SINGAPORE: An increase in the goods and services tax (GST) is one way the Government could raise revenue to finance the country’s spending needs, though economists are divided on when that could happen if this option was pursued.
The taxman could also be mulling a further rise in “sin” taxes or having duties on digital goods and services.
These predictions come after Prime Minister Lee Hsien Loong said on Sunday (Nov 19) that raising taxes will be inevitable as the Government makes investments in the economy and on infrastructure, as well as spending on social services and safety nets.
Mr Lee, who was speaking at the PAP convention, reiterated that Finance Minister Heng Swee Keat was right when he said that raising taxes is not a matter of whether, but when, although Mr Lee also stressed the Government has enough revenue for the present term.
In February’s Budget, Mr Heng hinted at a possible review of the tax regime, citing expectations for Singapore’s expenditure needs to rise rapidly, particularly in healthcare and infrastructure.
The former, for instance, has seen yearly spending over the last five years more than double to around S$10 billion and will likely keep rising as Singapore’s population ages.
While the Government has tried managing costs by implementing a permanent two per cent downward adjustment to the budget caps of all ministries and organs of state from April this year, it must also grow its revenue base in a “pro-growth and progressive manner” through new taxes or raise tax rates, Mr Heng said in his Budget speech.
TOP ON THE LIST: GST HIKE OR TWEAK TO INCLUDE E-COMMERCE?
One method to do so could be a hike in GST, which was the second-highest contributor to tax collection in FY2016 with S$11.1 billion, experts said. Corporate income tax, another main tax component, collected S$13.6 billion while individual income tax contributed S$10.5 billion.
“Over the years, the Government has used almost all of its bullets, including having ‘sin’ taxes for alcohol and cigarette. The GST is the only one that hasn’t been touched in a long time,” said UOB economist Francis Tan. “Now, it is the bullet that can finally be used.”
The GST, last raised to 7 per cent from 5 per cent in 2007, could be raised by 1 percentage point before being eventually increased to 10 per cent, reckoned Mr Tan.
This will put Singapore more or less on par with regional countries, such as Japan which has a GST rate of 8 per cent. South Korea, Thailand, Vietnam and Indonesia have rates of 10 per cent each.
“If anything needs to be shifted, it makes more sense to tweak the GST because it’s a consumption tax that’s still below the average of most OECD (Organisation for Economic Co-operation and Development) countries,” said Mr Vishnu Varathan, senior economist for Mizuho Bank. “So, there’s certainly scope for the Government to move it up.”
However, economists noted that any increase in the GST will likely result in a one-off pullback in consumption and in turn, have a spillover effect on the broader economy. It should also be complemented with relief packages to help households, in particular the low-income, cope with the rise in cost of living.
Others like KPMG’s head of tax in Singapore Chiu Wu Hong thinks the Government could be mulling a move towards indirect taxation that focus on consumption and usage-based taxes.
This includes expanding the indirect tax base to duties on digital goods and services.
A further increase in “sin” taxes, such as those levied on tobacco, alcohol and gambling, could also be in the works, added Mr Chiu.
The taxman could also be eyeing more environmental duties following the introduction of a carbon tax in this year’s Budget, said Credit Suisse economist Michael Wan.
However, a rise in the corporate tax rate, which currently stands at 17 per cent, will be a “no-no” amid the ongoing bout of corporate tax competition. With countries like the US planning to lower their rates, any increase could hurt Singapore’s competitiveness and send a negative signal to investors, said Mr Tan.
The experts said that individual income tax is also unlikely to come under the knife given the Government’s plan to keep it progressive and how the latest change was only announced in 2015.
Deputy Prime Minister and then-Finance Minister Tharman Shanmugaratnam announced in his Budget address in 2015 that marginal tax rates will go up for the top 5 per cent of income earners, who earn at least S$160,000, with the increases being larger for the highest earners.
“Given that tax rates should have a shelf life of about five to 10 years, to once again revise individual taxes within two years will reflect badly on the last adjustment and suggest that we didn’t think it through properly,” explained Mr Varathan.
“THERE’S NO GOOD TIME FOR THE INTRODUCTION OF ANY TAX INCREASE”
Still, the Government is “not facing any urgency to increase revenue at this point” and should opt to wait out the nascent recovery in the economy, said Nomura economist Brian Tan.
“The labour market is still facing a question of whether it will improve sufficiently next year,” he said.
“Unless we get a massive pick-up in private consumption, I think it’s very difficult to make the case that the economy needs a GST hike right now.”
And the consensus view among experts was that there is no urgency as the Government remains strong in its fiscal position even as initiatives to ramp up social safety nets and build more infrastructure come with a hefty price tag.
For FY2017, a smaller budget surplus of S$1.9 billion, or 0.4 per cent of gross domestic product (GDP), is expected largely due to an increase in expenditure. In comparison, FY2016 saw an expected budget surplus of S$5.2 billion though the exclusion of government top-ups to funds and Net Investment Returns Contribution from past reserves meant a basic deficit of S$5.6 billion.
For Singapore Management University (SMU) law don Eugene Tan, “there’s no good time for the introduction of any tax increase” though next year could “possibly be the last window” before the next general election.
Tax changes are more likely to occur in the next parliament term and Mr Lee’s comments over the weekend should be read as “preparing the ground” and part of the Government’s “longer-term engagement effort” with Singaporeans, he added.
“People may ask ‘Why do we need to raise taxes when we have a balanced budget?’ and that’s perhaps the price to pay for managing Government budgets too successfully.
“The challenge in public education lies in reducing the disconnect between perception and reality,” noted the political observer. “When it comes to this, it’s not a case of propping out more facts. It requires the Government to connect to people’s hearts.”
Assoc Prof Tan added that the Government has tried leveraging on the “complementary notion of the social compact”.
“Given smaller families, is it still realistic and fair to expect families to bear the burden of supporting the elderly? That’s why the narrative is shifting to the fact that this is a shared responsibility, and the tax increase will be an important component to ensure that we are able to ensure a balanced budget and have increased social spending at the same time.”
“There’s no good time for the introduction of any tax increase and I think the Government is fully aware of that,” the SMU law don told Channel NewsAsia. "They are probably seeing this as a longer-term effort to engage Singaporeans so that when (the tax hikes) eventually happens, the hope is that people understand why the Government is doing this.”