Singapore Budget 2016: S'pore's tax revenue collection: which way forward?

AMID an uncertain global economic environment, the Singapore public and businesses are anticipating the policy changes and measures to be announced in this year's Budget by newly appointed Finance Minister Heng Swee Keat on March 24, 2016.

Global economic conditions had been sluggish in 2015. According to the Ministry of Trade and Industry (MTI), Singapore's economy grew by 2.1 per cent in 2015 - lower than the 2.9 per cent in 2014. Economic growth in 2016 is forecasted to move at a modest pace of one to 3 per cent given a combination of reasons, including the continued slowdown in the Chinese economy, as well as the rise of insourcing in China and the US. These factors are unlikely to help in boosting the external demand for Singapore and countries in the region in the coming year.

It is likely that the government's tax revenue collection will be depressed in the coming year given that the levels of collection generally move in tandem with the state of the country's economy. Tax currently makes up more than two-thirds of the government's operating revenue. Consistent with the economic growth in year 2014, the Inland Revenue Authority of Singapore (IRAS) has collected a record all-time high of S$43.4 billion in tax revenue in the 2014/2015 fiscal year - S$1.8 billion, or 4.4 per cent, higher than the previous fiscal year.

The various types of taxes collected had generally increased in the same period. The three main tax components, namely corporate income tax, individual income tax and goods and services tax (GST) contributed S$13.4 billion, S$8.9 billion and S$10.2 billion respectively to the tax collection, representing a growth of 5.4 per cent, 16 per cent and 7.4 per cent as compared to the previous year. "Sin" taxes or betting taxes also grew - by 8.9 per cent and contributed S$2.6 billion. Stamp duty collection, however, had decreased from S$3.9 billion to S$2.8 billion, as a result of cooling measures introduced in the property market.

The composition of tax revenue collected has also remained relatively constant over the years. Corporate income tax, individual income tax and GST accounted for 30.6-32.1 per cent, 17.9-20.6 per cent and 21.9-23.6 per cent respectively during the 2009/2010 to 2014/2015 fiscal years.

With a lower economic growth in 2015, we would expect that the tax revenue collection in Singapore would be lower for the 2015/2016 fiscal year compared to the prior year. Yet, Singapore's total expenditure has been on an upward exponential climb over the past few years.

From fiscal years 2010/2011 to 2013/2014, the increase in total expenditure was below 6 per cent per annum. However, from 2013/2014 to 2014/2015 fiscal years and from 2014/2015 to 2015/2016 (budgeted) fiscal years, the total expenditure has increased by 10.6 per cent and 19.3 per cent respectively. The expected surge in 2015/2016 fiscal year expenditure is mainly attributed to healthcare initiatives such as subsidies for Medishield Life and infrastructural investments in Changi Airport Terminal 5 and rail line expansions.

Naturally the government will need to bolster its revenue in order to fund the additional spending. To that end, various revenue measures have been introduced in the 2015 Budget.

For example, the personal income tax rates for the top 5 per cent of income earners have been raised. The marginal tax rate for the highest income earners, that is those earning more than S$320,000, will jump from 20 per cent to 22 per cent for income earned in 2016 and taxes payable in 2017. This is expected to provide an additional revenue of S$400 million annually.

Also, the government will include Temasek in the Net Investment Returns (NIR) framework. This is expected to increase the total NIR contribution from about 2 per cent of the gross domestic product to about 3 per cent on average over the next five years.

A common concern among the public and businesses is whether the government will raise the GST to fund the increased spending planned in the next term of government. GST is often considered as a likely source of additional tax revenue due to its broad-based appeal. Moreover, Singapore's current GST rate of 7 per cent is one of the lowest in the world.

Many countries have implemented or increased their value-added tax (VAT) or GST rates in recent years. For instance, Malaysia has implemented GST in 2015. Japan has increased its consumption tax from 5 per cent to 8 per cent in April 2014, as part of a two-stage tax hike to fund rising social welfare costs linked to Japan's ageing population. However, the planned increase of the consumption tax to 10 per cent in October 2015 was put on hold till 2017. Thailand is also looking at increasing its VAT in a bid to rake up tax revenue to fund its development projects but has deferred implementation till September 2016 owing to a sluggish economy.

In Singapore, the government had indicated in its 2015 Budget that the revenue measures undertaken will provide sufficiently for the increased spending planned till the end of the decade. Therefore, it is unlikely that a hike in GST is imminent.

Thus, it will be interesting to see how innovative the government can be in seeking to increase its tax revenue in the years ahead. What is certain is that the fundamentals of fiscal governance remain: that we must be prudent in our spending and ensure that our revenue streams are sustainable to meet the socio-economic challenges of keeping our nation and future generations competitive and vibrant.