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Singapore's GST to be raised to 8% in 2023 and 9% in 2024; Minimum Effective Tax Rate for corporates to be explored

The last time Singapore raised its GST was from 5% to the current 7% in July 2007.

Singapore’s Goods and Services Tax (GST) will be raised in two steps – with the first increase from the current 7% to 8% scheduled to take effect from Jan 1 2023.

The second increase from 8% to 9% will subsequently kick off on Jan 1 2024, Finance Minister Lawrence Wong announced in his Budget speech on Feb 18.

The last time GST hike was imposed here was in July 2007, when the rate went up from 5% to the current 7%. The 2-percentage increase to the GST took effect in the same year that it was announced.

Prior to that, the increase from 3% to 5% was introduced in two steps – first to 4% in 2003 and subsequently to 5% in 2004.

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Wong stressed that timing of the hike was considered carefully after taking into consideration factors such as the ongoing pandemic, the state of Singapore’s economy as well as the inflation outlook.

In the most recent reading in December 2021, Singapore’s headline inflation — the measure of the total inflation in the economy — rose to 4%, the highest level the price gauge has been at in nearly eight years.

While the GST hike looks to raise more revenue for pressing needs, it has been met with concern from Singaporeans and businesses.

“Our revenue needs are pressing. But I also understand the concerns that Singaporeans have about the GST increase taking place at the same time as rising price,” explained Wong.

For one, the revenue from the increase in GST will go towards supporting Singapore’s healthcare expenditure as well as to provide aid for seniors.

Singapore’s healthcare expenditure had tripled from $3.7 billion in 2010 to $11.3 billion in 2019. Excluding Covid-19 expenses, the government is expected to spend about $27 billion or about 3.5% of GDP by 2030 if its expenses increase at a similar rate.

A 2 percentage point hike in GST is expected to rake in about $3.5 billion in revenue, which translates to about 0.7% of GDP. This figure does not include government rebates such as the permanent GST Voucher scheme, noted Wong.

He went on to say that the “GST revenue by itself will not be sufficient to cover our additional healthcare spending”.

This coupled with a rise in other areas of social spending has pushed the government to make concurrent changes to personal income tax, property tax and vehicle tax.

Low Hwee Chua, tax and legal leader at Deloitte Singapore calls Budget 2022 “one of the most lively Budget speeches in several years [from a tax perspective]”. “The message was clear – ‘every need must be paid by someone’ – but Singapore aims to have a fair and progressive tax system,” he explains.

Low’s counterpart, Richard Mackender, an indirect tax leader at Deloitte Singapore says he had already predicted that the GST increase would take effect in 2023. “Businesses will need time to make these changes, especially since the last rate change was back in 2007, so a date of Jan 1 2023 for the first increase will be welcomed,” he mulls adding that the next nine months or so will allow businesses to the steps needed to get ready and compliant.

With the GST rate change taking place in 2 stages, Mackender says that the businesses will need to make the necessary changes “not once, but twice”. In a broad sense, he notes that having two lots of system changes will add costs to businesses as they would need to revisit their systems to adjust it in the coming months, only to have to do it again in 2023.

As such, Mackender reckons that the 2-step increase “can be seen more from the perspective of easing the impact on consumers than helping businesses”.

Conversely, Nicholas Lee, Vice President and Market Leader Asia Pacific at Phillips Domestic Appliances believes that the phased approach will benefit businesses by allowing for more time for them to align their operations and prepare for the necessary changes.

However, Jeremy O’Neill, GST Senior Manager at Grant Thornton Singapore, says that the “need to update and revise taxes on a continuous basis is a necessary evil”. “A change in tax rate cannot be made without additional one-off costs to those affected. In the case of GST, the one-off costs are likely to include making changes to their finance and invoicing systems, reviewing contract terms, and updating pricing / menus,” he explains.

Furthermore, O’Neill says that there is a need to implement transitional provisions each time there is a change in the scope or rate of GST. GST-registered businesses may in turn seek to recoup the resultant increase in operational and transitional costs from their customers. However, the extent to this may be mitigated by the experience that businesses had from adopting a 2-stage GST hike in 2004.

Rebates

In a bid to cushion impact of the impending GST hike, the government will provide an additional top up of $640 million to the $6 billion Assurance Package.

The enhanced package seeks to provide the majority of Singaporean households with offsets covering at least five years of additional expenses. Lower-income households are also expected to receive offsets covering around 10 years worth of additional GST expenses.

As part of this, all adult Singaporeans will receive cash payouts ranging from $700 and $1,600 over five years from 2022 to 2026.

Minimum Effective Tax Rate

In another move, Wong noted that Singapore will need to update its corporate tax system to account for global tax developments relating to the Base Erosion and Profit Shifting initiative (BEPS 2.0).

As such, the republic is exploring a Minimum Effective Tax Rate (METR) to top-up the effective tax rate of multinational enterprise (MNE) groups to 15%. This is in line with the second pillar of the initiative which states, amongst others, that the introduction of a global minimum effective tax rate of 15% for some MNE groups.

Meanwhile, the first pillar requires some MNEs to re-allocate profit from where activities are conducted to where consumers are located.

"At this stage, it is premature and difficult to determine the eventual fiscal impact of both pillars," Wong said.

However, the Finance Minister noted that the city-state is likely to lose tax revenue under the first pillar given its small domestic market and the extent of activities conducted by MNEs here.

He added that Singapore would need to consider stiffer global competition for investments, as governments worldwide seek to restore and rebuild their economies after the effects of the pandemic.

In any case, the Inland Revenue Authority of Singapore (IRAS) is set to study the METR regime further and consult the industry on its design. The government will also closely monitor international developments before making any decisions on this.

"We will therefore need more time to study these issues thoroughly, and will announce changes in the corporate tax system when we are ready," said Wong.

Yeoh Lian Chuan, partner, private client and tax at Withers KhattarWong says this is a space to lookout for even as it remains under review. “The current low effective rates applied, and so development in that space continue to be worth watching closely,” he stressed.

Cover image: file photo

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