A rise of 2 percentage points in the goods and services tax (GST) will probably be announced in the next Budget, but the actual increases will be spread over the following two years.
That is the view of DBS senior economist Irvin Seah, who said the hike is needed so that the country can keep up with its increased spending needs.
Having the increase staggered over two years will help cushion the impact on households, he added.
His predictions follow recent comments by Prime Minister Lee Hsien Loong that taxes will be raised as government spending grows.
This sparked speculation among economists and tax specialists about the format and timing of the tax increase.
Higher tax revenues are unlikely to come from raising corporate levies, given the need for Singapore's economy to stay competitive, Mr Seah noted in a report out yesterday. Also, personal income tax rates for top-income earners have been adjusted recently.
This makes GST the top candidate, especially since rates here are relatively low compared with those in other countries in the region.
Japan has a GST rate of 8 per cent while South Korea, Thailand, Vietnam and Indonesia levy 10 per cent.
"The GST is perhaps the most direct and effective tool in terms of raising tax revenue. It has a relatively broader tax base and it is also the second-largest source of revenue, just behind corporate income tax," said Mr Seah. "Hiking the GST is politically challenging, given its regressive nature. In this regard, timing is crucial. With the next general election due in 2020, policymakers will have to act fast."
Mr Seah estimates that a hike of 1 percentage point would raise revenue of about $1.6 billion to $1.8 billion, equivalent to about 0.4 per cent of Singapore's nominal gross domestic product.
He expects a staggered GST hike, which would strike a balance between the need to raise revenue and an economic outlook that is still cautious.
"While economic growth in recent quarters has been encouraging, the economy has just emerged from two consecutive years of slow growth. And pockets of uncertainty remain in the external environment, which could pose risks to Singapore's economic performance next year," he noted.
The labour market also seems to have bottomed out, but "a more pronounced recovery remains visibly lacking".
"Hence, introducing a sharp GST hike at this moment could result in a double whammy for some workers and households," said Mr Seah.
The GST was implemented at a single rate of 3 per cent on April 1, 1994. It was raised to 4 per cent in 2003 and to 5 per cent the following year. The last hike to 7 per cent came in 2007.
Mr Seah expects a GST offset package worth at least $4 billion to be announced alongside the hike. Higher GST voucher payouts, a one-off income tax rebate as well as rebates on conservancy charges and utilities could be on the cards, he noted.