How will the impending GST rate hike affect businesses?
Businesses should prepare for the GST rate hike to avoid cashflow difficulties and the penalties for non-compliance.
In his New Year message on 31 December 2021, Prime Minister Lee Hsien Loong shared that Singapore would have to consider implementing the planned hike1 in Goods and Services Tax (GST), given that the economy is emerging from the COVID-19 pandemic. On 18 February 2022 during the Singapore Budget, it was announced that the GST rate will be increased in two steps, from 7% to 8% with effect from 1 January 2023, and from 8% to 9% with effect from 1 January 2024.
Despite the urgent need to raise revenue, the government has recognised the concerns of businesses and Singaporeans in deciding to manage the GST rate hike by firstly, not implementing the rate hike in 2022 and secondly, staggering the GST rate hike over two years instead of an immediate increase from 7% to 9%. The last time Singapore had experienced a staggered rate increase was in 2003 and 20042.
How will the impending GST rate hike affect businesses and what are the steps they can take to prepare themselves?
Preparing for the rate hike
The last GST rate hike took place on 1 July 20073, more than 14 years ago. Businesses that registered for GST after 1 July 2007 would not have had the experience of preparing for or navigating through a GST rate hike.
Those GST-registered businesses that went through the 2007 GST rate hike should be mindful that the change was more than a decade ago. By now, the institutional knowledge on navigating through the previous rate hike might no longer exist. Hence, they should not assume that tinkering with the GST rate in the system is all it takes to manage the rate hike.
Further, in the intervening years, their businesses may have evolved and expanded, went through at least two generations of staff, significantly updated their IT systems or transitioned into new ones. In addition, the Inland Revenue Authority of Singapore (IRAS) has released a constant stream of GST rules and e-Tax guides. The navigation playbook for the 2007 rate hike, if it is still around, is no longer adequate.
Therefore, it is crucial that all GST-registered businesses understand the implications fully and make the effort to adequately prepare for the upcoming GST rate hike that will occur not once but twice i.e., in 2023 and 2024.
Businesses should think about the few areas below, as they begin the preparation process.
1. Supplies spanning the rate change
To assist GST-registered businesses to prepare for the GST rate hike, the IRAS has issued guidance on the transitional rules for supplies spanning the rate change and the common business scenarios on 18 February 2022. Therefore, GST-registered businesses should familiarise themselves with the transitional rules and ensure that they apply the correct rate to their supplies (i.e., whether the old rate could still be applied under certain circumstances). It is also necessary to review contracts spanning the rate change and whether the contractual terms allow the new rate to be applied.
2. Price display
GST-registered businesses must show GST-inclusive prices on all their price displays e.g., price tags, price lists, advertisements and websites. Hence, GST-registered businesses must update their price displays accordingly in preparation for the GST rate hike. It would be particularly challenging to ensure that all the price displays are updated once the old rate ceases after midnight and the new rate comes into effect.
3. Accounting systems
GST-registered businesses should also engage their system vendors and in-house IT team early to discuss and prepare for the rate change, including devising an implementation plan and a road map for execution. One can expect their system vendors to be overwhelmed with similar requests from other customers, so it is important to reach out to them early.
For the in-house IT team that typically works on projects according to priority status, it is necessary to work with them and ensure that priority is given on getting the accounting system ready for the rate change.
Voluntary GST registration
Generally, businesses are liable for GST registration if they make taxable supplies4 in Singapore exceeding S$1m a year. GST-registered businesses can recover the GST incurred on their business expenses, subject to normal input tax recovery rules.
On the other hand, non-GST registered businesses have no means to recover the GST incurred on their business expenses. As a result, the dollar cost of their spending could increase in tandem with the GST rate hike. Instead of absorbing or passing the irrecoverable GST costs to their customers through price increases, such businesses could opt for GST registration voluntarily to recover the GST incurred on their business expenses.
However, they must examine the pros and cons of GST registration before proceeding with voluntary GST registration. For example:
- Impact on non-GST registered customers
GST-registered businesses must charge GST at the prevailing rate on their standard-rated supplies. This will impact their customers that are not GST-registered, whose purchase cost would be increased by the GST imposed. Volume purchasers may redirect their business to alternative suppliers that are not GST-registered. This is a business risk to consider when seeking voluntary registration.
- GST compliance costs versus the benefits of claiming the GST incurred
GST-registered businesses must prepare and file periodic GST returns (usually quarterly) and may also be subject to GST audits by the IRAS. In addition, they must maintain the relevant accounting records to support their GST declarations for not less than five years.
There is a cost to ensure GST compliance. It is essential to examine whether the expected amount of GST recoverable after GST registration is large enough to outweigh the GST compliance costs.
- Businesses exempted from GST registration
For those businesses previously approved by the IRAS to be exempted from GST registration5, they should also re-examine their irrecoverable GST costs and reconsider whether they should remain exempted from GST registration or proceed to register for GST.
Non-GST registered and partially exempt GST-registered businesses
The GST rate hike also impacts businesses that are either not eligible for GST registration – not even on a voluntary basis (for example, residential property developers making wholly exempt supplies from the sale of residential properties) or partially exempt GST-registered businesses that are not entitled to recover their GST incurred in full.
Such businesses have to decide whether to absorb the higher business costs due to the GST rate hike and accept a lower profit margin or pass on the additional irrecoverable GST costs to their customers via a price hike.
They should also consider accelerating high-value purchases before the GST rate hike or at least by making advance payments before the new GST rate kicks in. Doing so triggers the time of supply6 and thus allows their suppliers to charge them GST at the current rate of 7%.
Cost of non-compliance
A higher GST rate comes with higher penalties for non-compliance. The reason is that penalties are generally imposed on the value of the tax under-paid or over-claimed. For example, there is a 5% late payment penalty for under-declared or over-claimed tax.
Besides the higher quantum of penalties, the revenue could also be impacted as a result of non-compliance. For example, suppose a 7% standard rated supply at S$100,000 is incorrectly zero-rated (i.e., GST is incorrectly charged at 0%). In that case, the supplier needs to account for the GST payable to the IRAS based on the GST-inclusive method if the supplier is unable to recover the GST from the customer. Under the GST-inclusive method, the supplier would compute the GST payable based on the tax fraction (currently 7/107) of the sales consideration. This would mean that the revenue for the supplier would be reduced to S$93,457.95 instead of S$100,000 as the GST payable would be S$6,542.05 (i.e., S$100,000 x 7/107). If the GST rate is increased to 8% in 2023, this would mean that the revenue for the supplier would be reduced to S$92,592.59 instead of S$100,000 as the GST payable would be S$7,407.41 (i.e., S$100,000 x 8/108).
It is therefore critical for GST-registered businesses to stay on top of their GST compliance moving forward. GST-registered businesses should ensure that the correct GST treatment is applied and the appropriate documents are maintained for all their business transactions. There should be adequate and robust GST controls, both preventive and detective, to manage the GST risks as making GST errors would be even costlier after the GST rate hike.
This is also an opportunity for GST-registered businesses to transform by making their GST compliance process more efficient and robust through technology and automation and leveraging on the productivity solutions grants that was announced in Budget 2022.
It is also important to proactively seek clarification, for example, via GST rulings, on the correct GST treatment from the IRAS to minimise GST errors and penalties. If there are errors, GST-registered businesses should voluntarily disclose the errors to the IRAS under the Voluntary Disclosure Programme (VDP) to obtain a penalty waiver or reduction accorded under the VDP, subject to meeting the relevant conditions. GST-registered businesses should also consider participating in the IRAS Assisted Compliance Assurance Programme (ACAP) or the Assisted Self-Help Kit (ASK) to further improve their GST compliance and at the same time, obtain penalty waivers on the errors identified and disclosed to the IRAS under ACAP or ASK.
Import GST suspension schemes
All goods imported into Singapore are subject to import GST payable upfront before the goods can be imported into Singapore. With the GST rate hike, this would mean higher import GST payable upfront to the Singapore Customs and hence, have an impact on cash flow.
There are various import GST suspension schemes available, such as the Major Exporter Scheme (MES) administered by the IRAS. The MES allows for the suspension of the import GST payable on the importation of non-dutiable goods into Singapore. Therefore, GST-registered businesses with significant imports should assess if they are eligible to apply for the MES status to alleviate any cashflow disadvantage of having to pay the import GST. Beside the MES, GST-registered businesses can also look into other schemes such as the Zero-GST Warehouse Scheme and the Import GST Deferment Scheme to improve their cashflow.
The GST rate hike is finally here. Businesses should start their preparation early to ensure a seamless transition and avoid any unnecessary penalties for non-compliance.
The co-authors of this article are Yeo Kai Eng, a former EY partner and Danny Koh, Partner, Indirect Tax – Goods and Services Tax from Ernst & Young Solutions LLP.
