Broadening tax base seen as likely revenue boost

Singapore

THE government's need to collect more taxes is likely to fall on traditional sources such as personal income and property taxes, GST and possibly sin taxes such as betting.

The impact when they hit - such as GST or the goods & services tax going into double-digit territory - is not expected to last beyond a one-off temporary pullback in consumption, say observers. Higher personal income and property taxes could be neutral in impact as Singapore offers a safe and clean environment sought by many.

Finance Minister Heng Swee Keat in his 2017 Budget speech said that the government would have to raise revenues through new taxes or raise tax rates to pay for higher health and infrastructure spending.

The government should look at broadening the tax base which can come from tweaking the tax bands, and may not actually need to raise the tax rate, said Song Seng Wun, CIMB economist.

"With an ageing population and decreasing labour workforce, it needs to have a sustainable balanced tax base," he said.

The bulk of Singapore government revenue comes from the taxman or IRAS, which collected a total of S$57.8 billion in 2016 (Jan-Dec). Income tax accounted for 45 per cent of that and GST, 19 per cent, he noted. "I don't think we will see higher income tax rate, but rather tax planners can play play & tweak the various tax brackets in the coming years."

Some consultants think a hike of the personal income tax rate to 25 per cent from the current 22 per cent is doable and won't lead to an exodus of the rich.

Singapore is a desirable destination for many lifestyle reasons, said Mark Amatya, PwC director, global mobility services. "It is safe and clean; there is far less pollution than most major cities - notwithstanding the occasional haze; and we boast great schools and medical facilities."

By and large, the country has not relied on low personal taxes to attract and retain internationally-mobile top talent, he said. With the exception of Hong Kong (where most residents pay tax at a flat rate of 17 per cent), Singapore still has the lowest tax rates in the region.

"So we may still be competitive even if our headline tax rate rise to, say, 25 per cent," he said.

But Chung-Sim Siew Moon, Ernst & Young Solutions head of tax, is less sanguine on the impact of higher income taxes.

With the need for various social initiatives and programmes to be funded, there is a high probability that new income band (or bands) of above S$320,000 may be introduced with a new personal tax top rate of above 22 per cent in the coming future, she said.

"Obviously, this will impact the top tier of income earners and increase their tax burden."

With human capital being a key driver of economic growth, the government will need to balance higher personal income tax burden with other initiatives in attracting and retaining top talent and companies to Singapore, amid our closest competitor - Hong Kong, Mrs Chung-Sim said.

Still on the broadening tax base theme, consultants say that Singapore should reduce the GST registration threshold.

"If GST needs to be tweaked, the clearest way to do it would be to reduce the GST registration threshold," said Richard Mackender, Deloitte Singapore and Southeast Asia tax partner.

At S$1 million, Singapore's threshold is high compared to its neighbours, he said. In Singapore, only companies with annual turnover of S$1 million and above are required to register for the GST.

"Reducing it to a level more aligned with other countries (for example S$100,000) would bring more taxpayers into the GST net and therefore more supplies would be subject to the tax and ultimately, would be borne by consumers," said Mr Mackender.

But regardless of whether the GST threshold is reduced, most say that it is inevitable that there will be a hike in GST from the current 7 per cent given that the last two percentage point GST hike was 10 years ago.

GST collection totalled S$10.8 billion in 2016. Every one percentage point hike yields more than S$100 million to government coffers, said CIMB's Mr Song.

The impact of higher GST could be temporary.

In the Asia-Pacific region where the VAT (value added tax) or GST rate lies between 5 per cent (Taiwan) and 17 per cent (China) with the average rate being around 10 per cent, said Koh Soo How, PwC tax partner, "we do not hear much about how an increased GST rate may have impacted consumption with the exception of Japan which relies heavily on domestic consumption".

Said Mr Mackender: "If the increase is for 1-2 per cent, the economy is in a strong place and consumers are feeling confident, the increase would not have such a big impact, eg when GST went from 5 per cent to 7 per cent back in 2007.

"Of course, if the increase is very large, or if the economic cycle is on a downturn, it could reduce consumption and increase wage pressures, so that would not be such a good thing."

Additional revenue could come by way of higher car and/or sin taxes such as betting.

"Possibly even bringing back the estate duty which was eradicated from February 2008," suggested Selena Ling, OCBC Bank economist.

Suan Teck Kin, United Overseas Bank senior economist, thinks that the government would be cautious in slapping on new or higher taxes as these changes will have implications far beyond just the immediate dollars and cents. "As such, a combination of both higher GST and personal tax rates is less likely to happen because the revenue achieved could come at the expense of business costs and talent attraction," he said.

Looking on the bright side, CIMB's Mr Song said: "As long as the spending from the tax collection, balanced between direct (income tax, wealth tax) and indirect taxes (GST, carbon tax), goes into "productive" uses - adding to productive capacity of the economy & improving the livelihood of the people, then the economy as a whole can continue to prosper lah."