Paying for social spending with higher GST

by Koh Soo How, Published TODAY, 17 Oct 2012

In his National Day Rally speech on Aug 26, Prime Minister Lee Hsien Loong spoke about the need for taxes to rise "sooner or later" with social spending expected to increase significantly. While he did not say which particular tax he thinks would go up, a look at the tax collection trend here over the last decade may give us a clue.

In 2000, the Goods and Services Tax (GST) proportion of the total taxes collected by the Inland Revenue Authority of Singapore (IRAS) accounted for 12.3 per cent.

By this year, this figure jumped to 23.6 per cent of all taxes collected, almost doubling from a decade before. What this shows is the growing importance of GST as a source of the Government's tax revenues.

Singapore's ageing population would also suggest that there is little choice but to move towards a greater reliance on consumption taxes such as the GST, rather than direct income taxes, which are susceptible to a declining income tax base and economic cycles.

WILL IT HURT COMPETITIVENESS?

A natural concern is how an increase in GST will affect Singapore's competitiveness. Besides this, GST/VAT systems are known to be regressive and inflationary in nature, which can eventually stifle economic growth.

To address these concerns, we start with a simple comparison of our nation's GST regime with that of our global and regional counterparts.

At its current 7 per cent level, Singapore's GST rate is far below the European Union's rate, where the euro zone crisis has caused a sweeping rate increase in recent years.

A number of European countries are pushing their VAT rates to beyond 20 per cent (the highest being 27 per cent in Hungary) to address the issue of declining finances.

In Asia, where the GST/VAT rate lies between 5 per cent (Japan and Taiwan) and 17 per cent (China), Singapore is regarded as having a low rate. Japan is moving to raise its rate to 8 per cent and, ultimately, to 10 per cent in 2015.

Recent comments by senior government officials in Malaysia have strongly indicated that the Malaysian government is committed to introducing a GST to reduce its budget deficits.

Further south in Australia, there have been recent calls to reduce business taxes such as corporation taxes, to alleviate the worsening effects of a slowing economy and increase the current GST rate of 10 per cent.

By and large, data shows that countries can raise the GST/VAT by a certain percentage point to raise revenues and yet, not lose their competitiveness.

Corporate, income taxes?

It is noted that when GST was last raised in 2007 from 5 to 7 per cent, the corporate income tax rate was simultaneously reduced to 17 per cent while the individual income tax rate remained at 20 per cent, where it has stayed for a number of years.

While the Singapore Government of tomorrow could very well take a similar course of action to reduce the corporate income tax rate to blunt the adverse effects of a higher GST, businesses have the ability to recover the GST costs if they register for GST, which effectively makes any increase tax neutral for most businesses.

There could also be a reluctance to reduce the individual income tax rate in case it is perceived to help the higher income group; or to reduce the corporate income tax rate further, to avoid Singapore being regarded as a "tax haven".

On the other hand, it is unlikely that Singapore will raise its corporate income tax rate if the Government's policy is "to keep our tax regime competitive, and to make Singapore an attractive business hub to encourage new investments and to spur entrepreneurship", to quote the Ministry of Finance's website.

What is a more likely scenario is that Singapore will retain its headline income tax rates, and reduce the effective rate with tax incentives and exemptions. At the same time, it will review its consumption taxes such as the GST as a means to raise the revenues that may be necessary to finance future social spending and investments in infrastructure and capabilities.

OFFSET MEASURES

As for the regressive nature of GST, there are already a number of measures the Government has in place to deal with this. For instance, it uses offset measures, such as rebates and grants, to alleviate the burden on the lower income groups, who are most affected by an increase in the GST.

The recent introduction of the GST vouchers, in the form of cash, MediSave top-ups and U-Save rebates, is a highly visible long-term measure to mitigate the impact of GST and any future increases in the rate on rising prices.

In many ways, Singapore's GST system is exemplary of a modern GST regime, with few exemptions and a standard rate applied to virtually all goods and services. The IRAS has also been remarkably efficient in collecting its taxes, costing less than 1 per cent for every dollar of tax collected.

As a nation, we are well positioned to leverage off our GST system, when the time comes, to achieve our greater social goals without harming our competitiveness.

Koh Soo How is a Tax Partner with PricewaterhouseCoopers Services, Singapore, where he specialises in GST and leads the PwC Indirect Taxes network in Asia Pacific.