GST hike: Short-term cost vs long-term benefit

THIS WEEK'S TOPIC: Should Singapore raise the Goods & Services Tax (GST) this year? And should the tax hike from 7 per cent to 9 per cent happen at one go, or in two steps?

Marcus Lam Executive chairman PwC Singapore

There is no perfect time to raise taxes. The challenge is finding a balance among the conflicting needs of raising tax revenue, managing inflation and the cost of living, and the compliance cost to businesses. A 2-step increase in the GST rate will help to ease the inflationary pressure; however it will mean higher compliance costs and administrative challenges. Since a 2 percentage point increase is inevitable, a possible compromise could be to implement the hike at one go, but at a later date such as Jan 1, 2023 and to "front load" the S$6 billion Assurance Package. This will give businesses sufficient lead time to prepare for the GST rate hike and upfront relief to the lower- and middle-income groups.

Lawrence Loh Director, Centre for Governance and Sustainability NUS Business School

The GST increase for Singapore is inevitable, given its fiscal needs in the long term. Beyond the rise, the fundamental issue is about the underlying principles. Two are most critical - fairness and simplicity. GST involves taxation at the point of consumption, versus income tax at the point of earning or property and vehicle taxes at the point of ownership. Consumption is where direct economic activities take place and it is only fair that payment should be levied on the use of facilities - earning and ownership are more passive. GST may be hard on lower-income groups, but assistance schemes can be made available. And most of all, GST is simple to administer, especially if it is single-tiered.

John Bittleston Founder and chair Terrific Mentors International Pte Ltd

Singapore's finances, we understand, are not in a dire condition. The next phase of the pandemic is extremely problematic right now. The world's supply lines are in a state of chaos; informed opinion says they will recover in the next 2 years. Most importantly, people's lives have a long way to go to return to normal. I suggest the increase be delayed for 2 years, then achieved at one go. Whether that is politically practical is another matter.

Victor Mills Chief executive Singapore International Chamber of Commerce

Never has a proposed tax increase been talked about for so long or planned for so carefully. An increase in consumption tax is preferable to an increase in income tax because we can choose what we buy. The government needs to find additional revenue to fund projected increases in social spending. Without an assurance package to protect the less well-off, there would be a valid argument for waiting to implement the tax increase until 2023 and for doing so in 2 steps. However, with the fully funded S$6 billion Assurance Package in place, there is every reason to expect a GST rate increase in July 2022.

Max Loh Managing partner, Singapore and Brunei Ernst & Young LLP

There is no perfect time to raise the GST. The economy is showing signs of recovery and with the pressing need to fund national programmes while securing a long-term sustainable fiscal position, the case for a rate hike is clear. A 2-step approach to the hike may offer the government some flexibility in monitoring and calibrating the impact of the rate hike; yet a decisive 1-step approach will reduce uncertainty and anxiety and the burden on businesses in managing the rate change twice. The rate hike will not be a panacea for all economic and social pains but with thoughtful support provided to low- to middle-income earners through the S$6 billion Assurance Package, it is fair and progressive and can be an effective bittersweet pill for our collective good - taken sooner rather than later.

Frankie Chia Managing partner BDO LLP

The GST rate hike was planned to address the needs of our ageing population. It was delayed for good reason but that meant we had to draw on reserves to tide us through the past 2 years. With the economy finally showing sustained signs of recovery in 2022, now is as good a time as any to implement the rate hike to restock our reserves and prepare ourselves for the future. Compared to other advanced economies, our GST rate has remained relatively low at 7 per cent and untouched for 15 years. There is little benefit to a staggered increase, and most businesses will not be affected as it is a consumption tax.

Ong Pang Thye Managing partner KPMG in Singapore

Taxing a wider population through GST enables Singapore to take steps towards forging a progressive and inclusive tax system, as the country strives for economic growth and balances complexities such as an impending global minimum tax in 2023. Firstly, the GST hike to 9 per cent in Singapore remains well below the global average value-added tax (VAT) or GST rate of about 19 per cent. Secondly, GST monies can be channelled towards helping businesses and individuals, defraying inflationary pressures particularly felt by the lower-income group in buying essential goods. Actions will need to be swift to work out an inclusive GST system that fuels national growth - one that swings us forward without leaving anyone behind, whether they are lower-income or not. A one-off increase of GST is preferred as it can smoothen the transition for businesses that will face difficulties and expenses in aligning their systems and operations for the GST increase.

Svend Janssen Head of Asia-Pacific, Middle East & India Nuix

The GST is a fair income source for Singapore, given the mix of GST payers - especially when the country reopens. Also, 9 per cent is a moderate GST rate in global comparison. Given the economic growth indicators for Singapore, it seems to be the right time to do the move now, in 1 step. However, I believe the government is on the right track to think of delaying the impact for lower-income households by policy design.

Cheung Pui Yuen Chief executive officer Deloitte Singapore

Raising GST will enhance Singapore's tax base and provides tax revenues to sustain the growing needs of the society over the mid to long term. It is likely that the new rate will take effect in 2023 to give more time for the economy to recover and for businesses to make the necessary changes. We can expect the increase to happen in one go, as the government had previously stated, and businesses would prefer it, with sufficient offsets in the form of the GST support packages. However, should economic conditions prove less than ideal, the government might consider moving more slowly to help businesses and consumers adapt.

Chuin Ting Weber CEO & CIO MoneyOwl

For individuals, there is never a good time to pay more taxes, but the greater good often requires unpopular decisions. Underpinning the GST hike are the same prudence and stewardship that have enabled Singapore to weather the pandemic. We should go for a 1-step increase, so as not to compound administrative costs, but with transitional support for lower-income groups. One mitigating factor is that wage increases in 2022 are likely to be healthy. Singaporeans might wish to continue upskilling to safeguard our income-generating ability, and also review both short-term budgets and longer-term financial plans, to improve our financial resilience.

Chia Ngiang Hong President Real Estate Developers' Association of Singapore

Given our ageing society and the ever-growing demand for subsidised healthcare, education and social support for the underserved, it is necessary for the government to widen the tax base and collection to balance the national budget and replenish the drawn-down reserves to a healthy level. GST being an indirect tax (on consumption) would allow the government to manage the impact as it is done broadly across society, without jeopardising Singapore's tax- and business- friendly reputation.

Amid the yet uncertain macro-environment and current concerns on global inflation, it would be prudent to implement the hike in 2 steps - such as to 8 per cent in phase 1 and then 9 per cent next - to allow more time for households and businesses to adapt. The Assurance Package could also be extended or tweaked to help reduce the burden on lower- and middle-income Singaporeans in a targeted way.

Lee Quane Regional director - Asia ECA International

An ideal time for a GST rise would be during a period of low inflation since a tax hike has the potential to increase the prices of goods and services. With inflation rates high at the moment, a GST hike would further increase Singapore's cost of living and affect the purchasing power of local residents - especially once additional support from the Assurance Package wanes. While it may be better for the GST hike to be delayed until economic recovery is steadier or inflation is lower, it is worth noting that the funds - which are being put back into key public initiatives, such as improving local infrastructure - will help to cement Singapore's position as having the best quality of life in Asia and enhance its attractiveness and reputation. This bodes well for the country's economic recovery in the long term by creating better quality and higher-paying jobs that raise Singaporeans' standard of living.

Dileep Nair Independent director Thakral Corporation Limited

Many believe that consumption taxes, like our GST, are regressive. GST has a bigger impact on the poor, who spend a bigger part of their income, rather than wealthier people who can save more. No doubt, our government uses GST revenues to help lower-income groups through GST vouchers and other social assistance schemes. Still, there are many who fall through the cracks and miss the qualifying criteria. Administering such offset schemes also is burdensome. The need for a more than 28 per cent increase in GST (from 7 per cent to 9 per cent) is also questionable, given that the government budget has been in a surplus practically every year since 1990. Since a government surplus translates into a private sector deficit, there appears to be an already heavy tax burden which can drag on the economy. Given that we are barely on the cusp of a fragile recovery, it does not seem wise to raise the GST this year.

Toby Koh Group MD Ademco Security Group

GST is but one of the major income streams for the government. Greater insight into the government's future tax strategies will be useful for planning purposes for households as well as businesses. A 2-stage increase is preferred - 1 percentage point in 2023 and another point 1-2 years later. Perhaps a luxury tax can be introduced to mitigate effects to the nation's coffers and cap the increase to 8 per cent instead of 9 per cent. Taxing discretionary expenditure will be more equitable for our citizens.

Eileen Chua Managing director SAP Singapore

While the GST hike might add inflationary pressures, it is imminent amid Singapore's recovery from the pandemic and transition into a green economy. Businesses, especially small to mid-sized enterprises (SMEs), may face higher costs and a labour crunch. In this 'never normal', organisations need to leverage digital technologies to be intelligent enterprises, tap into data insights to optimise their operational footprint, and be able to predict and mitigate the impact from higher baseline costs stemming from a disruption in the supply of raw materials. Businesses will also need to invest in human capital by transforming jobs, innovating for growth while delivering exceptional experiences to cushion the impact of rising costs.

David Kuo Co-founder The Smart Investor

The question is not whether the GST should be raised, but this: If GST is not increased, which taxes should be increased to balance the budget? Would a hike in corporation or personal income taxes be more acceptable? The duty of any government is to ensure that income exceeds spending over an economic cycle. Failing to do so would mean borrowing to cover the deficit. That is a road that no country should ever want to go down. Nobody likes tax increases, but hiking GST is probably the least unpalatable. As to how it should be raised, there is no greater mistake than to try to leap an abyss in 2 small steps. One and done is arguably a good approach.

Helen Ng Chief executive officer Lock+Store

If the GST hike is unavoidable given the impact of the pandemic on the national budget, the increase should be staggered to soften the blow for individuals and businesses. We should conduct an impact analysis after the first stage. The second stage can then be adjusted or delayed depending on the findings. The aim is to avoid hurting our fragile economic recovery.

David Sandison Singapore practice leader Grant Thornton

The food and beverage (F&B) and tourism sectors are still reeling from the Covid measures. They need breathing space. A GST hike this year would affect them adversely at a time when they most need support. And, without getting into rocket science, consumers would prefer deferral and 2 stages.

That aside, and as a general proposition, most registered businesses would prefer a one-off hike, to avoid the administrative hassle of back-to back transitional measures that a 2-stage approach would bring. But maybe, in the face of higher-than-expected inflation, it would be better to swallow the pill now and be done with it.

John Butler Managing director, APAC & MENA Linesight

Singapore will need to find a sweet spot in balancing the generation of tax revenue while ensuring taxes are fair for sustainable and inclusive growth of its society, businesses, and the economy. The Covid-19 pandemic has reshaped the global economy and amplified the need for nations to secure long-term economic sustainability through fiscal resilience. To manage the challenging and unpredictable economic situation in a Covid-endemic new normal, it would be helpful to Singaporeans and the business community if the GST hike could take a 2-step approach to pave the way for a soft landing.

Yean Cheong Executive director SGTech

Our economic recovery is coming off a low base; despite the rosy gross domestic product (GDP) growth, our economy is still performing below previous levels. With the headwinds from the uncertainty created by new Covid variants, the tech talent crunch, rising business costs and other pressures, many tech companies are concerned that raising GST in 2022 may be ill-timed. Some appeal for a 1- or 2-year delay until our economic recovery is robust and uniform across sectors. A GST increase now may reduce consumer demand and business confidence, shaking the weak foundations of economic recovery.

John Ng Chief executive officer YTL PowerSeraya

With a progressive recovery in the economy, it may now be an appropriate time to implement a GST hike. However to lessen consumers' financial burden, such a move may be more accepting if it can be introduced in 2 steps. Already, electricity prices in Singapore have risen substantially because of higher global fuel costs, thereby leading to higher electricity bills. Hence apart from raising GST, consumer education is also key - on how they can practise energy conservation habits to save money, and at the same time, contribute positively to the environment through reduced carbon emissions when they use less electricity.

Maren Schweizer Chief executive officer Schweizer World Group

There is never a good time for a rise in GST rates. Nevertheless, a hike is more acceptable during a period of economic growth and expected increase in spending by individuals. It was already obvious before the pandemic that Singapore needs to find more fiscally sustainable ways to fund its social, environmental and healthcare needs, while Covid-related spendings have increased the need.

With inflation and its potentially negative impact on consumer spendings in mind, a staggered increase seems to be the right way at this point of time. It remains important to continue with a GST voucher scheme for low-income Singaporeans.

Shahzad Nasim Executive chairman Meinhardt Group

Raising the GST in 2022 would clearly strengthen Singapore's fiscal position and reduce the budget deficit over the next 2 years. Understandably, a huge deficit has been created over the last 2 years given the massive assistance packages the government provided to tide over this period.

It therefore seems to be reasonable to implement the expected small GST increase, given that the economy is now on more solid ground with a possible 7 per cent growth trajectory. However, in the short term, the GST increase will inevitably lead to an inflation spike in some components of the consumer price index (CPI) basket. It will perhaps be more prudent to stagger the GST hike, to soften the impact, gain time, and calibrate it to the actual economic recovery.

Lim Soon Hock Managing director PLAN-B ICAG

If fiscal leeway allows and so long as the economic pains of the pandemic remain, the GST should be deferred to at least next year. If it is to be raised next year, it would be wise to introduce the hike in 2 steps, again to ease the economic pain and to allow sufficient time for the economy to recover to pre-Covid levels. Omicron could also delay economic recovery. It should be noted that as the GST is consumption-driven, when prematurely introduced it would become a disincentive - discouraging people from spending at a time when more spending is needed to stimulate the economy.

While businesses and Singaporeans understand the vital need to replenish our coffers and that we need to save for future rainy days and to support projected increases in recurrent spending, in relation to GST, compassion must take precedence over economic logic, when circumstances justify.

Henry Tan Group CEO Nexia TS Group

GST is a direct consumption tax and is an effective way to collect revenue without discouraging income accretion. At 7 per cent, Singapore's GST is one of the lowest in the world and the last increase was more than 10 years ago. I would support a GST increase to 9 per cent instead of a staggered hike over a few years. This will ensure that any adjustment is done once and not repeatedly.

Based on past experiences, even though GST is a pass-through tax (that is, only the ultimate consumer bears the tax burden) companies take the opportunity to raise prices to cover GST increases, even though most of them can claim back input tax. I would also recommend that GST exemptions be made for essential goods and services. It is important to do so now that the GST will reach 9 per cent, so that the lower-income group can still enjoy the essentials affordably.

David Leong Managing director PeopleWorldwide Consulting Pte Ltd

The inevitability of raising GST to 9 per cent - it is better sooner to allow for tax receipts to catch up with social spending and large expenditures going forward. Taxes are unavoidable pains but must be seen as fair and equitably spent on social goods such as healthcare, security and infrastructure improvements. The beneficiaries must ultimately be Singaporeans and residents. Most importantly, future generations of Singaporeans will inherit a sustainable economy with a balanced budget - not one in debt like many countries elsewhere.