Preparing for a GST hike

At the recent People’s Action Party annual convention, Prime Minister Lee Hsien Loong spoke about a broad range of topics, including foreign relations, the economy, transport and infrastructure, among others.

Importantly, he highlighted how Singapore’s spending on the economy and infrastructure, as well as on social services and safety nets, are all necessary. In order to pay for these, Prime Minister Lee added that “raising taxes is not a matter of whether, but when”, reaffirming a point made by Finance Minister Heng Swee Keat in his Budget speech earlier this year.

While the Government has enough revenue and has said that it will not raise taxes in its current term, a Goods and Services Tax (GST) rate hike appears inevitable going forward.

Why is that so?

Firstly, GST is the second highest tax revenue contributor, trailing only corporate income tax.

The difference in tax revenue contribution of GST and corporate income tax has been narrowing, from 11 per cent in 2007 to 5 per cent in 2016 partly due to decreasing corporate tax rate.

It is difficult for Singapore to make an upward adjustment of the corporate income tax rate when many countries are doing the opposite. Hence, the importance of GST as an alternative tax revenue contributor cannot be ignored.

Secondly, Singapore’s GST rate at 7 per cent remains one of the lowest in the world and has remained unchanged for over a decade.

It was implemented in Singapore on April 1 1994 at a very low rate of 3 per cent. This was followed by a two-step increase in the rate, from 3 to 4 per cent in 2003 and from 4 to 5 per cent in 2004, and finally a one-time increase to 7 per cent on July 1 2007.

Lastly, increasing the GST rate would be in line with the consumption tax trends noted by the Organisation for Economic Co-operation and Development, where countries are increasingly looking at broadening their base to raise additional revenue.

Many have speculated that the GST rate would ultimately increase to 10 per cent.

The hike could be an immediate step-up from the current 7 per cent or it could be staggered in a multi-step approach, as seen in 2003 and 2004.

A multi-step increase would increase compliance costs for businesses, such as system updates and testing, managing transitional issues and determining the appropriate rate to apply for supplies.

However, a multi-step approach would result in lesser burden on individual consumers and hence, is less likely to cause them to dramatically cut back on spending, compared to a one-time rate increase where the burden is more pronounced and immediate.

Ultimately, whether the rate hike would be an immediate step-up or multi-step depends on the prevailing economic conditions and consumer sentiments.

WHAT DOES IT MEAN FOR CONSUMERS AND COMPANIES?

GST, being a tax on consumption, is ultimately borne by consumers. This means lower-income households will likely bear the brunt of a rate increase. The permanent GST voucher scheme introduced by the Government since Budget 2012 can help to lessen the financial burden on these lower income households. However, it would be helpful if additional measures could be introduced to help them cope with a rate hike.

For businesses, a GST rate hike may add pressure to their cash flow and could negatively affect their sales revenue. This is especially so if the majority of their customers are non-GST registered firms and individuals that decide to cut back on spending as a result of increased prices following a rate hike.

The Government has indicated that there are likely to be changes to tax e-commerce transactions. This will at least provide a level playing field for local and overseas businesses.

Other than potential cash flow issues and a potential temporary fall in sales revenue, most fully taxable GST-registered businesses are unlikely to be significantly burdened by a rate hike since they can recover the GST charged by their GST-registered suppliers in their tax returns.

Unfortunately, the same could not be said for partially exempt GST-registered businesses, such as developers of residential properties and banks, as well as non-GST registered businesses.

A GST rate hike would result in additional irrecoverable costs to these groups of businesses.

Companies are partially GST-exempt if they are in the business of making supplies that are exempt in nature. Exempt supplies refer to the sale and lease of residential properties, provision of prescribed financial services and the supply of prescribed investment precious metals.

As for non-GST registered businesses, they are not entitled to claim credits of the GST incurred on their purchases from the government. Hence, with a rate hike, the cost of their purchases would increase. They would either have to absorb the cost increase or pass it on to the consumers, which may affect their competitive against other GST-registered businesses.

However, non-GST registered businesses could consider applying for GST registration to avoid incurring irrecoverable GST costs. Of course, the cost of GST compliance and the benefits of recovering the GST incurred would have to be taken into consideration before they proceed.

With a higher GST rate, any non-compliance to the tax regime would also be more costly for businesses as it would mean being exposed to higher penalties. The need to focus on managing GST risks and improving compliance becomes even more critical for GST-registered businesses.

As a rate hike in the coming years becomes imminent, businesses would have to start considering the impact and ensure that they have adequate resources to mitigate the impact.

ABOUT THE AUTHORS:

Yeo Kai Eng is Asean and Singapore Indirect Tax Leader at Ernst & Young Solutions LLP and Chew Boon Choo is Partner, Indirect Tax at the same company. The views in this article are their own.