The Business Times (7 Apr 2021): The case for a 9% GST07 Apr 2021
INDRANEE Rajah, Singapore's Second Minister for Finance, was spot-on when she observed in Parliament on Monday that the government's cash surpluses from 2011 to 2019 do not reduce the need for the planned increase in the Goods and Services Tax (GST).
A prudent government should pay for today's expenses using today's receipts. It reflects a healthy operating dynamic and preserves inter-generational equity for future generations of Singaporeans. As a matter of principle, we should be allowed to additionally dip into our reserves only in exceptional situations like the present Covid-19 crisis and only as far as necessary.
Raising GST is a straightforward means of ensuring that we only spend what we have.
The math behind a 2 per cent raise in GST is a very compelling one.
In FY 2018/19, the Inland Revenue Authority of Singapore (Iras) collected S$11.1 billion in GST. This made up 21 per cent of the total taxes collected, and was the third highest tax type after corporate income tax (31 per cent) and individual income tax (21 per cent).
Assuming that consumption patterns remain the same in the years to come, a two percentage point increase in GST would provide an additional S$3.2 billion per year to Singapore's coffers and would immediately overtake individual income tax as the Republic's second largest generator of tax revenue.
The policy reasons for a GST raise also make a lot of sense.
First, as a broad-based tax, GST is a stable source of government revenue that is relatively free from domestic production and distribution distortions. In contrast, income tax can have a distortive effect on the economy. Income tax is a tax that kicks in after a certain level of income, on certain types of income. As a result, taxpayers are incentivised to take steps to avoid reaching certain levels of income and to classify their receipt of monies as not being of an "income" nature.
On the international arena, the "source" rules of taxation that apply to income tax are also problematic. One needs to look no further at the international "tax wars" between revenue-starved countries, which have introduced unilateral tax measures to tax foreign-based technology companies whose income is regarded as being "sourced" in those countries, as evidence of the inherent problems with the global tax environment.
Secondly, GST is also neutral in terms of foreign trade because it does not favour either imports or exports. In fact, the playing field between foreign and local supplies have also been recently evened out with the recent introduction of the reverse-charge mechanism for business-to-business supplies of imported services, and the overseas vendor registration scheme for business-to-consumer supplies of imported digital services.
Thirdly, GST is a relatively easy tax to administer and enforce. It is collected throughout the economic life-cycle from production, distribution to consumption - which means that even if GST is missed at one stage, it is still collected at another stage. GST is also a "self-enforcing" tax because a taxable person can claim input tax only if it is supported by tax invoices, which therefore allows the Iras to check and cross-check for enforcement purposes.
Finally, unlike income tax, GST does not have a discriminating effect on savings and investment. It is a tax on consumption. In other words, the more one consumes, the more GST one pays. As a result, more GST is collected from big spenders.
While there may be the fear that the lower-income may be disproportionately affected by GST because it means that necessities are also more expensive in absolute terms, this problem can be alleviated by simply providing GST vouchers to this class of individuals to offset the additional GST payable. Therefore, any rise in GST can be effectively neutralised by having the Singapore government "pay" for the GST on behalf of the lower-income.
In conclusion, I am supportive of the Singapore government's decision to raise GST. It is a tax that makes sense all around.
- The writer is a commercial litigator with Providence Law Asia LLC.