A 1% point increase in GST could lift CPI inflation by around 67bps.
As Singapore nears the delivery of the 2018 Budget on 19 February, the chatter on the prospect of higher taxes only grows louder.
According to Bank of America Merrill Lynch, in particular, there is the talk of an increase in the goods and services tax (GST) which brings in around $11b, or 16% of all operating revenue.
The first hint of potential adjustments to taxes was dropped in the report from the committee of the future economy (CFE), released in February 2017. One of the committee's recommendations was to "review and reshape Singapore's tax system" in order to keep it "broad-based, progressive and fair" and to remain "competitive and pro-growth".
Taking the need to raise revenue as a given, BofAML observed how Singapore could change its tax rates.
Firstly, corporate income tax (CIT), the largest source of operating revenue, comprises 20% at around $13.6bn. Whilst corporate tax increases are very unlikely, there are potential efficiency gains.
CIT productivity, defined as the ratio between CIT revenue as a percent of GDP and the top CIT rate, is lower in Singapore than Hong Kong and comparable to Malaysia.
Hong Kong's CIT productivity plays around 0.35 and 0.3, Malaysia's is slightly above 0.2, whilst Singapore's hit below 0.2 in 2016.
"We think it is time for a holistic review of tax incentives and exemptions for FDI investors, and ask whether the net benefits are still worthwhile," said BofAML ASEAN economist Mohamed Faiz Nagutha.
Meanwhile, the GST is the second-largest contributor to revenue, even as it remains one of the lowest globally, at 7%.
BofAML thinks the tax can be increased further given that the last adjustment was in 2007 or more than 10 years ago.
However, private consumption is still weak and any premature hike in GST "threatens to kill a recovery even before it can take hold," Nagutha said.
The team only thinks a GST hike can be announced in advance and implemented gradually to soften the impact. Moreover, the GST is expected to be enforced on all e-commerce purchases.
Instead of a heavy macroeconomic impact on GDP, a GST hike would create a more direct impact on inflation, with around 73% of the CPI basket subject to the tax.
A 1% point increase in GST tends to increase CPI inflation by around 67bps.
Here's more from BofAML:
Given the emphasis on keeping the tax system progressive, we do not rule out further increases in the top marginal personal income tax rates. Any further tweaks are likely to be phased in gradually, as the top rates were only recently increased in 2017.
Finally, with the inclusion of Temasek in the Net Investment Returns (NIR) framework, the $14b contribution from net investment returns to the Budget is even larger than corporate tax revenue.
Whilst this sum is not counted toward 'operating revenue', it, nevertheless, bolsters the overall budget balance and has enabled the budget to be balanced across the government's term of office, as required by the constitution.
The amendments made in 2015 already allow for up to half of the expected long-term real returns on fiscal reserves invested by MAS, GIC and Temasek to be taken into the annual budget.
"We think further tweaks are unlikely, as all investment agencies are now under this framework and the 50-50 ratio strikes an intuitively delicate balance between the needs of the present and the future," Nagutha said.
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