Why tax-free imports are a retail red herring

Australia’s struggling retailers have stepped-up their campaign for a reduction in the $1000 low value threshold exemption for goods and services tax and duty on imported goods. But lowering the threshold is likely to be self-defeating and ignores the real problems confronting local retailers.

Ideally, imported goods would be taxed on the same basis as domestic goods and there would be no low value threshold exemption. Tax neutrality between imports and domestic goods would remove a distortion in relative prices and expand the tax base.

That is fine in theory, but it is not the end of the story. While there are potential economic efficiency gains from lowering or eliminating the exemption, there are also offsetting costs.

The collection of taxes is not costless. For every dollar of revenue raised, the government and private sector incur compliance and collection costs.

Taxes that cost more to collect than they raise in revenue are self-defeating, especially if the government has more efficient revenue raising options.

The existing $1000 exemption threshold recognises that collecting GST and duty on the huge variety of low value imported items would be very expensive relative to domestic goods. Simply lowering the threshold, without any effort to lower these costs, would be pointless.

That is not to say that measures could not be taken to lower compliance and collection costs for low value imports. The Low Value Parcel Processing Taskforce last year identified a range of measures that could make a lower threshold more viable.

But these measures would still entail an expensive up-front investment in new processes and systems. This investment would substantially offset any revenue gain or wider economic benefit.

Some of these measures may still be worth implementing as governments should aim to lower compliance and collection costs where possible.

But it is difficult to escape the fundamental trade-off identified by the taskforce and other government advisory bodies like the Productivity Commission: the lower the exemption threshold, the greater the cost relative to any benefit.

While it may be possible to reform current arrangements that would then justify a threshold lower than $1000 on cost-benefit grounds, the efficient threshold is almost certainly not zero.

The GST should have only one purpose: to raise revenue for state governments. The design and administration of the tax should not be compromised to serve other objectives, such as protecting local retailers from international competition.

Australia’s retailers are almost certainly barking up the wrong tree in seeking salvation through a lowering in the low value exemption threshold.

It would seem unlikely that the threshold is driving the growth in overseas online sales and imports.

A simple test should make this point: is the online overseas price still cheaper than the local price after GST and duty is applied? Sadly for Australian retailers, the answer to this question will often be yes.

The exchange rate is also a factor in this calculation. The currency has not done Australian retailers any favours, but it is more of a symptom rather than a cause of other economic fundamentals. The exchange rate is a price signal that retailers must heed along with everyone else.

Australian retailers would be better served examining their own business models than campaigning for higher taxes on low value imports.

Well before the advent of the internet, Australian tourists often found that overseas retailers beat the locals not only on price, but often on product range, quality and service, too.

What the internet has changed is that Australian consumers no longer need to get on a plane to enjoy what overseas competitors have to offer.

With some notable exceptions, Australian retailers have been slow to innovate in response to these competitive pressures.

The rows of deserted shops on Sydney’s Oxford Street will not be filled again by raising taxes on low value imports.

They will return to life when Australian retailers adopt new and internationally competitive business models that better appeal to local consumers.

There is much governments could do to alleviate cost pressures and tax burdens on Australian business, including retailers. Retailers would be better served lobbying government for policies other than raising inefficient taxes on low value imports.

Dr Stephen Kirchner is a research fellow at The Centre for Independent Studies.