Singapore’s taxation policy is anchored on the philosophy that the operational costs of running the government are borne by its citizens, who, in turn, shall reap the benefits derived from governmental services.
In line with this, Singapore strives to pursue a comprehensive policy on taxation as it levies taxes on as many individual taxpayers as possible. Recently, Prime Minister Lee Hsien Loong, speaking at the People’s Action Party Convention, hinted at a potential tax hike, signifying the need to raise taxes in view of the country’s growing expenditures and government’s key investments on infrastructure, healthcare, public transport network and social services for economic growth.
GST Hike in Singapore: An Inevitable Occurrence
Following this speech by the Prime Minister, tax experts theorised potential changes to Singapore’s current tax regime, which likely features a raise in the goods and services tax (GST) from 7% to 9% in the 2018 Budget. Mr. Francis Tan, a UOB economist, stated that since Singapore’s GST rate has remained at 7% for the last ten years since 2007, an eventual increase may be underway. GST is being targeted as a significant source of revenue, as last year’s GST collection remained the second highest contributor to governmental revenues in the fiscal year of 2016. Further, estimated GST collections for the fiscal year of 2017 amount to $11.25 billion, which is almost 16% of the overall estimated operating revenues of the government.
Understanding the Concept of Singapore’s Goods and Services Tax
Goods and services tax (GST) pertains to a broad-based tax imposition charged at every phase of manufacture and distribution. It is similar to value-added taxation (VAT) which is an indirect form of taxation.
According to the Inland Revenue Authority of Singapore (IRAs), for GST to be imposed on goods or services, the following requisites must concur :
- The provision of tangible goods or services must be in Singapore, except those exempted under the GST Act such as exports, exempt supplies and international services.
- The supply is made by a GST-registered taxable person or one who is liable to register as such.
- The sale of goods or services must be done in the normal course of business.
A Closer Look at the Tax Hike Effect on Businesses and Consumers
So how exactly does a GST tax hike affect businesses in Singapore? The tax hike implementation is predicted to yield the following outcomes:
Lower Consumer Spending
A GST tax hike impacts both end consumers and businesses in different ways. Being a tax on domestic consumption, GST is borne ultimately by customers. Its regressive nature allows the burden of taxation to be shifted onto the consumers. This means that a GST-registered company, while directly liable as the collecting agent to the taxing authority, may collect the tax from its customers.
To illustrate, in case of a GST hike from 7% to 9%, a company which normally charges $100 service fee to a customer may pass the burden of paying the increased rate of 9% to the consumer for a total invoice of $109, and thereafter remit the GST collection of $9 to IRAS upon the filing of GST returns on a quarterly basis. Shouldering the tax burden is likely to cause a dramatic cut back on consumer spending, which then translates further to decreased sales revenues for businesses.
Diversified Tax Base Inclusive of E-commerce Purchases
Early this year, Singapore’s finance minister Heng Swee Keat confirmed the government’s plan of diversifying the GST tax base. The projected GST tax hike may come with a broadened tax base, which includes e-commerce purchases and imported digital services such as music downloads and e-books . Under such tax scheme, the foreign seller is made liable for GST on sales and is required to register to account for its sales. This is to level the playing field between local retailers and overseas suppliers who are not subject to the same GST liability.
Higher Penalties for Non-Compliance
A higher GST rate means stiffer penalties for delayed payment. Currently, GST-registered enterprises are mandated to settle their tax liability within a month after the end of the accounting period. Otherwise, a 5% penalty and an additional 2% additional penalty may be meted on overdue tax. To ensure compliance with the new tax regime, tax authorities may prescribe stricter penalties, in the form of interests, surcharges or even criminal prosecution.
Hike Implementation Segregates Luxury from Non-Luxury Goods
Mizuho’s Bank economist, Mr. Vishnu Varathand, said that the government may use the tax hike as a means to address issues on social inequality. To cushion the impact of the GST hike on lower income taxpayers, luxury and non-luxury goods may be subject to different tax rates, with corresponding higher GST liability for high value items.
GST Registered Company: Is it a Good Business Decision?
GST-registered businesses are least likely to be affected by the tax hike, as they are entitled to claim input tax incurred in purchases and credit it against output tax. Unfortunately, this input tax credit scheme allowing crediting of input tax is unavailable to non-GST registered companies. This exposes them to added costs and lessens their competitiveness in the market.
The Process of GST Registration
Registration for goods and services tax may either be compulsory or voluntary . A tax payer may likewise avail of exemptions under certain conditions.
A taxpayer is liable for compulsory GST registration in the following instances:
- Retrospective basis: If the taxable turnover per quarter, for a duration of 12 months, exceeds $1 million.
- Prospective basis: if the taxpayer reasonably foresees, with the aid of supporting documents, that in a period of 12 months, the $1 million threshold will be surpassed.
Voluntary registration remains an available option if the taxpayer is not compelled to register but wishes to do so for purposes of claiming input tax on purchases.
Exemption from GST Registration
A taxpayer liable for GST registration may be exempted if the business turnover from the sale of goods and services pertains almost wholly to zero-rated supplies.
Getting Professional Assistance for GST Registration
With the impending tax hike, it may be a good business plan to consider registration under GST to avail of tax credits and avoid irrecoverable GST costs.
At Corporate Services Singapore, our professional tax specialists will guide you in determining whether GST registration is ideal for your business set-up. For professional advice on how to take advantage of Singapore’s GST tax regime or how to register company in Singapore, feel free to contact us for expert advice.