Raising GST: the case for sooner than later

The GST rate hike is a bitter pill for the collective good but will not be the panacea for all recovery pains.

It has been 14 years since Singapore last raised its Goods and Services Tax (GST) rate from 5% to 7%. Arguably, any hike in taxes will be a bitter pill to swallow for those affected. For a consumption tax like GST, it is important that people and business have adequate time to adapt to the changes, while the lower-income and vulnerable are extended targeted support. The introduction of GST vouchers in 2012, which is now a permanent feature, bears testimony to this principle.

At 7%, Singapore’s GST rate is one of the lowest among the double-digit rates in many developed economies around the world. In the near future, it will be raised to 9%.

The intention to raise GST rates sometime between 2021 and 2025 was announced much earlier in February 2018. Many may have been prepared for the earliest implementable date. Given the drastic economic fallout from the COVID-19 pandemic, implementing the hike this year would be untimely, or even insensitive. Unsurprisingly, the rate hike has been deferred to sometime between 2022 to 2025 — and as Deputy Prime Minister and Finance Minister said, to have it “sooner rather than later”.

It is also a case of better late than never. The premise and rationale for raising GST have never changed. Government spending on health care, social, infrastructure and security has been escalating and is expected to increase further in the years to come. Even before the pandemic, Singapore has been running an operating deficit in five out of the last seven years. Moreover, the pandemic reinforces the importance of continued investment in the health care system, while at the same time, underscores the imperative of restoring the depleted reserves used to keep Singapore resilient through the COVID-19 support measures.

GST has, on average, contributed almost one quarter of the total tax revenue collected by the government over the past five years. It is therefore a vital source of revenue for Singapore. And while there are other options to bolster revenues, there are limitations too.

We have seen various steps taken to increase tax collection over the years. For example, in Budget 2013, property tax was increased for owner-occupied properties to a steeper, progressive scale of 0% to 16%. In Budget 2015, personal tax rates were raised for taxpayers with chargeable income of S$160,000 and above. In Budget 2018, the buyer’s stamp duty was raised from 3% to 4% for residential properties exceeding S$1m.

Further jacking up personal and corporate tax rates to boost the coffers, like how it is done in other countries, is possible — but not ideal. Singapore must preserve its competitive tax regime to continue to attract and retain investments and talents. Significant economic spin-offs are at risk when we fail to do so. Also, workers and companies should be allowed to keep as much as they earn and choose how they spend, save or invest.

What about the much-touted wealth taxes proposed by various quarters?  The problem is that wealth taxes are inefficient, ineffective and difficult to administer.  Assets and wealth (other than immovable property) are deployable globally to avoid such taxes, which also discourages savings and investments, acting as a potential distortion to economic activities.

There are, of course, other mechanisms to levy other forms of taxes such as the carbon tax, and these should be continually considered and reviewed by the government, in light of evolving economic impetuses. For now, taxing what we spend to consume, as opposed to what we earn, save and invest, looks to be a more pragmatic option forward.

Buffer and prepare

Invariably, the impact of the increase will be felt far and wide across the population — albeit differentially. This is how economics and social inclusiveness is put to the test in policymaking.

It is reassuring – and significant – that a S$6b Assurance Package will be deployed when the GST rate hike kicks in. The majority of Singaporean households will receive offsets to cover at least 5 years’ worth of additional expenses incurred due to the higher GST rate, with those living in 1- to 3-room HDB flats getting about 10 years’ worth of additional GST expenses incurred. The government will also continue to absorb GST on publicly subsidised health care and education. These, and the long-standing GST voucher scheme, will invariably buffer Singaporeans from the GST increase. The aforesaid measures turn the GST on its head from being a regressive tax to a progressive one.

To put numbers in perspective, foreigners residing in Singapore, tourists and the top 20% of resident households are estimated to account for over 60% of the net GST borne by households and individuals. The intention for lower- and middle-income households to receive more in benefits than the taxes they pay helps to keep Singapore’s overall taxes and transfer system fair and progressive.

For companies, the rate hike is likely less of a concern cost-wise. Most GST-registered businesses recover the GST incurred on their purchases anyway. Perhaps the only worry is that with a higher GST rate comes higher penalties for non-compliance as penalties are generally imposed on the value of the tax underpaid or overclaimed. Clearly, the best practice must be to have an efficient and robust GST reporting process, regardless of whether a rate hike is in play. Efforts to prepare for the change, such as modifying the accounting systems, are not likely to be significant costs given past experiences with rate changes.

For small and medium enterprises that are not liable to register for GST, they can voluntarily do so, and therefore be able to claim the GST incurred on their purchases and avoid irrecoverable GST costs. However, they should be certain that the benefits of registering for GST outweigh the costs, including those associated with GST compliance.

More than just timing

Assuming that the dark clouds of COVID-19 lift earlier and economic growth returns faster than expected in the months ahead, there is a possibility that the GST rate hike may materialise in the middle of 2022, following the year’s budget announcement. In 2007, the government had then announced the revised GST rate effective as of 1 July 2007, in the same year as the budget announcement. Having said that, what worked in the past may not be as relevant in the new normal.

With an ever-accelerating pace of change, our ability to pivot and adapt is critical with difficult choices to be made. That there will be increased expenditures to achieve economic, social and sustainability objectives is a given. How that can be funded by increased revenues to balance the budget and enable fiscal prudence and sustainable spend is imperative.

Ultimately, it is less about predicting the timing of the hike than the need for Singaporeans to be united in embracing it as a necessary bittersweet pill that we must individually swallow for the collective good of the whole — yet knowing this cannot, and will not, be the panacea for all recovery pains.

The writers are Max Loh, Managing Partner, Singapore and Brunei, Ernst & Young LLP; and Yeo Kai Eng, EY Asean Indirect Tax Leader.

This article was first published in The Business Times on 11 March 2021.