Tax revenue has to be raised, said the Finance Minister in his Feb 20 Budget speech. Analysts do not expect a GST hike till 2020, but say online shopping could be subject to GST soon. And personal income tax for high earners may go up.
One much talked-about aspect of this year's Budget is the 30 per cent hike in water prices to be implemented in two phases from July.
Not surprisingly, the move is not popular, although the Government is giving rebates to cushion the impact for most households. But Singaporeans should get used to the idea of paying more for the public resources and infrastructure they enjoy, as this is a sign of the trend ahead.
Finance Minister Heng Swee Keat hinted as much, saying in his Budget speech on Feb 20 that Singapore's expenditure needs are expected to rise rapidly in the years to come, particularly in healthcare and infrastructure.
One way to sustain Singapore's fiscal system is by managing other costs, and to that end, the Government is implementing a permanent 2 per cent downward adjustment to the budget caps of all ministries and organs of state from April this year.
This means that the budget growth projections that the agencies are currently operating on will shrink, although it does not amount to a budget cut.
But prudent management is not enough - Singapore must also grow its revenues in a pro-growth and progressive manner. After all, the Government's expenditure already far outstrips revenue - it expects a primary deficit of $5.62 billion for financial year 2017.
This means that government revenue, including all taxes and fees, is not enough to pay for expenditure on defence, education, social spending and all the nation's needs.
Singapore is able to produce an overall Budget surplus only by drawing on the net investment returns framework, which allows the Government to spend up to half of the long-term expected real returns from the GIC, the Monetary Authority of Singapore and Temasek Holdings.
An ageing population and the constant need to upgrade and extend Singapore's infrastructure to cope with an expanding population will place further pressure on government resources.
"We will have to raise revenues through new taxes or raise tax rates. We are studying the options carefully. We must make these decisions in good time, to ensure that our future generations remain on a sustainable fiscal footing," Mr Heng said.
If tax revenues have to rise, which tax is likely to be hiked?
Experts say it is unlikely to be corporate tax, given the need for Singapore's economy to stay competitive. Broad-based hikes in personal income tax rates are also unlikely, given the Government's plan to keep taxes progressive.
The taxman has to seek revenues elsewhere.
A GST HIKE NEXT YEAR?
And so there has been speculation over whether the goods and services tax (GST), now at 7 per cent, will be raised in the near future.
CIMB Private Bank economist Song Seng Wun said at a post-Budget forum organised by the Economic Society of Singapore last week that it is "only a matter of time" before the GST is raised.
The GST is estimated to have contributed $10.9 billion to government coffers in FY2016, or 15.8 per cent of total operating revenue.
Some tax experts believe a GST hike is on the cards - albeit in a few years.
Mr Loh Eng Kiat, a tax partner at accountancy and business advisory firm Baker Tilly, notes that globally, governments are shifting away from direct taxes (paid by a person or organisation directly to the government) towards indirect taxes (taxes levied on the manufacture or sale of goods and services).
Many countries are also reducing their corporate taxes in a bid to be more competitive. Mr Loh thus thinks it is more likely for Singapore to raise the GST rate rather than, say, the corporate tax rate, now at 17 per cent, to shore up revenues.
Still, he expects that this will not happen until at least 2020, a view shared by Ernst & Young Solutions' head of tax, Mrs Chung-Sim Siew Moon. She noted that tax revenue was buttressed last year: "It was mentioned in Budget 2015 that raising the personal income tax rates of the top income earners, as well as including Temasek Holdings in the Net Investment Returns Contribution framework, will provide additional revenues equal to about 1 per cent of gross domestic product annually for the Budget over the next five years."
The additional revenue might stave off a GST rise till 2020, she added.
TWEAKS TO THE GST
While a blanket hike may be a few years away, the GST could still be tweaked in other ways in the meantime.
Mr Heng noted in his Budget speech that increasing digital transactions and cross-border trade have led some countries to adjust their GST system to ensure a level playing field between their local businesses, which are GST-registered, and foreign-based ones, which are not. "We are studying how we can do likewise," he said.
Singapore's GST system does not extend to foreign companies unless they establish a fixed or business establishment in Singapore and their annual taxable turnover exceeds $1 million. There are also exemption thresholds for the import of low-value goods below $400. Singaporeans do not pay GST when they download a movie or a song online, or buy a piece of furniture from an overseas seller via Taobao.
This did not use to be a big deal to the taxman. But e-commerce exploded, and is expected to continue growing exponentially.
A report by Temasek Holdings and Google released last year showed that e-commerce in Singapore was valued at US$1 billion (S$1.4 billion) in 2015, and is projected to grow to US$5.4 billion by 2025. The tax impact and potential revenue loss will become more significant.
Associate Professor (Practice) Simon Poh from the Department of Accounting at the National University of Singapore's Business School, said Singapore should change its rules to let it tax such cross-border goods.
"Countries like Japan, Korea, Australia and New Zealand have already changed their domestic laws to collect GST on such e-commerce transactions. One way is to require foreign e-commerce companies to register and charge local GST for such transactions," he said.
The Government could also consider whether to reduce or remove the current GST exemption on import of goods worth $400 or less, Mrs Chung-Sim said. She notes that small online players might still be able to evade paying GST as it is difficult to take action against non-compliant overseas-based companies.
However, the experience of other countries that have implemented such rules suggests that big multinationals do generally comply, as they are concerned about the reputational risks associated with non-compliance.
"Most tax authorities adopt a pragmatic 80-20 approach, that is, compliance by 20 per cent of the overseas-based big multinationals would contribute to 80 per cent of the GST revenue collection from the cross-border supplies of digital products and services," Mrs Chung-Sim said.
How might a change affect e-commerce players and online shoppers?
If the Government decides that foreign e-commerce players of a certain size must charge GST on goods and services sold to Singapore residents, regardless of the value of the items bought, you may then have to pay GST if you renew your subscription to Netflix or buy a dress from Asos. Companies that set up operations here, such as Amazon, will have to charge GST if their taxable turnover exceeds $1 million.
PERSONAL INCOME TAX CHANGES A POSSIBILITY
Apart from GST tax changes, a review of the personal income tax system is also likely.
In Budget 2015, the Government announced increases in tax rates for individuals with chargeable incomes of at least $160,000. The top marginal tax rate was also increased from 20 per cent to 22 per cent for individuals with chargeable incomes in excess of $320,000.
"Even with these changes, which took effect from 2016, the personal income tax structure in Singapore remains one of the lowest in the world," Mrs Chung-Sim noted.
In the United States, for example, the top income bracket is taxed 39.6 per cent, in Australia 47 per cent and in South Korea 38 per cent. Even within South-east Asia, Singapore's tax rate is lower than that of every other country's, except Brunei's, where there are no personal income taxes.
Aligned with the Government's push for a more progressive tax structure and with the need for more social spending as the population ages, there is a high probability that a new income band, or perhaps even more than one new band, will be introduced above $320,000, with a new personal tax top rate of above 22 per cent, Mrs Chung-Sim added.
ESTATE DUTY OR A REVERSAL OF INCENTIVES
Prof Poh thinks the Government may re-introduce estate duty, which was scrapped in 2008. But to do so, the Government would have to reverse its own policy. He added: "The other drawback is that estate duty can be easily minimised through tax planning."
The Government may raise additional revenue by withdrawing or tightening some tax incentives introduced in the past.
One example is the start-up tax exemption scheme. Introduced in 2005, it allows eligible companies to claim 100 per cent tax exemption on the first $100,000 and a further 50 per cent exemption on the next $200,000 of normal chargeable income for each of its first three consecutive years of assessment after incorporation.
To reduce abuse, he suggests that an additional condition be added that the company employ at least three local employees, excluding company directors, for the entire duration of each qualifying year.
It is useful to bear in mind the keywords that Mr Heng used in describing the tax policy the Government wishes to maintain: pro-growth and progressive.
Before a blanket hike of the GST rate, the Government is more likely to first implement measures that affect the wealthy (such as through higher tax rates for top income earners) or discretionary spending (imposing GST registration on foreign-based e-commerce players).
When a GST hike is needed, it will likely be accompanied with measures to cushion the impact on low-income households.
A version of this article appeared in the print edition of The Straits Times on March 01, 2017, with the headline 'GST, personal income or corporate tax hike next?'. Print Edition | Subscribe
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