Opposition alternatives to GST hike will not plug funding gap, need 'reality check': Wong

REVENUE from higher corporate, wealth and other taxes cannot substitute for the planned increase in the goods and services tax (GST), Finance Minister Lawrence Wong argued on Wednesday (Mar 2), as he rebutted alternatives to a GST hike that had been proposed by opposition Members of Parliament.

"We cannot just ignore consumption taxes and put the entire burden on income and wealth taxes," Wong told the House in his maiden Budget round-up speech.

Instead, he argued that Singapore needs "a good mix" of income-, asset- and consumption-based taxes to fund public spending and maintain a diversified, resilient, fair and progressive revenue base.

Earlier in the three-day Budget debate, Workers' Party (WP) MP Louis Chua (Sengkang GRC) suggested that the government could top up the coffers with revenue from wealth taxes and the Organisation for Economic Co-operation and Development's upcoming global minimum effective tax rate on multinational enterprise groups.

His fellow WP MP Jamus Lim (Sengkang GRC) proposed reallocating a share of carbon tax revenues, as well as increasing so-called "sin taxes" on gambling, alcohol, and tobacco.

But such measures "will not help to meet our structural funding gap", Wong rejoined, noting that there will be a dwindling share of economically active workers who can pay income taxes.

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The minister called for a "reality check" on Chua's projection that corporate income tax revenue could rise to seven times the present amount with a tax rate of 15 per cent, which is the global minimum effective tax rate under the Base Erosion and Profit Shifting (BEPS) 2.0 initiative.

"He says it is purely hypothetical, but he should have said it is wishful thinking," said Wong, adding that the eventual impact of BEPS 2.0, including potential changes such as a Minimum Effective Tax Rate top-up tax, "cannot be ascertained by a simple static analysis". (see amendment note)

Since BEPS 2.0 marks "a fundamental change in the competitive environment for Singapore" and would limit the tax incentives of the past, Wong argued that any extra revenue generated would have to be reinvested to ensure that Singapore remains competitive for investors.

Tapping personal income taxes could also badly damage Singapore's competitiveness, he said, noting that the top marginal rate would have to rise from 22 per cent to 42 to per cent to cover the revenue gap from an unchanged GST rate of 7 per cent.

Otherwise, personal income tax rates would have to go up for a broader range of income brackets, including middle- and upper-middle-income earners, Wong warned.

Similarly, "property tax rates may very well need to be doubled across the board" to eliminate the need for a GST increase, and would put the squeeze on home owners.

On wealth taxes, the estate duty suggested by People's Action Party MP Saktiandi Supaat (Bishan-Toa Payoh GRC) was scrapped in 2008 "because it did not achieve the social equity outcomes we had hoped for", while taxes on capital gains or dividend income might hurt Singapore's competitiveness, as other regional jurisdictions do not impose them, Wong added.

The Progress Singapore Party and the WP, which cited the GST hike in their objections to the Budget, have put forth "politically more attractive options" as alternatives, said Wong - but added: "I'm afraid they are too simplistic and divisive and will end up creating more problems for our society."

In response, Leader of the Opposition Pritam Singh, who is the WP secretary-general, told the House that "there were arguments made in the extreme which were not put forward by WP MPs", such as the example of a personal income tax rate of 42 per cent on the upper tier.

He reiterated doubts over whether raising the GST is "a reasonable thing to do" amid elevated inflation, and asked for estimates of the impact of BEPS 2.0 on corporate income tax revenues.

Wong replied that "many details are still being worked out" regarding BEPS 2.0, but the impact "would range from neutral to perhaps some increase", and the government will consider giving a range of estimates.

In a Facebook post about the conclusion of the Budget debate, Prime Minister Lee Hsien Loong said: "It is easy to push the responsibility to the higher-income earners. But a tax system where the burden is borne by just a small group, and the rest piggyback on their contributions, cannot be sustained."

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

Amendment note: An earlier version of this article incorrectly stated that Finance Minister Lawrence Wong said that the eventual impact of Singapore's potential BEPS 2.0-compliant Minimum Effective Tax Rate top-up tax "cannot be ascertained by a simple static analysis". He was in fact referring to the eventual impact of Pillars 1 and 2 of BEPS 2.0, which may involve the introduction of a Minimum Effective Tax Rate top-up tax.