What Singaporeans need to know about the 20-year-old GST

On 1 April 2014, the Goods and Services Tax in Singapore passed its 20th year in the statute books. Although GST was new to Singapore, it was not a new tax. Value Added Tax (VAT) had been in use in the European Union (EU) for almost 30 years by 1994, and Singapore was able to take advantage of best practices and the bitter experience of other countries in its design and implementation of the tax.

This is perhaps one reason why Singapore designed a tax with few exemptions and a low starting rate. It kept the tax base as wide as possible and, in keeping with Singapore’s general philosophy on such matters, meant that there was little incentive to challenge the application of the tax to particular circumstances.

Indeed the absence of GST case law challenging the fundamentals of the tax is a notable difference in Singapore, especially when compared with other jurisdictions such as Australia, New Zealand, or the United Kingdom.

However, this absence of case law in Singapore can be explained primarily by the low rate of the tax in Singapore. For the first 11 years, the rate was 3% and even now the rate is only 7%. A rational taxpayer is unlikely to weigh the cost-benefit of a court case against the tax exposure at a 3% rate and decide that the court case is a better outcome.

This absence, as always, is both a challenge and an opportunity. A challenge, because where there are unclear areas of the law, there is no local case-law to draw upon; and an opportunity, because the lack of local case law does not mean an advisor cannot refer to the vast body of case-law from other jurisdictions to support a position – although it should be remembered that such cases are merely persuasive and not binding on the Inland Revenue Authority of Singapore (IRAS).

Thus far, it is fair to note that GST has been a very stable tax. It is true IRAS has added to the body of law over the years, bringing in new schemes and widening the application of zero-rating, for example. And the rate has gone up from 3% to 5% and in 2007 it was increased again to 7%.

But it is clear that these changes have been primarily in response to changes in Singapore’s economy and for the most part are driven by the needs of businesses in Singapore. The question is whether the tax remains fit for purpose or whether it requires more fundamental changes.

To answer this, we can consider the experience in other countries and take account of the recommendations of supranational bodies such as the Organisation for Economic Co-operation and Development (OECD) for their views on how indirect tax systems should operate in general. Here we can see that there are some areas that Singapore’s system may need to revisit.

In the EU, value-added tax (VAT) systems recognise that different types of supply may require variations to the place where the tax is treated as being supplied and hence reported. For Business to Business (B2B) international transactions, the place of supply is moved from the location of the supplier as the place where the tax should be reported, to the location of the recipient.

The recipient accounts for the tax using a self-assessment or reverse charge mechanism. However, the fundamental basis of Singapore’s international services rules is that the place of supply is where the supplier belongs. If the supplier is outside Singapore and supplies a service to a recipient inside Singapore, no GST is due.

For organisations like the OECD, this represents potential tax leakage and is not an example of how an ideal GST system should operate. Of course, in today’s climate tax leakage is also something that governments are less likely to tolerate.

Another reason to expect IRAS to look at the place of supply rules is because of the rise of Missing Trader Fraud, where a fictitious trader in a chain claims input tax but fails to account for output tax on his onward sale. The B2B rules help to reduce the risk of non-compliance in this regard, so it is likely that we will see the GST change its place of supply rule to accommodate the reverse charge for certain defined services (something that is already in the GST Act).

The other question is that of rate changes. The standard rate of the tax is currently 7% and has been so since 2007. It is generally accepted wisdom that taxes never go down, although this is clearly not so in the case of Corporate Income Tax.

However, as Singapore addresses an ageing population and increasing social spending, the Government will surely want to make sure it has sufficient revenue. The general view of bodies like the OECD is that taxes on consumption are ‘fairer’ than taxes on profits, therefore it should not be a surprise to us all if the focus for which tax to increase falls on GST.

After all, across the region, the rate of the tax is typically around 10%. Singapore’s Government is on record stating that GST will not be increased until at least 2016, but beyond that – we can only wait and see.

In summary, Singapore’s GST has been a very successful tax for the Government: indeed, it raises approximately one quarter of Government revenue. The rate has been fairly stable and there has been remarkably little case law, but there are areas that are in the spotlight, particularly business to business services supplied from outside Singapore (the so called reverse charge) and whether the rate will stay low for much longer.

While we celebrate GST’s 20th birthday this year, we can see that the next 20 years will bring changes that will continue to place the tax as one of the key sources of the Singapore Government’s revenue.