-fair-tax,6407

[1] Hall and Wilcox, A Guide to Taxation in Australia, 25 June 2015, <https://www.lexology.com/library/detail.aspx?g=5ebb4d78-d304-4d32-9cdb-9b26ba544b7e/>

[2] Mallesons King and Wood, Rethinking Australia’s Taxation System, 31 July 2015, <https://www.kwm.com/en/au/knowledge/insights/rethinking-australias-taxation-system-20150330>

[3] Charis Chang and AAP, Who are the winners and losers if GST is increased, 22 July 2015, <https://www.news.com.au/finance/economy/australian-economy/who-are-the-winners-and-losers-if-gst-is-increased/news-story/051f1f26fc4dad0a7a5b5c241a79f7c4>

[4] John Freebairn, How increasing the GST could boost our standard of living, 31 March 2015, <https://theconversation.com/how-increasing-the-gst-could-boost-our-standard-of-living-39495>

[5] Jessica Irvine, Australian GST reform debate heats up, 01 December 2016, < https://www.acuitymag.com/finance/australian-gst-tax-reform-debate-heats-up>

[6] Michael Janda, GST increase to 15 per cent would leave nation$27.5 billion better off: CPA, 18 February 2015, < https://www.abc.net.au/news/2015-02-18/gst-increase-would-leave-nation-better-off-cpa/6130664>

[7] Raffaele Piccolo, The GST: Is an efficient tax a fair tax? , 22 April 2014, < https://independentaustralia.net/politics/politics-display/the-gst-is-an-efficient-tax-a-fair-tax,6407>

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