SINGAPORE (Feb 26): In the end, speculation about a hike in the Goods and Services Tax (GST) turned out to be true — well, sort of. In his Budget speech on Feb 19, Finance Minister Heng Swee Keat said the government would increase the rate of GST from 7% to 9% between 2021 and 2025.
Why announce a tax increase years away from its implementation? One reason might be that stating the intention to raise the rate of GST when everyone is already expecting it, and clearly explaining why it will be necessary, could prevent the issue from becoming politicised. In his speech, Heng said the GST hike would be needed to fund expected increases in healthcare, security and social spending that will “directly benefit current generations”, despite the government’s “prudent spending, saving and borrowing for infrastructure”.
Another reason might be that the government is choosing to delay the GST rate hike until it is absolutely necessary. Indeed, Heng said in his Budget speech that the precise timing of the hike would depend on the state of the economy, growth of expenditures and how “buoyant” existing tax revenues happen to be.
As it happens, the government expects to finish its current fiscal year (FY) to March 31 with a surplus of $9.61 billion, well above the estimated $1.91 billion, thanks to higher-than-anticipated contributions from stamp duties, corporate tax and statutory board contributions. Nevertheless, Heng said the GST rate hike was likely to happen sooner rather than later within the stipulated timeframe.
Selena Ling, head of treasury research and strategy at OCBC, says the long lead time to the implementation of the GST rate hike is unprecedented. “We thought that they might hike it in 2019 or 2020, and didn’t expect them to push it this far down the road.” She attributes this simply to the government being confident about having enough revenue to fund its planned spending up to 2020. “Given the size of the budget surplus, which is the highest in 30 years, it would have been quite unpalatable to say that we need to hike GST now,” she adds.
Koh Soo How, Asia-Pacific indirect tax leader at PwC, says later-than-expected implementation of the GST rate hike might also have had something to do with changes to GST rules. They include the mandating of customer accounting from January 2019 for prescribed goods, such as mobile phones, whose GST-exclusive sale value exceeds $10,000. “That’s a significant change as far as the GST rules are concerned. We also [expect] that an e-commerce tax is going to come,” Koh says. “For the minister to then announce a GST rate hike this year would have been too much of a shock to the system.”
Whatever the case, most analysts expect GST to become an increasingly important source of tax revenue in the future. The government expects to collect $10.8 billion in GST in FY2017, making it the second-largest source of tax revenue behind corporate tax and ahead of personal income tax, which are expected to contribute $14.4 billion and $10.7 billion, respectively, to government coffers. Total operating revenue is expected to come in at $75.2 billion for FY2017.
Interestingly, GST revenue for FY2017 is expected to be 4.3% below what had been budgeted for the year, and 2.8% under what was achieved in FY2016. According to OCBC’s Ling, weaker consumer sentiment in the first half of FY2017 could have been a reason for this. A “structural” factor could be the growing popularity of e-commerce. “Instead of buying from brick-and-mortar shops, more could be buying from foreign online sites.” An e-commerce tax, which is currently being studied by the government, could plug this gap, Ling says.
Regressive or progressive?
Michael Wan, an economist at Credit Suisse, says GST is an efficient and sensible form of taxation for Singapore’s developed economy and ageing population, even though it is widely said to be regressive, as it weighs more heavily on lower-income groups. “In an economy that is expected to age quite rapidly over the next 10 to 20 years, it ensures that the tax net remains [intact], rather than taxing a base expected to decline over the next two decades,” he says.
He adds that Singapore corrects the regressive nature of GST with its social spending programmes and redistributive policies. “If you combine spending with revenue, you can theoretically create a fiscal system that’s progressive overall, even if the tax is regressive and hurts the lower income more.”
In fact, even with the next GST hike at least three years away, Heng announced some measures to cushion the impact on the vulnerable. For starters, the government will continue to absorb GST on publicly subsidised education and healthcare. It will also pump in $2 billion to the GST Voucher (GSTV) scheme to support enhanced payments to help lower-income households. The government currently distributes about $800 million a year from the GSTV Fund. An offset package with more support for lower- and middle-income households will be implemented for a period.
Separately, the government continued introducing progressive tax measures, with a hike in the top marginal buyer’s stamp duty (BSD) for residential properties to 4%, from 3%. This applies to properties valued above $1 million, effective from Feb 20. The BSD rates, which until recently ranged from 1% to 3%, had not changed since 1996. Heng framed the hike as a means to “enhance progressivity”, as it targets those who can afford high-value properties.
Shantini Ramachandra, tax partner and private (tax) leader at Deloitte, sees this tax measure as a smart way to address inequality in Singapore without eroding its status as a global wealth management hub. “Why did the government go this way rather than introduce a new wealth tax or reintroduce inheritance tax or estate duties? We think that this hike will have a minimal impact on Singapore’s current status as a leading financial and asset management centre, whereas the introduction of a wealth tax would have had a negative impact on our ambition,” she says.
However, some Singaporeans who have sold their properties in en bloc deals and are now hunting for a new home could be hurt by this tax measure, Ramachandra notes. “They will be affected because there is no transitional measure to cover them. There’s been a recent surge in en bloc sales, and this group will now be saddled with the hike.”
Nevertheless, industry players are sanguine about any impact this might have on demand for high-value property. ERA Realty Network key executive officer Eugene Lim says the increase is not “alarmingly large”. “For purchasers who buy a property above $1 million, it is a very marginal increase in the stamp duty paid,” he says. PropNex Realty key executive officer Lim Yong Hock agrees. “Any investor who is prepared to buy a big-ticket property will not be deterred by the marginal increase in stamp duty,” he says.
Higher costs, prices?
Apart from preparing to raise the rate of GST, the government is also broadening the GST base, with the imposition of GST on imported services from Jan 1, 2020. Currently, GST does not apply to imported services provided by an overseas supplier that does not have a Singapore establishment.
Business-to-business imported services will be taxed via a “reverse charge” mechanism, whereby a local business customer would have to account for GST to the Inland Revenue Authority of Singapore (IRAS) on the services that it imports. However, only businesses that make exempt supplies or do not make any taxable supplies will need to apply the reverse charge.
This will affect primarily businesses that are unable to recover all GST they incur, such as financial services institutions or residential property developers, say Deloitte tax partners Richard Mackender and Danny Koh, in an email to The Edge Singapore. “The reverse charge requirement will mean that their costs will increase, because from 2020 they will be incurring more GST as a result of having to self-assess GST on the services they buy from outside Singapore. It is likely that these businesses will look to pass on the GST to their customers, but it will certainly mean that these businesses will have additional costs to bear, which will be a factor for their investment decisions in the future,” they note.
Meanwhile, business-to-consumer (B2C) players functioning as overseas suppliers and electronic marketplace operators will have to register with the IRAS for GST. According to a draft e-tax guide released by IRAS on Feb 20, this includes mobile apps, online gaming, movie-streaming sites, cloud storage services and even software downloads and firewalls. “[The] requirement is that they charge and collect GST from their local customers and account for this GST via a periodical GST return to IRAS, if the value of all the sales they make in Singapore is more than $100,000,” note Mackender and Koh.
Among the prominent B2C service providers likely to be affected is US-based video-streaming site Netflix.
A spokesperson for the company confirmed that it would be affected, but did not comment on whether this could affect subscription prices.
According to Mackender and Koh, established B2C players already face a similar regime in countries such as Australia, South Korea and Japan. And, once it is implemented here, it is likely to result in many of them raising their prices. They add, “The change does mean that the price of their services will increase by 7%, and in due course 9%, so for local consumers, the cost of buying these services from overseas providers will be more aligned with the cost of buying similar services from local providers. That will be a good thing for the local providers, helping them to compete, but it is not welcome news for local consumers.”
OCBC’s Ling says the biggest challenge for the imposition of a “Netflix tax” could be enforcement issues. “The bigger players may be more willing to comply, but there are also smaller ones that may be more challenging to regulate. We will have to wait for more information on this. After all, the devil is in the details.”
