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GST hike announcement could be on the cards for Budget 2018: economists, tax specialists

THE Goods and Services Tax (GST) is likely to go up within the next few years, with an announcement expected as soon as Budget 2018, economists and tax experts say.

Their predictions follow comments by Prime Minister Lee Hsien Loong, who told the People's Action Party (PAP) convention held on Sunday that Singapore will be raising its taxes as government spending grows.

Besides a GST hike, the government could also be exploring alternative avenues for raising revenue including e-commerce taxes, analysts said.

Finance Minister Heng Swee Keat hinted at upcoming tax hikes in his Budget speech in February, saying that Singapore's expenditure needs are expected to rise rapidly in the years to come, particularly in health care and infrastructure.

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The government's expenditure already far outstrips revenue - it expects a primary deficit of S$5.62 billion for financial year 2017.

"We will have to raise revenues through new taxes or raise tax rates. We are studying the options carefully. We must make these decisions in good time, to ensure that our future generations remain on a sustainable fiscal footing," Mr Heng said.

Analysts said that higher tax revenues are unlikely to come from raising corporate tax rates, given the need for Singapore's economy to stay competitive. Broad-based hikes in personal income tax rates are also unlikely, given the government's plan to keep taxes progressive.

This makes GST the top candidate.

"The straightforward one is GST - which has not been touched in a decade," said CIMB Private Bank economist Song Seng Wun.

"At the moment, there's no pressing need to raise GST. But it's been more than a decade, and 7 per cent is very low relatively to global averages," he noted, adding that a one percentage point hike will bring in about S$1 billion per year in additional revenue for the government.

"Globally, there is an increasing shift from direct taxes to indirect taxes as governments relook at the composition of their tax base and the efficiencies of the relevant taxes," said Loh Eng Kiat, a tax partner at accountancy and business advisory firm Baker Tilly.

"In line with these underlying trends, I expect it is more likely for Singapore to raise the GST rate rather than to raise the tax rate for corporates."

The increase is likely to come "fairly soon, within the next one to two years", said Chia Seng Chye, tax services partner at Ernst & Young Solutions. "Our rates are considered low relative to some other countries in the region - the average is about 10 per cent."

"Whether it's an immediate step-up or a phased increase remains to be seen," he added.

GST was implemented at a single rate of 3 per cent on April 1, 1994. It was raised to 4 per cent in 2003 and to 5 per cent in 2004. The most recent hike came in 2007 when then-Second Finance Minister Tharman Shanmugaratnam announced that the GST rate would be increased to 7 per cent.

Each increase was accompanied by an offset package to help households cope with higher costs of living.

"GST is a regressive tax, which means lower-income households will be hit harder and feel the effects more," said Mr Song, adding that any upcoming GST hike will likely also be accompanied by GST vouchers and rebates.

In addition to its existing sources of revenue, the government could also be exploring alternatives related to the growing digital economy, including taxes on e-commerce spending or earnings. But this would involve more complex changes to existing tax laws.

"Traditionally, tax rules have been drafted based on physical presence; but with e-commerce, things are different since you can do business wherever you want - and you don't even need employees or an office," Mr Chia noted.

"So changes need to be made to tax laws to account for a company's electronic or virtual presence. There is still no international consensus on how to deal with an entity's electronic or virtual presence."

Even as the government looks for ways to grow revenue sustainably, it also needs to be transparent about its expenditure to allay concerns on the ground about raising taxes, Mr Song said.

"Taxpayers must be shown that their tax dollars are being put to good use. Then from the public standpoint, the change won't be met with as much resentment. It has to be made clear that the government is raising taxes because it needs to, not just because it can," he added.

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