The Buzz over GST: Does it really need to go up to 9 per cent?

By Calida Soh and Cheng Yui Seeng

ILLUSTRATION: CALIDA SOH

One big question on people’s minds today as Deputy Prime Minister and Finance Minister Heng Swee Keat delivers the Budget Statement is what he will say about the GST, in particular, when the rise is expected to kick in. So far, the formulaic answer has been “between 2021 and 2025’’. But a new wrinkle has creeped in since. The Covid-19 outbreak is expected to hit the economy even more severely than the severe acute respiratory syndrome (Sars) did in 2003.

Singapore’s tax on goods and services started at 3 per cent in 1994, with the Government promising that it would remain so for five years. But when the Government announced a GST hike to 5 per cent in 2003, it faced an outcry from those still feeling the impact of the 2001 recession. It decided to phase in the rise: to 4 per cent in 2003, and to 5 per cent a year later. True to its word, the GST was raised the following year despite calls to help businesses recovering from the impact of the Sars epidemic. The tax was raised to 7 per cent in 2007, where it has stayed since, bringing in revenues almost around or slightly higher than the personal income tax collection. A significant change made recently is the levy of GST on overseas digital services in what is commonly known as the Netflix tax. Over 100 providers have started collecting the tax from its customers since its introduction in January this year.

Opposition parties have always campaigned against GST hikes, arguing that the tax is inherently regressive and hit the poor in the pocket more than it did the rich. Hence, cash packages are usually disbursed in tandem with tax raises to cushion its impact, with lower-income homes receiving more generous help. In 2003, these monies came in the form of Economic Restructuring Shares, as part of a $3.6 billion scheme. The offset package for the next GST hike in 2007 increased to $4 billion and was disbursed over a five-year stretch. From 2012, the GST voucher was a permanent fixture for lower-income households. It had three components: cash, utility rebates and Medisave top-ups. In 2019, $1 billion in GST vouchers and Medisave Top-Ups were given to 1.7 million Singaporeans and 930,000 HDB households.

This time, the Opposition has a new argument. The Singapore Democratic Party (SDP) and the new Progress Singapore Party (PSP) have called to delay the GST hike in light of the economic hit caused by the virus outbreak. PSP has also said that other fees should also be kept constant.

The Government has been coy about giving an exact timing. It has some leeway to introduce the change as early as next year or as late as 2025. It can even decide to do it in two phases like it did in 2003. Will Mr Heng give more specific details today? What he has let fall are only assurances that the GST offset package would be a generous one, to kick in when the rise is a reality.

What is clear, however, is that there would be measures to alleviate the plight of those suffering from the Covid-19 outbreak. A $230 million economic relief package was created in 2003 to help businesses affected by Sars. It is expected to be over twice as much this time — at least $500 million.

MPs and critics alike have suggested alternatives to the GST rise — such as having more taxes for the wealthy, using more investment returns from Singapore's past reserves or exempting basic necessities such as rice and milk powder from GST.

The Government maintains that the GST is its best option to raise revenue. Ministers have called on Singaporeans to look at the tax system beyond GST: They would see a progressive tax system, with the bulk of the burden falling on the well-off.

No government, however, can ever prepare its population for a tax hike. In this case, hints have been dropped since 2017. Former Finance Minister Tharman Shanmugaratnam had said that the country had enough in the kitty at least till the end of the decade.

The decade has come.

BUT DOES SINGAPORE REALLY NEED SO MUCH MONEY?

You can blame it on Singapore’s demand for better healthcare and education services.

For example, the Government’s healthcare spending has more than doubled from $3.9 billion in FY2011 to an estimated $10.2 billion in FY2018, with the establishment of more hospitals and physical infrastructure as well as more subsidies. More money will be needed for the healthcare needs of those aged 65-year-old and above, a demographic set to double from 430,000 to 900,000 by 2030.

Despite shrinking cohorts of students due to a falling birth rate, government spending on education has increased. This is largely from pumping more money into pre-school education to ensure students — especially those from lower-income homes — form strong learning foundations.

The Government’s projection is that healthcare spending will be increased from 2.2 per cent of GDP today to almost 3 per cent of GDP over the next decade. This is an increase of nearly about $3.6 billion in today’s dollars. Within the next decade, healthcare spending is expected to overtake education, which is no small sum. By 2022, the Government will spend $1.7 billion per year on the pre-school sector — double its current spending.

There are also infrastructure needs, such as the building and upgrading of flats and expansion and renewal of the bus and rail systems. Different parts of Singapore such as Jurong Lake and Punggol Digital District will be redeveloped as well. If all infrastructure projects in the pipeline proceed as planned, spending could reach $13.6 billion in 2020 and $14.9 billion in 2021, with railway projects accounting for 45 per cent of the total.

Of course, a decision can always be made NOT to spend more or to cut proposed spending in some sectors. This means that people must accept some trade-offs or a lower quality of living. Should defence expenditure be sacrificed to help defray extra medical costs? Should subsidies on education go down instead?

A 2 per cent rise in GST, the Government has said, would bring in an approximate addition of 0.7 per cent of GDP per year into the Government’s coffers. The GST collection last year was $11.1 billion. The extra would amount to another $5.7 billion according to 2019’s GDP.

This is a breakdown of tax revenue collection over the years.

SOURCE: data.gov.sg

But the chart does not reflect all the components of Singapore’s revenue. Below is a snapshot of last year’s revenue, which includes a Singapore innovation known as the Net Investment Returns Contribution (NIRC).

SOURCE: MOF

WHY TARGET THE GST?

Countries the world over are turning to such indirect taxes to raise revenue. As it is a tax on consumption, everybody pays, including the tourists and business travellers who stay in hotels and patronise restaurants. It is less affected by sentiment-prone revenues such as income and corporate taxes which will go down when the economy is affected. Even oil-rich Saudi Arabia has introduced a 5 per cent tax in 2018 as an alternate measure to raise revenue.

Singapore’s current rate of 7 per cent is a low one as compared to the OECD average of 19 per cent.

GRAPH: CHENG YUI SEENG/ SOURCE: OECD, PwC

On the other hand, there is a worldwide trend of lowering corporate taxes to raise a country’s competitiveness as a place to do business. Companies will be attracted to places with low taxes that will not shave off too much of their bottomline. The United States, for example, reformed corporate rates from 38.9 per cent to a flat rate of 21 per cent in 2018, after the election of pro-business Donald Trump as president.

Singapore’s corporate tax is a flat rate of 17 per cent, compared to 16.5 per cent in Hong Kong and 12.5 per cent in Ireland. Hong Kong actually has a two-tiered tax regime, where the first HK$2 million of assessable profits will only be taxed by half at 8.25 per cent.

Like companies, high net worth individuals move to places where income taxes are low — and leave if they believe that the taxes they pay amount to hefty penalties for their effort or enterprise.

In Singapore, only individuals who earn an income of more than $22,000 annually are expected to pay tax, which is a high threshold that exempts many citizens. In 2018, 1.7 million out of a population of 5.6 million, pay personal income tax. Income taxes can be flat or progressive, with higher-income earners paying more, which is the case in Singapore. In 2017, the income tax rates for the highest group of income earners increased from 20 per cent to 22 per cent. In a parliamentary reply last year, Mr Heng said that the personal income taxes collected from the top 20 per cent of taxpayers have more than doubled between Year of Assessment 2007 and 2017, from $4.3 billion to $9.8 billion.

That the personal income tax system is progressive has never been in doubt. The question is whether making it even more progressive would yield the requisite revenue — or make it too painful for high-income earners to live here.

On the face of it, the least painful way to raise more money is to change the NIRC formula.

In FY2018, the NIRC contributed $15.9 billion in taxes, the biggest chunk of revenues. It consists of 50 per cent of the NIR on the net assets invested by GIC, the Monetary Authority of Singapore and Temasek Holdings, and 50 per cent of the Net Investment Income (NII) derived from past reserves from the remaining assets. In other words, we can spend 50 per cent of the estimated gains from investment, and put the rest into the reserves to make more money for the future. The NIRC is not a traditional revenue source. Most countries actually have to contribute towards their reserves, rather than be able to draw on the interest of past savings.

Underlining its importance, Mr Heng said last year: “If we did not have the NIR framework, we would have had to double our personal income tax collection or our GST collection to raise the same amount of revenues. In fact, we would not even be able to raise the same amount of revenue, because it is now the largest category and doubling all the rest does not give you that same amount.’’

Because the NIRC is now at its 50 per cent limit, there have been calls to revise this limit to free up more revenue. Some MPs have suggested tweaking the percentage, to be raised to fund non-recurrent substantial infrastructure and lowered to 50 per cent when the necessity passes, for example. But the Government has been insistent on drawing the line at 50 per cent to maintain fiscal discipline, and to continue building the reserves.

Mr Heng said that choosing to keep smaller reserves may seem like an option. But Singapore is too vulnerable to the volatile economy and financial markets. “With an economy worth nearly S$500 billion a year, we should set aside enough to protect it and our people’s livelihoods and future”, he added. The reserves also serve as a strategic defence, to deter currency manipulators, for example. As for why the line is drawn at 50 per cent, he is less clear. It appears to be a balance of drawing on past effort and preserving for future benefits.

CAN WE TWEAK THE GST FURTHER TO REDUCE ITS REGRESSIVE EFFECTS?

This is an oft-heard suggestion: Why not exempt some basic necessities from GST or have a tiered tax with more imposed on luxury goods? In Malaysia, a total of 5,443 items are exempt under the current Sales and Service Tax (SST). These include food items such as rice, cooking oil, bread, baby food products and bottled drinking water. General goods such as newspapers and wheelchairs, medicine and construction materials such as sand, cement and bricks are also on the list.

South Korea also has many items exempt from tax, for instance, non-processed or non-edible-foods, health and medical services like funeral services and disinfection services, basic passenger transportation services, land and cultural or art activities.

SDP member Alfred Tan, for example, was reported saying: “What is another S$20,000 to the person buying his S$1mil Rolls Royce or Bentley? In contrast, S$20 of GST for milk and rice for a family on a $1,000 monthly salary is a lot. What about his family’s childcare, healthcare, transportation, utilities, food and other necessities of life? Is this too complex for such a well-resourced government? The Government prides itself on creating the country’s complex healthcare finance system. Is a tiered GST system too difficult?”

Speakers at a protest on 3 March 2018 against the planned GST hike also echoed his sentiments.

The Singapore Government’s answer has always been along these lines: Better to have a flat tax for all, and then redistribute some to those who have been most affected. This is easier to administer and there will be no arguments about what is basic or not. Bread, for example, could be plain white bread or the more expensive organic wholemeal type. Even rice has many varieties. In fact, why allow the well-off to avoid paying tax on organic wholemeal bread and basmati rice? They would be saving more, in absolute dollars, than the poor.

International researchers have also concluded that it is not sensible to use tiered GST rates to help the less well-off and recommends moving towards single-rate regimes. In fact, significant revenue is lost from GST not collected from higher-income households. India, for example, has plans to simplify and reduce the number of its GST tiers from six to two.

BUT YOU CAN STILL PRY MORE OUT OF THE RICH….

People’s Action Party MP Cheryl Chan suggested wealth and inheritance taxes on ultra-high net worth individuals or the top 1 to 2 per cent of society as a possible source of revenue in future. These would be an additional source of funds to sustain the many social welfare programmes that may have "a long tail in the years ahead", she said during the debate on last year’s Budget statement.

She said that the rise in wealth inequality has been greater than in income inequality. "Those with wealth are not only on a better footing to accumulate more, they have even better access to resources that help preserve their wealth."

Mr Heng maintained that wealth taxes should ideally target fixed assets like property instead of inheritances or other holdings. The wealthy are people who can manage their finances well enough to escape having to pay inheritance taxes, which were abolished here in 2008.

The Government has chosen instead to adjust property taxes over the years to become more progressive, and this includes levying stamp duties. Singaporeans pay an additional 12 per cent for their second property and another 15 per cent for third and subsequent properties, following changes to the additional buyer's stamp duty in 2018. Foreigners fork out additional 20 per cent on all purchases. In Budget 2018, the Government increased the top marginal buyer's stamp duty rates for residential properties worth more than $1 million from 3 per cent to 4 per cent. Analysts have described this as less of a cooling measure and more of a luxury tax.

BUT BUT BUT….GST IS STILL REGRESSIVE

The Government has asked its citizens to consider the tax system as a whole, which penalises high-income earners with high-end properties the most. They also make up a large portion of those who contribute to GST, though it may not be a large part of their household income.

Lower-income households (with an annual income of less than $20,000) do not pay income tax and although the GST eats up more of their income, the GST vouchers and other rebates they receive help to offset the tax. They are also more subsidised than others, for example, in healthcare subsidies. Plus, access to better schemes like the Silver Support programme is regulated with means tests on income and age to ensure benefits are kept for the needy.

Looking at the overall balance of taxes and transfers, lower- and middle-income households receive more benefits from transfers and subsidies than what they pay in taxes, according to the most recent chart tabulated by the Finance ministry.

For the five year period of 2011 to 2015, the top 20 per cent of households in income level contributed to 54.9 per cent of taxes, while the bottom 20 per cent only paid 8.7 per cent of taxes. Furthermore, the bottom 20 per cent of households received 26.4 per cent of transfers.

SOURCE: MOF

WHAT ABOUT BORROWING FROM SOMEWHERE?

That can be done but someone has to pay the debt in time. The burden for recurrent spending would then be shifted to future generations. Mr Heng thinks that this approach is better for big lump-sum projects that give returns further along in time, like the Changi East development and Cross Island line. For example, the upcoming Terminal 5 (T5), part of the Changi East development, is estimated to cost around $10 billion.

These huge expenditures will benefit generations of Singaporeans, making it fairer and more efficient to be funded in this manner. This could apply to other large projects to mitigate the effects of climate change as well.

Whatever is announced today, you can expect some unhappiness or, at the very least, resignation. Perhaps, attention will be focused instead on the care package that has been promised to alleviate cost of living and business costs that go up because of the Covid-19 outbreak.

Mr Heng put out an intriguing Facebook post last night, suggesting that the reserves could be touched to help the economy ride out the impact of the virus outbreak. It wasn’t clear if he meant past reserves, which would require presidential assent. This current term of Government has so far amassed $15 billion in surpluses, which would have to be used first. Mr Heng might well make a distinction between coming up with the care package for the more immediate relief, and raising the GST as a longer-term strategy which Singapore should stay on course for.

The Government has acknowledged that announcing the proposed tax rise so early could be politically damaging. It also gives the opposition ammunition to paint the Government as uncaring of people’s needs. Because of the complexity of the subject, it is easier to sway people with slogans such as No to GST rise. Perhaps, the Government should have its own slogan too although it would take some doing to factor in all the ramifications of a GST rise into a pithy soundbite.