SINGAPORE - Ever since it was announced in 2018 that the goods and services tax (GST) would be raised from 7 per cent to 9 per cent some time between 2021 and 2025, there has been much speculation as to exactly when it will take place, and what impact it will have on Singapore households and businesses.
The increase was held off last year as Singapore grappled with Covid-19, but Prime Minister Lee Hsien Loong indicated in his New Year message that the Government will have to "start moving" on the hike as the economy emerges from the pandemic.
More details will be revealed during the Budget on Feb 18. Meanwhile, here are answers to 15 questions you may have about the GST:
1. What is GST, when was it introduced, and why?
The GST is a broad-based tax paid on goods or services consumed domestically, including imports. In other countries, it is known as value-added tax, or VAT.
It was introduced in 1994 at a rate of 3 per cent, as part of a shift from direct taxes to indirect ones to boost Singapore's international competitiveness.
The additional revenue collected from GST enables individual and corporate income tax rates as well as property tax rates to be kept low. Also, a broad-based consumption tax spreads costs more fairly and creates a more resilient tax base as the population ages.
2. How is it calculated for businesses?
GST is a multi-stage tax collected at each stage of the production and distribution chain.
Output GST, which a GST-registered business charges on its local supplies of goods and services, is collected by businesses on behalf of the Government. Input GST refers to what a GST-registered business pays on its purchases of goods and services for business purposes.
To determine the net GST payable by or refundable to the business, the input tax paid is deducted from the output tax collected in a given period.
3. How does our rate compare with other countries?
The current rate of 7 per cent in Singapore is among the world's lowest, even in Asia. The 2021 global average standard VAT rate was around 19 per cent, and around 12 per cent in Asia. The increase to 9 per cent will still put Singapore's GST rate below the Asian average.
4. Is anyone exempt? Is GST ever absorbed?
In Singapore, the sale and lease of residential properties, provision of financial services, import and local supply of investment precious metals, and supply of digital payment tokens are exempt from GST.
To address its impact, in particular on lower-income households, the Government has continued to fully absorb GST on publicly subsidised education and healthcare.
5. How much does GST contribute to revenue?
GST has, on average, contributed more than one-fifth of the total tax revenue collected by the Government over the past five years.
In financial year 2020/21, the Inland Revenue Authority of Singapore collected $10.3 billion in GST. This made up 21 per cent of the total taxes collected, and was the third-highest tax type after corporate income tax (33 per cent) and individual income tax (26 per cent).
Assuming consumption patterns remain the same in the years to come, a two percentage point increase in GST would add more than $3 billion a year to Singapore's coffers, and could overtake individual income tax as the second-largest generator of tax revenue.
6. When was GST first raised?
The GST rate was raised from 3 per cent to 5 per cent over 2003 and 2004 - by one percentage point at a time - and then to 7 per cent in 2007.
7. Why the hike this time?
There is never a "good time" to raise rates, but a hike is more acceptable during a period of economic growth and renewed consumer spending.
The economy is on the mend, and gross domestic product is expected to grow 3 per cent to 5 per cent in 2022. PM Lee has said that he is cautiously optimistic about Singapore's economic recovery in the year ahead.
8. Is there a good reason to increase GST?
Singapore has to boost its tax revenue to fund social and healthcare spending, especially given its ageing population.
Since the GST was last raised in 2007, public expenditure has grown significantly. Between 2007 and 2019, government spending rose from around $33 billion to $75 billion a year. Social spending nearly tripled. Government healthcare expenditure grew from around $2.2 billion to $11.3 billion.
Having run up cumulative budget deficits of more than $75 billion over the past two years and drawn down reserves to the tune of $53.7 billion, there is also some urgency to rebuild public finances. The Government has to meet the constitutional requirement to balance the budget by 2025.
9. Why not just tax the rich?
It is tempting to invoke the Robin Hood solution of taxing the rich to pay the poor. But measures that equalise opportunities - such as improving access to education, and additional investments in vulnerable communities - are more powerful than any forced income or wealth redistribution.
Also, Singapore needs to find more fiscally sustainable ways to fund its needs. As a broad-based tax, GST is easy to administer, and is a stable source of government revenue relatively free of domestic production and distribution distortions.
In contrast, income tax can have a distortive effect on the economy as taxpayers are incentivised to take steps to avoid reaching certain levels of income, and to classify their receipt of monies as not being of an "income" nature.
10. Will the hike be staggered?
The GST hike over 2003 and 2004 was done in a staggered manner, to ease in the cost burden for consumers as Singapore emerged from the aftermath of the Sept 11 terrorist attack in the United States in 2001 and Sars.
But this approach causes inconvenience to GST-registered businesses, which have to adjust their enterprise resource planning systems and price displays a few times.
Thus, some analysts expect the GST to be raised by two percentage points at one go.
11. Will exceptions be made for some goods and sectors?
Singapore has a broad-based GST system with no reduced rates on essential goods. This allows the tax to be administered simply, without the added complication of defining which goods are essential.
Though sectors such as food and beverage, tourism and entertainment have been harder hit, exceptions are not expected to be made for such sectors, which have received various forms of government support during Covid-19.
12. Won't the GST hike add to inflation and cost pressures faced by businesses and Singaporeans?
Such pressures should be countered by diversifying imports and building buffer stocks of essential goods, not by postponing the hike.
Though there are troubled parts of the economy and more vulnerable households, it is more effective to support them through targeted and time-bound subsidies.
13. Is GST regressive?
In theory, GST is regressive as it imposes a proportionately larger burden on lower-income Singaporeans than higher-income ones.
But GST forms part of Singapore's overall tax and benefits system, which is progressive. Those with higher incomes spend more, hence they pay more GST and contribute more to GST revenue.
The permanent GST Voucher scheme helps the lower- and middle-income with cash support and utility rebates, and the elderly get MediSave top-ups. There are other government subsidies - in areas such as education, housing and medical care - as well as Workfare and Silver Support schemes for the lower-income.
The net result is that lower- and middle-income households receive more in benefits than the taxes they pay.
14. Will I be hit by the full impact of the GST hike now?
No. A $6 billion Assurance Package means that all adult Singaporeans will get cash payouts of between $700 and $1,600 over five years to offset at least five years of additional GST expenses for most households, and 10 years' worth for those living in one- to three-room Housing Board flats.
The GST Voucher scheme, which has three components - cash, MediSave top-ups and U-Save rebates - will be enhanced when the GST rate is increased.
This will fully offset the GST for retiree households living in one- to three-room HDB flats, significantly offset the GST for retiree households living in four- to five-room HDB flats, and offset about half of the GST for lower-income households with no elderly persons.
15. What support did the Government give in previous GST hikes?
The Government rolled out offset packages that included cash payouts, utilities, conservancy and rental rebates, and other subsidies. The highlight of the Budget 2002 GST offset package was $3.6 billion in Economic Restructuring Shares for eligible Singapore citizens aged above 21.
Shares worth between $600 and $1,400 were disbursed over three years.
The Budget 2007 GST offset package comprised cash payouts called GST credits, a senior citizens' bonus over four years, and top-ups to the Public Transport Fund for lower-income households, among other kinds of help.