The Government had announced during Budget 2018 that it plans to raise the GST from 7% to 9%, sometime between 2021 and 2025, while Singapore faced growing expenditures in healthcare, security and other forms of social spending. This is expected to raise additional revenues amounting to almost 0.7% of Singapore’s GDP per year.
Deputy Prime Minister and the Finance Minister Heng Swee Keat stated at the People’s Action Party convention last November that the permanent GST Voucher scheme will be enhanced when the GST rate goes up to help Singaporeans cope with the rate change. Details of the GST support package will be shared at Budget 2020 announcement on 18 February 2020, possibly together with information about the impending GST hike.
The rate was increased from 5% to 7% during the last GST review in 2007. The GST Offset Package helped Singaporeans to manage the hike and included GST credits, senior citizens’ bonus, assistance for low-income families with young children, aid for pensioners, help for lower-income families in reducing public transport costs, and additional subsidies for healthcare, education, along with service and conservancy charges. The GST Offset Package cost the Government S$4b over five years and it is likely that the new support package would contain similar measures.
Questions have been raised regarding the exemption of certain daily necessities such as food, healthcare and education from GST, since its implementation. The Government has maintained its policy of using a broad-based approach to levy GST and applying a single standard rate uniformly to keep the GST system simple. Zero-rating is restricted to exports and international services while the exemption is limited mainly to financial services and residential properties.
Using a broad-based GST system sidesteps the complex and potentially contentious process of identifying the goods and services that should be exempted. Otherwise, GST-registered businesses will need to understand the intricate rules and ensure that GST treatment is applied properly on all their supplies and that GST is correctly collected. There is also the issue of properly identifying the input GST claim to be made and the allocation of common input GST. The added complexity could drive up compliance and administration costs for businesses, which may eventually be passed on to the end-consumer.
The potential complexities of a non-broad based GST approach can be best understood using Japan’s example. The consumption tax in Japan was raised from 8% to 10% last year under a two-tier system, where the rate levied on certain goods remains at 8%. The reduced rate list includes takeaway food, non-alcoholic beverages and subscriptions for printed newspapers that are published twice or more a week.
It was reported that the dual-rate system caused much confusion for both consumers and businesses and led to tax administration issues.
Japan introduced a rewards programme effective also from 1 October 2019 as part of the support measures to offset the impact of the consumption tax hike and to drive greater use of digital payments in the country. Consumers will receive up to 5% rebates on purchases made at small establishments, retail stores and convenience stores if they use cashless payment methods for nine months. The rebates will be in the form of reward points or simple discounts, depending on the payment platform. This programme would be more appealing to the younger generation as elderly consumers are less likely to embrace technology-centric options.
The Government has in the past introduced a GST support package to lessen the financial burden of a rate hike. The support package was designed to provide more help for lower-income families and senior citizens. To further reduce the impact of the GST hike on individual consumers, the Government can consider staggering the increase, like in 2003 and 2004 when the GST rate was raised from 3% to 4% in 2003 and to 5% from 1 January 2004, instead of introducing an immediate step-up of 2%.
However, the option of spreading out the rate increase would mean higher compliance costs such as changing account systems twice for GST-registered businesses. Hence, like the 2007 rate hike, the Government could potentially announce a one-time rate increase and compensate Singaporeans with a substantial support package so that no one can unfairly profit by raising prices in anticipation of a second-step increase.
The additional GST would be passed on to consumers for most GST-registered businesses. For smaller businesses that are not GST-registered, they may consider registering for GST to recover the GST incurred on their purchases. The Government had offered subsidies of up to 50% of GST registration-related costs for Internet connection, IT consultancy and training for small enterprises during the 2007 rate hike. Free automation software was also provided to help businesses administer the GST.
It is challenging to determine when is the best time for the GST rate increase, with Singapore’s economic growth for 2019 reported to be the worst in 10 years, coupled with the uncertain global economic outlook ahead. Yet, funding Singapore’s growing needs in healthcare, education and national security continue to be a pressing concern. An early announcement on the date and details of the GST hike will provide the needed certainty and help businesses and consumers to prepare and plan ahead.
Source: The Business Times, 6 February 2020