Timing Singapore’s GST hike a catch-22 situation: tax analysts

• Feb 16, 2021

DECIDING on the timing of the Goods and Services Tax (GST) could prove to be a delicate challenge for the Singapore government, which is sandwiched between not just fiscal and political pressure but now recessionary pressure as well.

Tax analysts that The Business Times spoke with appear divided on where the sweet spot lies, with most predicting the GST hike to take place in 2023; some expect it to come in late 2022 or 2024.

Richard Mackender, indirect tax leader at Deloitte Singapore, said: “We do not anticipate that the GST rate would be raised in a recessionary environment.

“However, 2023 is perhaps far enough out that Singapore’s dynamic and open economy could be growing, and so could perhaps tolerate a GST rate increase.”

In 2018, Deputy Prime Minister Heng Swee Keat signalled the need for a GST increase some time between 2021 and 2025 to 9 per cent, from the current 7 per cent, to cover future health care needs. This was later deferred by a year during Budget 2020, just as the Covid-19 pandemic was gaining momentum, but Mr Heng said it will not be put off indefinitely.

Last year brought Singapore its worst recession on record; the economy shrank by 5.4 per cent.

But the situation should improve this year, given that the economy is coming from last year’s low base; the official growth forecast is 4 to 6 per cent.

“If they’re able to achieve that kind of growth for this year, then there will be room to discuss a GST hike as early as the second half of 2022,” said DBS senior economist Irvin Seah, noting that the bank is predicting a 5.5 per cent growth this year.

He added that the announcement could be made during next year’s Budget, with the hike taking effect later in the year.

This scenario is plausible based on a number of factors, such as if the economy recovers faster than expected, global vaccination efforts proceed smoothly and the Covid-19 crisis does not worsen in Singapore and the region.

David Sandison, Singapore practice leader and head of tax at Grant Thornton, is more cautious. He is sticking with a 2023 prediction, and possibly an initial one percentage point hike to 8 per cent.

“There is no doubt that we have yet to see the actual cost of the fallout from the pandemic, and businesses … may only be starting to see the first rays of sunshine in 2022,” he said.

“Raining on this parade would almost certainly be counter-productive to that renaissance,” he added.

He added that although a 2 percentage point hike could add S$3 billion of revenue annually, it may dampen consumer demand, “halting any hoped-for economic recovery in a very fragile economic situation”.

Concurring, Lam Kok Shang, partner and head of indirect tax at KPMG Singapore, believes the increase could come in 2024, as sectors like business travel, aviation, and oil and gas are likely to face uncertainties for at least the next two years until unrestricted overseas travel is allowed.

By 2024, most, if not all countries would have completed their innoculation exercise and overseas travel restrictions would be lifted, he said.

A two-step hike was previously carried out in 2003 and 2004 when the GST was raised from 3 to 5 per cent and cannot be ruled out this time around, suggested Kor Bing Keong, GST leader at PwC Singapore.

“However, a two-step approach is generally not welcomed by businesses, as each GST rate hike will require changes to systems and processes, which usually come with additional cost and resources,” he said.

Some analysts believe delaying the GST hike beyond 2023, which leaves a smaller window of 2024 and 2025, could bring a new set of problems.

Already, GST collection is expected to be down 14 per cent in 2020, Mr Heng had said last October, due to travel disruptions and the impact of Singapore’s “circuit breaker” or partial lockdown.

Yeo Kai Eng, indirect tax leader at EY Asean, said a GST increase cannot be postponed for too long, given the expenditures Singapore has to shoulder to achieve its economic and social objectives.

“Even before the pandemic, Singapore had been running an operating deficit in five out of the last seven years, wherein our operating expenditure exceeded operating revenue. We rely heavily on the net investment returns to maintain a balanced budget,” he said.

Raising operating revenue has thus become “critical”, which makes increasing the GST a “strategic decision that has to be made”, he said.

This could be exacerbated by the fact that Singapore is already likely to run into a Budget deficit this year due to the economic crisis. The government is required to keep a balanced Budget over each term under Singapore’s Constitution.

Mr Seah said if the GST, which contributes to 21 per cent of tax revenue, is not raised over the next two to three years, the government will be on a “tight leash” when it comes to fiscal spending.

“For example, a lot of infrastructure projects we have would be deferred. The fiscal resources would be stretched and spread more thinly as well, so they won’t be able to afford broad-based, generous Budget measures,” he said.

Social and welfare spending could take a hit, as well as various subsidised costs including education and health care for the increasingly ageing population, Mr Yeo said.

In addition to the fiscal pressure, leaving the GST to the end of this term of government would cut it too close to the next General Election, which must be held by 2025. This could turn out to be politically costly decision, given how unpopular a GST hike is likely to be.

Mr Kor said without the additional annual revenue, the government would need to look for other sources of revenue, or borrow to finance its increasing recurrent expenditures.

Raising personal and corporate tax is not ideal, said Mr Yeo, as the government “would want workers and firms to keep as much as (possible of what) they earn, and be free to choose how they spend, save or invest”.

Besides, having a competitive tax regime would enable Singapore to attract and retain investments and talent, he added.

Simon Poh, a tax specialist from the NUS Business School, said this leaves wealth taxes as one of the most “politically correct” taxes to raise.

This could spell an increase in property tax and stamp duties, he said, since the property market has “surprisingly resilient”; there have been murmurings about another round of property cooling measures.

Another possibility is that GST could be imposed on all low-value imported goods to make up for the shortfall, he suggested. Currently, imported goods under S$400 are exempt from GST. The import of digital services became taxable from last year and is commonly referred to as the “Netflix tax”.

Mr Lam said the increasing trend for online shopping could accelerate this move.

Regardless of when the hike takes place, a S$6 billion Assurance Package has been set aside to help Singaporeans offset the impact of the additional GST for five to 10 years.

Mr Mackender said: “There is an argument that consumption taxes are regressive, yet it is clear that the government is aware of this. The GST vouchers recycle a large part of the additional GST from the rate increase to help and support lower income groups.”

Source: https://www.businesstimes.com.sg/government-economy/singapore-budget-2021/timing-singapores-gst-hike-a-catch-22-situation-tax