In Focus
ECONOMY, FINANCIAL SERVICES | Marianne Estioco, Singapore

Should the GST be tweaked in Budget 2016?

Singapore needs alternative revenue sources.

The issue of whether policymakers will tweak the goods and services tax (GST) is a long-standing issue in Singapore, where government coffers are under pressure from a rapidly ageing population and the need for increased social spending.

Kor Bing Keong, a GST Partner at Ernst & Young, argues that the government should consider lowering the GST registration threshold to include companies with an annual turnover above $500,000. At present, only companies with a turnover of $1 million and above are required to register for the GST.

"With the expected increase in social spending by the government, a decrease in GST registration threshold could bring more businesses into the GST net and increase revenue collection,” Kor said.

He added that the high GST registration was important at the start of GST implementation because it saved smaller companies from the costs of compliance. However, the tax is now an integral part of businesses and GST-compliant accounting software are now readily available, which will make compliance less burdensome for smaller firms.

Last year, a report by BMI Research said that the ruling People's Action Party (PAP) may use its strong mandate to hike the GST.

"While the recent increase in the top marginal income tax rate will provide some support to the government's annual intake, Singapore's ageing population and the government's growing commitment towards supporting low-income elderly citizens will likely necessitate additional revenue streams, and an increment to the current GST level of 7.0% is a prime candidate for adjustment," said BMI Research.

However, Citi economist Wei Zheng Kit argues that despite proposals to broaden the tax collection net, the GST is unlikely to be tweaked in this year's upcoming budget.
Wei said that tweaking the GST at this point would be untimely, as it would adversely impact smaller companies which are already reeling from the effects of restructuring.

"It would likely worsen cash flows of the smallest companies (often in the embattled retail/F&B sector), at a time when these companies may be struggling with declining turnover, still-elevated costs and margin squeeze. Softening domestic demand may also limit the ability of companies to fully pass on GST to customers, without facing a drop in demand, hence squeezing margins even further," Wei said.

Wei added that the government already has additional revenues from the inclusion of Temasek in the net investment returns (NIR) framework. The inclusion of Temasek could imply another $4-5 billion increase in the NIR contribution through 2020, Wei noted, almost half of the likely GST collections in FY15.

Lastly, Wei said that widening the GST net would be "regressive" and go against the broad direction of increasing progressivity of the tax system.

“Lowering the turnover thresholds for GST registration would likely bring into the tax net many small businesses such as hawkers, provision shops and neighborhood retailers, raising the cost of daily necessities for the lowest income segments of society. While such a move may eventually be considered, we think it would be unlikely to be implemented in FY17," Wei said.
 

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