By G. Kalyan Kumar
Singapore’s proposed hike of the goods and services tax (GST) from 7 to 9 percent after a surplus budget has baffled many.
For the 2017 financial year, Singapore posted a net surplus of S$9.6 billion that was above the estimated S$1.9 billion. It was the biggest surplus in recent times. In dollar value, the surplus constituted 2.1 percent of GDP.
Now the dilemma is how far Singaporeans will accept the GST hike. According to a tax expert with Deloitte Singapore, hiking the GST will not be an “easy sell” to the citizens.
One consolation is that the GST hike will only take place in 2021. It will be a deferred pain and less severe, according to a political observer.
But the GST hike plan may backfire if the Budget continues to post surpluses in the coming years and bust the government’s claim that the surplus is non-recurrent and a tax hike is a must.
This will lead to calls for shelving the GST hike and the opposition may capitalise on this issue at the next election.
What makes the GST hike peculiar is that the broad tax hike was announced in this parliamentary term, but its implementation has been deferred to the next term.
Rationale for GST Increase
Let us look at the impact of the GST hike from 2021–a good four years after the surplus bonanza. The government’s rationale for hiking the GST is that it wanted a fiscally sustainable future with stable revenue flow. For that, it cannot bank on the surplus without devising new channels of sustainable fiscal sources.
Finance Minister Heng Swee Keat is on record that the bumper surplus may be considered a seasonal phenomenon and is never a structural surplus.
According to the FM, the streams that contributed to the surplus were revenues from the Monetary Authority of Singapore (MAS) and high stamp duty collections as a fall out of the booming real estate and property sector.
However, the government asserts that these revenue sources are not perennial. According to the FM, it will be unrealistic to expect them to be a permanent phenomenon.
“We cannot base our long-term fiscal planning on the basis of exceptional factors being positive, year after year,” Heng said.
Reduce Stress on Healthcare System
The government is expecting a big rise in social expenditures, including healthcare. This is inevitable in managing an aging population.
According to a UOB report, 2018 marks the first time Singapore’s population that is 65 years and older will match those under 15 years old. The report by economist Francis Tan expressed that the demographic change will negatively impact the city state’s economic growth, in addition to driving up healthcare costs.
In response to the ageing population, the budget for the Ministry of Health (MOH) has been increasing over the years. In 2010, the budget stood at S$4 billion, and in 2017 it grew to S$10 billion. Now Heng is predicting an annual health budget of S$13 billion by 2020.
Funding from a higher GST may help to alleviate the financial burden on the healthcare system, while keeping Singapore’s direct taxes such as income tax and corporate taxes low to continue to attract investments and entrepreneurial activity.
Digital Services to Undergo Taxation
The GST hike will also have a sizeable impact on Singapore digital consumers, who will be slapped with “Netflix tax” and businesses using imported services. The logic of taxation is that the services are originating from abroad.
Heng defended the digital tax saying that it will ensure a robust tax system in a digital economy.
GST Hike a Revenue Pipeline
According to an expert, the proposed e-commerce tax will broaden the scope of GST in Singapore and provide the government with a viable revenue pipeline. In taxing digital services, Singapore will be joining countries like Australia, the European Union, Japan, and Korea.
However, unlike Australia, Singapore will not tax low-value imported goods. Australia was the first nation in the world to impose tax on low-value imported goods.
Singapore will be the first country in Southeast Asia to introduce a tax on the digital economy, noted a tax consultant with PwC. Some reports say that Thailand, Malaysia, and Indonesia are also considering digital GST.
The surging e-commerce market in Singapore has increased the government’s appetite for tapping the sector as a tax source. The e-commerce market is expected to generate S$7 billion by 2025. In e-commerce, cross-border transactions constitute 55 percent of total deals.