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EDITORIAL

Push to keep fiscal system sustainable is sensible, timely (Amended)

ONE of the key planks in the comprehensive Budget 2017 that Singapore unveiled on Monday is to drive home the need to maintain a sustainable fiscal system - and in so doing, set the stage for tax changes to come.

In its report released earlier in the month, the Committee on the Future Economy (CFE) called for - among various recommendations aimed at positioning Singapore for the challenges over the next decade or so - a review and reshaping of Singapore's tax system. The review is necessary given rising domestic spending due to ageing and global changes in tax rules, the CFE said. The government should maintain a tax regime that upholds two key principles, it added. The tax system should remain broad-based, progressive and fair, and at the same time, stay competitive and pro-growth.

In his Budget speech, Finance Minister Heng Swee Keat (who is also co-chair of the CFE) filled out a bit more of the fiscal picture: With big increases expected in healthcare and infrastructure expenditure in the coming years, Singapore would need to not only spend judiciously but also grow its revenues. He let on that Singapore is studying options to raise revenues through new taxes or raise tax rates, and said that the decisions must be made "in good time". Among the slew of tax changes that he did announce, two that stand out are a new carbon tax from 2019, and diesel tax changes that took immediate effect. These two measures - as well as a hike in water prices from July - speak of Singapore's stand on environmental sustainability, and are moves in the right direction for a first-world economy. They also reflect, to an extent, a global shift to indirect taxes, apart from Goods and Services Tax (GST), as a source of government revenue.

Amid a global trend of falling corporate tax rates in developed countries over the years, Singapore made a clear shift from direct to indirect taxes - an imperative already set out as far back as in the 1986 Economic Committee Report. As Singapore looks to grow its revenues, it has to maintain a wide tax base, if not expand it. The majority of Singaporeans do not pay income tax, but every consumer pays GST. While there were no indications of a GST hike anytime soon, Mr Heng did say this week that Singapore is studying other countries’ GST practices on digital supplies from abroad - such as music, movie downloads from overseas - and online purchases. The move would be significant, with the e-commerce market expected to hit, by some estimates, US$5.4 billion by 2025, of which more than half would be cross-border sales. Tax on cross-border e-shopping is in line with the recommendations of the OECD BEPs (Base Erosion and Profit Sharing) project, aimed at battling offshore tax avoidance, that Singapore supports. In his speech, Mr Heng underscored Singapore's commitment to BEPs principles, which spell the most significant changes in international tax ever.

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How else might Singapore enhance and ensure fiscal sustainability? Some commentators have argued for land sales to be included as government revenue. Under the Constitution, land sale revenues form part of Singapore's past reserves, which are invested and are not available for the government's budgetary spending. And indeed, on spending, even with the "permanent" 2 per cent downward adjustment to the budget caps of all ministries, there would still be scope to continually review in particular the biggest-ticket expenditures on the plate.

Amendment Note: A earlier version of the article stated that while there were no indications of a GST hike anytime soon, Mr Heng did serve notice this week that Singapore will be introducing GST on digital supplies from abroad. This is incorrect as Singapore could be studying other countries’ GST practices on digital supplies from abroad. The article has been revised to reflect this.

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