Propelling Singapore through present challenges and beyond

FINANCE Minister Lawrence Wong's maiden Budget speech last Friday (Feb 18) was one that heavily emphasised the strengthening of Singapore's social compact. Rising cost of living, an ageing population, and, not to mention, climate change are goliath challenges faced by a small nation that has no natural resources.

Already, our war chest has been drawn down by more than S$40 billion after 2 years of unprecedented expenditure in combating the prolonged Covid-19 pandemic. Still, this reflects our fiscal prudence as it is lower than the originally expected draw on reserves of S$52 billion.

This year's Budget, titled "Charting Our New Way Forward Together", wields important tax policies to transition Singapore from a "position of strength" towards greater economic and environmental sustainability.

The key tax announcements impact many sources of revenue for a more resilient tax regime: Goods and Services Tax (GST), personal income tax, property tax, corporate tax, and carbon tax.

As anticipated, the proposed timing of the GST hike to 9 per cent was officially announced. Although the current rate of GST at 7 per cent has not been raised since Jul 1, 2007, there never is a "good time" to do so.

However, with rising costs for both businesses and the man on the street, the GST increase, which was widely anticipated to happen in 2022, will be delayed to Jan 1 next year.

Having said that, the GST rate will be raised in staggered fashion, 1 percentage point at a time with effect from Jan 1, 2023 and again on Jan 1, 2024 - as was the case in 2003 and 2004 when the GST rate was increased over the 2 years from 3 per cent to 5 per cent.

While this move is well-calibrated, there is the administrative cost for GST-registered businesses in having to manage the rate change twice.

With GST also imposed on low-value goods imported via air or post, and on business-to-consumer imported non-digital services with effect from Jan 1, 2023, GST could become a larger and sustained contributor to tax revenues in the coming years.

We applaud the S$640 million top-up to the S$6 billion Assurance Package where various offsets such as GST voucher scheme, U-Save and CDC vouchers are distributed to cushion the impact on the lower-income and vulnerable households.

Like many countries, Singapore has been debating income and wealth inequality, which has been exacerbated during the pandemic.

While recognising the ideal of taxing net wealth, it is not easy to implement. Singapore has made it clear that it will adopt its own approaches in addressing progressivity in the tax system.

This is reasonable as there is a fine balance between the moral imperative for the affluent to pay their fair share of taxes while maintaining Singapore's overall competitiveness and reputation as a private wealth management hub in Asia.

In the interim, in this year's Budget it was announced that the top rate of personal income tax will rise by 2 percentage points from the year 2023 (that is, Year of Assessment 2024).

In addition, property tax on residential properties will see a steep rate hike spread over 2 years, in 2023 and 2024. For the higher-end properties, the property tax will be more than doubled. There is also a new additional registration fee tier for luxury cars.

No announcements were made on increases in other property-related taxes such as the Buyer's Stamp Duty or the Additional Buyer's Stamp Duty. Property buyers will be relieved, for now.

The world of corporate taxation is changing, including the imposition of a global minimum tax rate.

Singapore is engaging with industry bodies to explore the implementation of a "top-up" tax, referred to as the Minimum Effective Tax Rate. This is consistent with the concept of creating a resilient tax system of the future.

Green transition

Given the ambitious goal to achieve net-zero emissions by or around mid-century, a decisive announcement was therefore made to "set the right price of carbon".

This right price is proposed to be raised from the current S$5 per tonne five-fold to S$25 per tonne from 2024 and S$45 per tonne from 2026.

The carbon tax regime was first announced in Budget 2018 and it was subsequently suggested that this would be increased to between S$10 and S$15 per tonne by 2030. This has now been recalibrated to a proposed rate of S$50 to S$80 by 2030.

Wong was quick to highlight that even with the increased carbon tax rate, there would be no increase in net revenues as offsets would be provided to both businesses and households to manage the increases.

Much of the tax collected in this area would also be ploughed back to businesses for long-term decarbonisation technologies and practices.

The future was always present

Securing Singapore's future is a recurrent theme in every Budget, even when we need to tackle immediate challenges. This year's Budget is no different.

The finance minister had said at the 35th Singapore Economic Roundtable that "our economic story has always been one where we defied the odds".

While this was directed at the challenge of managing Singapore's emissions curve, it aptly sums up our resilience and determination as we strive as a nation to chart a sustainable and inclusive home for all.

• The writers are both Partners, International Tax and Transaction Services, at Ernst & Young Solutions. The views expressed are the writers' own and not necessarily those of the firm.