Singapore GST: past, present and future
Kor Bing Keong and Chew Boon Choo review how the GST has evolved over the past decade and discuss the potential developments for this indirect tax in the future.
The goods and services tax (GST) has been a fixture in Singapore for 21 years. It now makes up the second-largest share of Singapore’s tax revenue pie. How has GST evolved in Singapore and what will the future bring?
Rationale for the GST
GST was first implemented in Singapore at a low rate of 3% in 1994. The introduction of GST has enabled Singapore to gradually reduce its reliance on direct taxes as a source of tax revenue. In connection with the implementation of GST, Singapore reduced the corporate income tax rate and the top personal income tax rate from 30% to 27% and from 33% to 30% respectively for the year of assessment 1994. Both of these taxes have been on a downward trend since.
The decrease in income taxes has helped to attract more investment and talent into Singapore. As a result, Singapore has blossomed as an international centre for business.
GST developments over the past decade
- GST rate increase
- Introduction of self-review programmes
After the introduction of the GST, the GST rate remained at 3% for almost a decade before several stepped increases in a span of less than five years. The GST rate was raised to 4% in 2003, to 5% in 2004 and then to 7% in 2007 where it has remained since.
Along with the rate increases, the amount of GST revenue collected by the Inland Revenue Authority of Singapore (IRAS) has almost tripled, from S$3.47b in the financial year ended 31 March 2005 to S$10.22b in the financial year ended 31 March 2015. As a contributor to the tax coffers, GST now stands just behind corporate income tax and ahead of personal income tax.
Voluntary compliance is at the cornerstone of the IRAS’ taxpayer compliance strategy. To help GST-registered businesses, the IRAS has rolled out two main voluntary compliance initiatives:
- Assisted Compliance Assurance Programme (ACAP)
- Assisted Self-Help Kit (ASK)
Assisted Compliance Assurance Programme (ACAP)
Launched on 5 April 2011, ACAP is a holistic framework that helps businesses to identify GST-related risks in their business processes.
The IRAS is the first tax administration in the world to incentivise businesses to adopt voluntary compliance, setting aside S$10m to co-fund the cost (capped at S$50,000 per participant) incurred by GST-registered businesses to take part in the ACAP programme. The fund was fully utilised on 30 June 2014. Apart from the co-funding, ACAP offers the following benefits:
- Full waiver of penalties on errors disclosed
- Step down of GST compliance activities by the IRAS
- Faster GST refunds
- Automatic renewal of GST schemes.
Since then, more than 300 businesses from different industries have successfully applied for ACAP with over 200 businesses having attained the ACAP status as at 30 June 2014. The strong response reflects the high importance these businesses place on validating their GST control frameworks and being self-compliant.
Assisted Self-help Kit (ASK)
ASK is a comprehensive self-assessment compliance package which helps GST-registered businesses to review the accuracy of their GST submissions. Businesses which discover any GST errors and disclose these errors on a timely basis to the IRAS can qualify for zero or reduced penalties under the IRAS’ Voluntary Disclosure Progamme (VDP).
ASK is available to all GST-registered businesses that wish to enhance their GST compliance. It is also a prerequisite for the application or renewal of certain GST schemes, such as the Major Exporter Scheme (MES).
GST schemes and remission
To ease tax compliance for various industry players and remove any GST disincentives to the businesses, the IRAS has introduced various new schemes or extended existing schemes. These include:
|Approved Third Party Logistics Scheme (3PL)|| |
The 3PL scheme was enhanced in 2006 to allow third party agents to remove goods from zero GST warehouses with GST suspended, as well as import goods belonging to themselves or their overseas principals with GST suspended.
Approved Import GST Suspension Scheme (AISS)
Introduced in 2009, AISS aims to alleviate cash flow issues faced by companies in the aerospace industry by suspending import GST on qualifying aircraft parts.
Approved Marine Customer Scheme (AMCS)
Introduced in 2011, AMCS eases compliance within the marine sector by allowing zero-rating on qualifying ship-related purchases and rental, as well as maintenance services.
Enhanced Approved Contract Manufacturer and Trader (ACMT) Scheme
The ACMT scheme was enhanced in 2011 to allow contract manufacturers of active pharmaceutical ingredients (APIs) in the biomedical industry to be able to apply for the ACMT scheme. This enabled them to enjoy a range of benefits, such as relief of GST on the value added services supplied to overseas client and suspension of import GST.
The IRAS has also introduced or extended several GST remissions to relieve the GST costs of certain industries. These remissions include:
Singapore-listed real estate investment trusts (S-REITs)
GST remission has been extended to 31 March 2019 to allow S-REITs to claim GST on business expenses incurred. Furthermore, the remission has been enhanced to allow GST claims on expenses incurred to set up special purpose vehicles (SPVs) that are established solely to raise funds for the S-REITs.
Fund management industry
GST remission has been granted from 1 April 2015 on the supply of services to a qualifying fund or overseas fund manager who wholly relies on a Singapore fund manager to carry on its business.
Simplification and clarification of GST rules
To facilitate GST compliance, the IRAS has also simplified certain GST rules to the extent the revenue collection is not undermined.
One significant change involves the time of supply rule which determines when output tax should be accounted for. The rules have been simplified by removing both the basic tax point (i.e., when goods are made available and when services are performed) and the 14-day rule. With effect from 1 January 2011, output tax is accounted for at the earlier of when the invoice is issued or when payment is received.
The deeming rule on gifts, an anti-avoidance provision under the GST law, has also been simplified. From 1 October 2012, the series of gifts condition was removed. In addition, GST-registered businesses have also been given a choice of not accounting for deemed output tax if they do not claim the input tax on the purchase of the gift.
Over the years, the IRAS has also published more in-depth e-Tax guides to provide GST-registered businesses with a greater understanding of the GST rules, as well as guidance or clarity on the IRAS’ position on certain GST treatments.
Taking a hard stance against tax evasion
As GST has been around in Singapore for more than 20 years, it can be observed that the IRAS is less tolerant of non-compliance by GST-registered businesses. In 2014 alone, 11 cases of GST fraud and evasion were publicised in the press, with the highest penalty involved being S$1.2m.
Outlook for the next decade
Potential for GST rate increase?
In his 2012 National Day Rally speech, Prime Minister Lee Hsien Loong said: "Let me tell you the truth, as our social spending increases significantly, sooner or later our taxes must go up".
Indeed, any increase in government spending must be covered by sufficient tax receipts. However, the government has been more inclined to reduce its reliance on income taxes. After all, maintaining a low corporate income tax is important in keeping Singapore competitive.
Therefore, a potential candidate to help finance social spending is the GST. It’s been eight years since the GST rate was last raised and at 7%, Singapore’s current GST rate is still one of the lowest in the world (see chart).
Prevailing standard GST/VAT rates in selected countries as at 1 January 2015
(a) With effect from 1 April 2015
(b) 10% rate will apply from 1 October 2016, unless further extension of the 7% rate is announced
(c) 5% for certain goods
Many countries have increased their value-added tax (VAT) or GST rates in recent years. The average standard VAT or GST rates for European Union member states and Organisation for Economic Co-operation and Development (OECD) member countries have increased from 19.5% and 17.5% respectively in 2008 to 21.6% and 19.2% respectively in 2015.
Therefore, it should not be a surprise if there is a Singapore GST rate increase within the next decade.
Expanding the GST base
As an alternative to a GST hike, could the current GST base be widened to achieve higher GST collection? This would mean certain transactions may no longer enjoy tax exemption – they would be subject to tax. Currently, transactions that are exempted from GST in Singapore are the sale and lease of residential properties, the provision of certain prescribed financial services and the supply of investment precious metals (IPM).
However, charging GST on residential properties would contradict the current housing policies set out by the government, while the exemption for the supply of IPM was only announced in Budget 2012 and made effective from 1 October 2012. Hence, there is little possibility for the Government to reverse the GST treatment for these two categories in the near future.
The last item that remains on the exemption list is prescribed financial services. Currently, several fee-based incomes (e.g., upfront fee on provision of loans, fees relating to operation of deposit accounts, merchant discount for credit card transactions) are exempt from GST. This is not the case in certain countries. Taxing all fee-based financial services could be an option for expanding the GST base.
Taxing of the digital economy
The evolution of technology has led to a radical change in business models over the years. The creation and existence of the digital economy magnifies the scale of cross-border trading of goods and services. This poses new tax and regulatory challenges.
The OECD/G20 Base Erosion and Profit Shifting Project on “Addressing the Tax Challenges of the Digital Economy” noted the evolution of technology has dramatically increased the ability of private consumers to shop online and the ability of businesses to sell to consumers around the world without the need to be present physically or otherwise in the consumer’s country. This has an adverse impact on a country’s GST revenue collection and on the level playing field between resident and non-resident suppliers.
Singapore generally adopts a pragmatic and pro-business approach in its design of the GST system. This approach has however compounded the GST leakage brought forth by the digital economy. More specifically, Singapore currently does not levy GST on the following transactions:
a. Supplies of services (e.g., downloadable software) by overseas suppliers to Singapore businesses as the reverse charge mechanism (where customer self-imposes GST on purchase of services) in Singapore is currently not operative.
b. Supplies of services (e.g., e-book, music) by overseas suppliers to Singapore consumers as such supplies are considered as made outside the Singapore GST regime.
c. Supplies of low value goods (e.g., sale of fashion items through online stores) by overseas suppliers to Singapore consumers due to the GST import relief on importation of non-dutiable goods by air or post where the value does not exceed S$400.
Issues (a) and (c) are largely not applicable to most developed economies as they do impose a reverse charge mechanism and do not grant the import relief. However, issue (b) remains a challenge, especially when goods (e.g., shrink wrapped software) are being re-characterised to services (e.g., downloadable software) when they are sold online. To address this issue, many countries including Norway and member states of European Union have started to tax cross-border services and intangibles by treating such services as supplied in the country where the consumers are located and require the overseas service providers to register for GST in the country where the consumers are located. Simplified registration systems are also introduced for these overseas service providers. Australia and New Zealand have also issued exposure draft and government discussion document in May and August 2015 respectively to gather feedback on adopting similar approaches in taxing the digital economy and registering overseas service providers.
It is currently unclear the extent of GST leakage posed by the digital economy to our tax collection. However, against the background of the measures taken by other countries in taxing the digital economy, Singapore may one day consider adopting the same approach in boosting its tax revenue base to finance its social spending. On the other hand, considering the complexities in the implementation of these new measures and the pragmatic approach of our government, we do not expect this day to come soon.
Increasing use of data analytics
In today’s ever complex environment, data analytics is assuming a new and elevated status. Tax authorities worldwide have shown interest in applying data analytics in tax enforcement as the ingenuity of predictive analytics could detect outliers in the GST declarations.
Close to home, it was mentioned in the press in October 2014 that the IRAS was able to detect a case of failure to register for GST using data analytics tools and prosecute the taxpayer. The use of data analytics is likely to increase as the IRAS focuses on enforcement of GST. The benefits to the IRAS are clear: the more efficient use of technology lowers costs of collection and increase the chances of fraud or error detection.
Expansion of self-review programmes
The trend of encouraging voluntary compliance is likely to continue and even expand in the years to come. Further refinements to the existing programmes should be considered.
The current ASK and ACAP are “one-size-fits-all” programmes. As these programmes evolve and the IRAS gathers more information on the specific errors or issues facing each industry, it will be useful for the IRAS to develop industry-specific ASK and ACAP programmes. This will enhance the usefulness of these programmes and increase the probability of error detection.
We have witnessed how GST has grown in importance over the years. To keep pace with the ever-changing economy and meet the demands of social spending, the GST system would have to evolve. The question is would this involve changes to the tax rate, the tax rules or the tax base?
Change is inevitable. To remain relevant, Singapore has to continually reinvent itself in all areas – be it taxation or otherwise. As the saying goes “The future belongs to those who prepare for it today”.
Kor Bing Keong
Partner, GST Services
Bing Keong has more than 20 years of experience in providing advice on GST issues to companies in a wide range of industries such as real estate, financial services, REITs and manufacturing. In addition to GST advisory work, he regularly conducts workshops for companies and speaks at both EY and external seminars.
Chew Boon Choo
Director, GST Services
Boon Choo has more than 15 years of GST experience. Her experience covers a wide range of GST engagements such as GST ACAP review, ASK review, GST due diligence, GST training and GST advisory work. Her client base covers a wide spectrum of industries such as the pharmaceutical, consumer products, financial services and logistics sectors.