Additional Cost of Implementing Multi-tiered GST for Exemption of Basic Necessities

Parliamentary Question by Ms Hazel Poa:

To ask the Minister for Finance what is the additional cost of implementing a multi-tiered GST that will allow for the exemption of basic necessities.

Parliamentary Reply by Minister for Finance, Mr Lawrence Wong:

As explained during the budget debate, we have already achieved the effect of multi- tier effective GST rates, with higher effective GST rates for higher-income households. This is achieved by implementing GST with the permanent GST Voucher and the absorption of GST on publicly-subsidised healthcare and education. This is a more effective way of specifically helping the low-income Singaporean households, than exempting certain goods from GST for all who consume them. In fact, various studies have shown that an exemption for a basket of essential goods tends to benefit the well-to-do more, as they spend more on everything, not just luxury items, but basic necessities as well. So such a move will not help to make our GST system fairer.

We do not have estimates of how much it will cost businesses and IRAS to implement a multi-rate GST system in Singapore. What we do know is that these costs will ultimately be passed on to Singaporeans, both as consumers and taxpayers. We also know that our conclusion is well supported by the experiences of other jurisdictions with multi-rate GST systems:

a. A 2021 study by the European Parliamentary Research Service noted that “a uniform VAT system, combined with direct instruments [such as direct transfers], would be more efficient”; that “differentiated VAT rates, exemptions, and registration thresholds lead to higher compliance costs”; and that “as a large proportion of compliance costs are fixed and independent of firm size, SMEs are disproportionately burdened”. It further cautioned on “the costs of reduced VAT rates that go beyond revenue losses and include, for example, VAT fraud” which “are difficult to quantify”. ¹

b. A 2006 study of VAT compliance costs in Sweden estimated that the compliance costs would be reduced on average by roughly 30% if a single rate system replaced a multi-rate system². A 2005 study by the Swedish Government also estimated that borderline cases constitute roughly one-fifth of all dispute cases referred to their tax tribunal. A conservative estimate of the cost of resources in the public and private sector expended on these borderline dispute cases was about 700 million Swedish krona³ (or about SGD 146 million based on the exchange rate then).

¹ European Parliamentary Research Service (2021), VAT gap, reduced VAT rates and their impact on compliance costs for businesses and on consumers.

² Skatteverket, Report 2006/3b Compliance costs of value added tax in Sweden, http://www.skatteverket.se/download/18.906b37c10bd295ff4880002550/rapport200603B, 2006.

³ Copenhagen Economics (2007), Study on reduced VAT applied to goods and services in the Member States of the European Union, Copenhagen.