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Raising GST for fiscal sustainability

By Ng Gek Teng and Richard Mackender

Singapore’s Goods and Services Tax (GST) rate will be raised from the current 7% to 8% on 1 January 2023 and again from 8% to 9% on 1 January 2024, as announced by the Finance Minister in his Budget 2022 speech.

Compared to other countries within Southeast Asia, Singapore’s new GST rates are still among the lowest in the region.

Although the GST changes will help shore up public finances in some ways, there are hidden consequences that businesses and consumers need to consider, even as Singapore continues on its journey as a nation.

Business Impacts

GST-registered businesses need to start preparing as soon as possible for the first rate-change.  The following are seven key areas that businesses need to address:

  1. Updating the financial accounting system and invoicing system to create the necessary additional tax codes for the new GST rates;
  2. Updating the cash register system and online website pricing to reflect the new GST rates;
  3. Updating the pricing schedules made available to the public;
  4. Determining the GST rate applicable on those transactions which straddle the GST rate change;
  5. Reviewing contracts and agreements to determine how the GST rate increase can be passed on to customers and how the revised pricing can be communicated to customers;
  6. Considering the possibility to apply for special GST schemes to manage business cashflow; and
  7. Equipping employees with the relevant GST knowledge to be aware of the impact of the changes.

Considering some of the changes are in the accounting systems, it is important to involve your IT department or to hire IT professionals to update the system logic, and we should not overlook that such system changes will need to be done twice, given the staggered rate increase. Legal costs to update agreements and clauses in documents may also be incurred as a result of contractual changes. The GST rate increases could also result in  additional GST costs that are not recoverable for certain businesses.

Consumers and non-GST registered businesses

For consumers and non-GST registered businesses, there will be an increase in the costs of local purchases made from GST-registered suppliers once the rate change takes effect. The Government has staggered the increase to help ease the impact on consumers and there will be pressure on businesses to only pass on price increases that are justifiable. Non-GST registered businesses may want to consider applying for GST registration on a voluntary basis to be able to recover the GST on their purchases. Whilst being GST-registered would help cushion the impact of the increase in GST rate, there is the compliance burden to be kept in mind. It is therefore important that a careful cost-benefit analysis is carried out before making any decision.

Consumers can be reassured from the Government’s extension of the GST Voucher scheme to help offset the GST costs and the setting up of the Committee Against Profiteering to monitor excessive price increases. A further way to mitigate the impact of the rate change is to consider the timing of major purchases so that goods and services can be obtained at pre-GST increase prices where possible.

Increased social spending

Today, social spending makes up the largest part of the Singapore Government’s annual expenditure, of which, a very big part goes into improving the quality, accessibility and affordability of our healthcare infrastructure.  According to the Finance Minister, if healthcare spending continues to increase at the same pace as in the past 10 years, it is expected that healthcare expenditures will amount to approximately S$27 billion or around 3.5% of GDP by 2030, and this figure excludes Covid-19 related expenses.

Whilst this is a big sum of money, it still pales in comparison to social spending in continental Europe and the Nordic countries which provide much higher levels of state-financed welfare. These countries may spend close to 30% of their GDP on social spending and to fund this, higher income tax and VAT rates are imposed. Although it is most unlikely that social spending in Singapore will ever be comparable to these countries – indeed the Finance Minister has said in his speech that Singapore does not intend to adopt the European model of comprehensive universal welfare and high taxes –, Singapore’s social spending is expected to increase every year due to the needs of an aging population.

To remain fiscally sustainable, Singapore needs to make changes to its tax system, even though it has no intention to be a tax-intense country. As a small nation, Singapore is open to vigorous competition with neighbouring countries and its ability to attract investors and talents from all over the world is crucial for the city-state to continue to enjoy its cultural and financial standing in the global economy.

The writers are Ng Gek Teng, Tax Director and Richard Mackender, Indirect Tax Leader at Deloitte Singapore. The above are their personal views and may not represent the views of the firm.

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