The case for a 9% GST

The math behind a 2% raise in GST is a very compelling one.

In FY 2018/19, the Inland Revenue Authority of Singapore (IRAS) collected S$11.1 billion in GST. This made up 21% of the total taxes collected, and was the third highest tax type after corporate income tax (31%) and individual income tax (21%).

Assuming that consumption patterns remain the same in the years to come, a 2% increase in GST would provide an additional S$3.2 billion per year to Singapore’s coffers and would immediately overtake individual income tax as Singapore’s second largest generator of tax revenue.

The financial benefits of raising the GST rate are undeniable. However, GST has always been a political hot potato in Singapore.

As a result of the Covid19 situation, Deputy Prime Minister Heng Swee Keat announced in February this year that the 2% GST hike will not take place in 2021 despite indicating in 2018 that the GST hike will take place sometime between 2021 and 2025.

Just last Friday, on 28 August 2020, DPM Heng made the shocking revelation that over 20 years’ of past Budget surpluses have been used to fund the measures to combat the Covid19 pandemic and its economic repercussions. According to DPM Heng, Covid19 has used up “a generation’s worth of savings”.

The financial statistics are dreadful.

Despite this, DPM Heng was only able to say that the government was “carefully monitoring” the situation “in a way that fosters collective responsibility, with each generation contributing its fair share”. No further details were provided as to when the GST hike would actually take place.

Perhaps the tentative tone adopted by DPM Heng suggests that the PAP-led government may have some concerns with taking the politically-difficult stance of raising GST after the less-than-desirable outcome in Singapore’s recent elections. After all, getting Singaporeans to pay more will never be an easy pill to swallow. The opposition will have a field day in Parliament.

But we need to step back to consider why GST is a “good” tax.

First, as a broad-based tax, GST is a stable source of government revenue that is relatively free from domestic production and distribution distortions. In contrast, income tax can have a distortive effect on the economy. Income tax is a tax that kicks in after a certain level of income, on certain types of income. As a result, 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.

On the international arena, the “source” rules of taxation that apply to income tax are also problematic. One needs to look no further at the international “tax wars” between revenue-starved countries, which have introduced unilateral tax measures to tax foreign-based technology companies whose income is regarded as being “sourced” in those countries, as evidence of the inherent problems with the global tax environment.

Secondly, GST is also neutral in terms of foreign trade because it does not favour either imports or exports. In fact, the playing field between foreign and local supplies have also been recently evened-out with the recent introduction of the reverse-charge mechanism for business-to-business supplies of imported services and the overseas vendor registration scheme for business-to-consumer supplies of imported digital services.

Thirdly, GST is a relatively easy tax to administer and enforce. It is collected throughout the economic life-cycle from production, distribution to consumption – which means that even if GST is missed at one stage, it is still collected at another stage. GST is also a “self-enforcing” tax because a taxable person can claim input tax only if it is supported by tax invoices; which therefore allows the IRAS to check and cross-check for enforcement purposes.

Finally, unlike income tax, GST does not have a discriminating effect on savings and investment. It is a tax on consumption. In other words, the more one consumes, the more GST one pays. As a result, more GST is collected from big spenders. While there may be the fear that the lower-income may be disproportionately affected by GST because it means that necessities are also more expensive in absolute terms, this problem can be alleviated by simply providing GST vouchers to this class of individuals to offset the additional GST payable. Therefore, any rise in GST can be effectively neutralised by having the Singapore government “pay” for the GST on behalf of the lower-income.

When one keeps in mind the above points, perhaps it may be possible to convince the Singapore populace of the benefits of raising GST in these perilous times.

It bears reminder that the PAP-led government has a long runway to implement and deal with any problems arising from the 2% GST hike. They were elected in July 2020 and have a 5-year timeline to settle any discontent. In my view, that is a fairly long time for Singaporeans to adjust to the status quo – particularly if we can see the positive impact on our economy arising from the implementation of a 9% GST by the next elections.

From a political perspective, there is no good time to raise the GST rate. But in an economy battered by the effects of Covid19, it is imperative that Singapore presses ahead strongly and raises the revenue needed to fund further efforts.

I therefore strongly urge the government to reconsider its decision not to raise the GST rate until after 2021.

I am of the view that the additional S$3.2 billion to Singapore’s coffers can potentially go a long way to saving our economy from the crisis of our generation.