Burden of GST hike falls on better-off, will not change effective rate at the bottom: Wong

THE burden of the upcoming goods and services tax (GST) hike will mostly be borne by the well-off, as offsets will ensure that the effective GST rates for low income households remain unchanged, said Finance Minister Lawrence Wong in Parliament on Wednesday (March 2).

He was responding to Members of Parliament (MPs) from the Workers' Party (WP) and Progress Singapore Party (PSP) who had argued that the GST is regressive and disproportionately impacts the poor.

Both parties said they will not support the Budget as they disagree with the GST tax hike, and asked if other options could be considered to increase revenue.

In his round-up speech, Wong said that lower-income households currently pay a "much lower" effective GST rate than higher-income households. The effective GST rate takes into account the permanent GST voucher scheme, as well as GST absorbed by the government on subsidised healthcare and education.

"In fact, on average, the households at the bottom 10 per cent do not pay any GST at all after offsets. This includes many retiree households without income," he said.

For the second lowest decile of households, the effective rate is also very low, said Wong, while the effective GST rate for middle income households is "well below" the headline 7 per cent after offsets.

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It will be similar when the GST is eventually raised to 9 per cent in 2024, said Wong. The effective GST rate for the lowest three deciles of households will not change, as the enhanced permanent GST voucher scheme will neutralise the impact of the hike.

Middle income households will also continue to pay an effective rate that is below the 9 per cent headline rate.

"After the GST rate increase, it is the top 20 per cent of citizen households who pay a greater share of GST and that is after GST vouchers and absorbed GST is netted off," said Wong.

Wong also made a case for why the government has chosen neither to put in place a multi-tiered GST system, nor introduce exemptions for essential items, as some opposition MPs had proposed.

For one thing, such a system would, in practice, lead to "highly arbitrary distinctions" between products and encourage businesses to think of creative ways to have their products classified into lower tiers, he said.

It is also administratively onerous and costly to introduce exemptions, he added. But most importantly, such a system would not effectively target support to those with greater needs.

He cited a government study that looked at 4 categories of items: uncooked food; basic food-serving services including hawker centres, food courts and coffeeshops; telecommunications services; and utilities.

Exempting these 4 categories from GST would result in a S$1.2 billion loss in tax revenue. But of this, only S$185 million or 15 per cent would benefit the bottom 20 per cent of resident households, said Wong. (see amendment note)

"So this is ineffective as a redistributive tool to make our system fair," he added.

"Essentially, we already have a highly tiered GST system in Singapore, but it is not tiered by the different types of goods and services," said Wong.

"Instead, it is tiered by the impact of our GST, such that the well-to-do pay more GST and the lower income are impacted the least. That is a fairer and far more effective way of taxing consumption," he added.

Get the latest updates on Budget 2022 here: bt.sg/budget22

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Amendment note: An earlier version of this story quoted Finance Minister Lawrence Wong saying that the bottom 20 per cent of households would only benefit by S$150 million of the S$1.2 billion loss in tax revenue if 4 categories of essential items are exempted from the GST. The ministry later clarified that it should be S$185 million. The story has been updated to reflect this.