Yahoo Finance GST hike in Singapore 'inevitably' needs to proceed despite inflation: KPMG
Raising the GST may be one of the most “fiscally sustainable methods” to increase tax revenue to fund healthcare and social costs.
The hike in Singapore’s goods and services tax (GST) will “inevitably” need to proceed as planned, says Gan Hwee Leng, partner, indirect tax, at KPMG.
With prices increasing due to the current inflationary environment, however, it’s understandable that Singaporeans should be concerned about an increase in GST, which could put additional pressure on residents, she adds.
Singapore’s core and headline inflation expanded further in May. During the month, Singapore’s CPI-All items inflation rose to 5.6% from April’s 5.4% increase, while MAS core inflation grew 3.6% y-o-y, up from the 3.3% growth seen in April.
MAS core inflation represented a 13-year high since December 2008, while CPI-All items inflation reached a high that was not seen since November 2011.
That said, Gan notes that Singapore’s healthcare and social expenditures are also going up exponentially.
“If taxes are not collected to fund these additional costs, individual households may end up shouldering the heavier burden of healthcare and social costs. This would be challenging especially for lower income families,” she writes.
To this end, raising Singapore’s GST may be one of the most “fiscally sustainable methods” to increase tax revenue to fund these costs.
In her note dated June 27, Gan also notes that the GST hike is staggered, which would “go some way in preparing Singaporeans to reconsider their spending patterns and explore alternatives for goods and services”.
She adds that the government has sought to cushion the hike for those in the lower income groups with schemes such as the $6.6 billion assurance package and the extension to the GST voucher scheme.
Furthermore, there is the recently-announced $1.5 billion support package to help businesses and residents cope with inflation. The package is also focused on ensuring that lower-income households are sufficiently supported, notes Gan.
On taxes that are inflation- or recession-proof, Gan says the government could consider upping “sin taxes”, referring to taxes imposed on tobacco and other goods and services that are seen as harmful to society.
“Tobacco excise duty, which is levied at the moment of manufacture rather than at point-of-sale, was last raised by 10% in 2018. This could provide another source of revenue while discouraging the consumption of such goods,” she writes.
“That said, given that it is a broad-based tax, the GST has proven to be a reliable revenue contributor and less susceptible to recession as compared with other types of taxes. A one-percentage point increase in the GST rate would add $1.6 billion in revenue to Singapore’s coffers each year,” she adds.
“This is a significant amount, which could see GST eventually overtaking individual income tax as Singapore’s second-largest generator of tax revenue. With a targeted approach in addressing the regressivity of GST, pressing ahead with the GST increase remains necessary to strengthen the country’s fiscal position amid rising spending needs.”
Moreover, GST on its own, should not contribute to inflation, as it is only paid when goods and services are consumed in Singapore, which could “encourage more savings”.
Taxes for petrol and diesel in Singapore ‘necessary’
Taxes on petrol and diesel in Singapore are also necessary in order to manage the country’s wider move to car ownership, says Gan.
“This is also in line with the country’s climate agenda,” she adds, in response to why Singapore does not have a tax holiday on petrol and diesel.
“Taxes on petrol and diesel, along with other taxes on car ownership, are avenues to steer more residents towards utilising Singapore’s efficient public transport,” says Gan. “These concerted efforts can help with tackling the rising population of motor vehicles on our roads, while contributing to some of the government’s revenue.”
Taxes unlikely to exceed wage inflation
Taxes are also unlikely to exceed the inflation of wages if consumption patterns remain the same. Wages are also likely to increase at a steady pace, says Gan.
“The government has also said that Singaporeans can expect real wage growth this year, with salary increases likely to outpace inflation,” she notes.
However, she recommends consumers make “slight changes” to their lifestyle habits by spending less on luxury items or travelling on modes of public transport instead of owning a car.
“Amid global uncertainties and challenges, consumers should remain prudent in their spending and take proactive steps to manage their expenses in the short- to mid-term,” she says.
Global minimum tax rules
On the implementation of the global minimum tax of 15% by 2023, Mark Addy, KPMG partner, energy & natural resources, telecommunications, media & technology, tax, says the timeline has always been an “ambitious” one.
“Following recent developments in Europe, it seems likely that this could now be delayed till 2024 at the earliest across most countries,” he writes.
“However, as the momentum for a global minimum tax is still very strong, the wider economic situation is unlikely to push its implementation back further than 2024 at this stage. Companies that may be affected should continue to model the financial impact on their business, review their existing structures and prepare their finance teams early in anticipation of the commencement date,” he adds.
While the new global minimum tax will be “of particular concern” for companies which benefit from tax incentives in Singapore, the situation is not all “doom and gloom”.
“We may even see some companies looking to expand their footprint in Singapore to take advantage of its relatively low headline tax rate of 17%,” says Addy.
“There’s little doubt, though, that current economic conditions combined with potential tax rises will not be warmly welcomed by the business community,” he adds.
See Also:
Click here to stay updated with the Latest Business & Investment News in Singapore
Singapore all-items CPI up 5.6% y-o-y in May; MAS core inflation up 3.6% y-o-y
Get in-depth insights from our expert contributors, and dive into financial and economic trends
