Is this the “right time” to raise Singapore’s GST?
There is never a “good time” for a rise in GST rates, but economists will agree that the hike is more acceptable during a period of economic growth and increase in spending by individuals.
Singapore’s GDP is expected to grow 3 to 5 per cent in 2022. Considering that an impending rate hike had already been announced during the 2018 Budget to happen between 2021 to 2025, the timing of the rate hike should not be too much of a surprise.
Even before the pandemic, it was pertinent for Singapore to increase its tax revenue to fund social spending, especially with the ageing population here. Furthermore, Singapore has spent S$13.8 billion in COVID-19 expenditure in 2020 and with the emergence of Omicron continuing to drive Covid concerns, Singapore needs to find more fiscally sustainable ways to fund its social, environmental and healthcare need.
Is there a good reason to raise GST?
Currently, it is estimated that approximately 30 per cent of residents in Singapore pay the bulk of the personal income tax collected. The corollary of this is that the rest of the 70 per cent pays none or very little personal income taxes. As this 30 per cent ages and retires from the workforce, pressure will be on the personal income tax revenue collected.
The current GST rate of 7 per cent in Singapore is amongst the world’s lowest, even in the Asian region. This is compared to the global average standard VAT/GST rate of about 19 per cent and 11.6 per cent in Asia for the year 2021. The increase to 9 per cent in Singapore will still put Singapore’s GST rate below the Asia average rate.
While it is argued that GST is regressive, the Government has made the GST Voucher Scheme permanent for lower-income Singaporeans to cope with tax. With the rate hike, it is expected that the Government will extend a combination of financial assistance, both GST and U Save vouchers, to this group of Singaporeans.
Should Singapore use wealth taxes instead of GST to collect revenue?
Much has been discussed on the possibility of introducing wealth taxes, which typically refers to taxing the assets owned by a person. This comprises the person’s personal assets including property and cash or cash equivalents. If more wealth taxes are introduced, high-net worth individuals may channel liquid assets to other jurisdictions that do not have those wealth taxes. This is with the exception of immovable properties that they own which are currently taxed through property taxes and stamp duties.
Singapore abolished estate duty in 2008 as it did not fulfil its objective of taxing more on the wealthy — it instead affected the middle and upper-middle income disproportionately. Furthermore, Hong Kong and Malaysia abolished their estate duty or inheritance tax as well. Hence, it is reasonable that the Government announced that introducing wealth tax requires deeper analysis especially when Singapore positions itself as a private wealth management centre for Asia.
For now, the existing taxes on property and stamp duty on conveyancing of real estates, such as additional buyer's stamp duty, would add to the revenue collected. This can be seen from the recent buyer’s stamp duty increase in December 2021 even though these measures are primarily introduced as “property cooling measures”. Furthermore, we will expect Budget 2022 to cover carbon taxes which will complement revenue collected by the Government.
Do we expect the GST implementation to be staggered? For example, exceptions made for some sectors or differentiation for essential/luxury goods?
Singapore has operated a broad-based GST system with no reduced rates on essential goods, similar to Europe and Australia. All goods and services are taxed at the standard rate of 7 per cent, with the exception of exported goods and services, residential properties and certain financial services. The reason for the broad-based system is to have simplicity in administering the tax without the definitional complications such as when goods are considered as essential. Given such a broad-based system, it is not expected that there will be exceptions made for sectors such as hospitality and F&B, which were affected by the pandemic and received various financial support given by the Government to tide through the challenging times.
It has been 15 years since the last GST hike which was done in a staggered manner — with an increase from 3 to 4 per cent in 2003 and subsequently to 5 per cent in 2004. The staggered rate hike was mooted on the ground to ease in the cost burden for consumers since Singapore had just recovered from the economic shocks of September 11, 2001 and SARS. However, one must note the inconvenience caused to GST-registered businesses as they had to tweak enterprise resource planning (ERP) systems, price displays and more to comply with the rate hike. As such, we anticipate the GST hike to be raised directly to 9 per cent instead of a staggered one.
Will GST pose greater pressure on multinational corporations’ (MNCs) decisions to locate in Singapore?
GST is a tax on domestic consumption and ultimately paid by end consumers, hence the GST hike should not affect MNCs’ decisions to invest or locate in Singapore. This is since the GST incurred by MNCs on their business operations can be recovered in full. An exception is financial institutions such as banks that are not able to claim input tax in full, in view of their business activities. As such, GST would represent higher business costs for financial institutions.
Nonetheless, the MNCs located in Singapore are here not merely for tax reasons. Other benefits such as modern infrastructure and a stable political climate are reasons attracting MNCs to Singapore. Hence, it is expected that Singapore’s global competitiveness will not be affected solely by the GST hike.
From 1 January 2023, Singapore will also be imposing GST on imported remote services and low-value goods.