Goods and Services Tax (Singapore)
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Goods and Services Tax in Singapore
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...

 is a broad-based value added tax
Value added tax
A value added tax or value-added tax is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its...

 levied on import of goods, as well as nearly all supplies of goods and services. The only exemptions are for the sales and leases of residential properties and most financial services. Export of goods and international services are zero-rated.

Singapore's GST was introduced on April 1, 1994, at 3%. It was increased to 4% on 1 January 2003, and to 5% on 1 January 2004. It was increased to its current rate of 7% on 1 July 2007.

Background

Before 1986, Singapore's corporate income tax rate and top marginal personal income tax rate both stood at 40%. Such high rates were deemed to be uncompetitive. On the recommendation of the 1986 Economic Committee, Singapore's government decided that it needed to shift from direct to indirect taxes, in order to maintain its international competitiveness in attracting investments, and to sustain its economic growth in order to create well-paying jobs for Singaporeans.

Objectives

The GST was part of a larger tax restructuring exercise to enable Singapore to shift its reliance from direct taxes to indirect taxes. The government argued that tax reform was necessary in order to maintain Singapore's competitiveness, in order to sustain long-term growth and job creation. The government also argued that with an ageing population, Singapore’s income tax base was expected to decline. With a broad-based GST, the taxation burden would be more evenly spread among the population.

A value-added tax, like the GST, also has several features that make it attractive. Being a tax on consumption, and not on income, the tax system inherently encourages savings and investments instead of consumption. The tax also has a self-policing mechanism that discourages evasion, unlike in a retail sales tax system or an income tax system where it would be relatively easier to evade.

Implementation

GST was implemented at a single rate of 3% on 1 April 1994, with an assurance that it would not be raised for at least five years. To cushion the impact of GST on Singaporean households, an offset package was also introduced. Simultaneously, corporate tax rate was cut by 3% to 27%, and the top marginal personal income tax rate was cut by 3% to 30%. The initial GST rate of 3% was among the lowest in the world, as the focus was not to generate substantial revenue, but to allow people to get adjusted to the tax.

In 2002, the Economic Review Committee reviewed Singapore's tax policy, and recommended that further tax reform was necessary to bring in new investments. The committee noted that other countries were aggressively cutting their direct tax rates in order to attract internationally mobile capital and labour, and recommended that the government rely more on GST for its tax revenues, while again cushioning the impact on Singaporean households through an offset package.

The government accepted the committee's recommendations. The GST rate was increased from 3% to 4% in 2003, and to 5% in 2004. Each increase was accompanied by an offset package that was designed to make the average Singaporean household overall better off, even after accounting for the additional costs imposed by the increase in GST rates. Direct tax rates were also reduced correspondingly.

GST increase to 7%

On 15 February 2007 (Budget Day), Second Finance Minister Tharman Shanmugaratnam
Tharman Shanmugaratnam
Tharman Shanmugaratnam is a politician from Singapore. A member of the governing People's Action Party , he is currently the country's Deputy Prime Minister, Minister for Finance and Minister for Manpower. He previously served as the Minister for Education from 2003 to 2008...

 announced that the GST rate would be increased to 7% with effect from 1 July 2007.

The rate increase was accompanied by an offset package to help Singaporeans with the increase in GST, and which would cost the government $4 billion over five years. The government argued that the offset package would help the majority of Singaporeans offset their increased GST costs for several years. The offset package consisted of direct transfer benefits, in the form of cash payouts (GST credits, growth dividends, senior citizens' bonuses), CPF top-ups (post-secondary education account top-ups for students, Medisave top-ups for older Singaporeans), and rebates (on utilities and public housing service & conservancy charges). Those who earned less or lived in smaller homes received more benefits. The government also argued that the Workfare Income Supplement, a wage subsidy, would provide significant support for lower-income workers on a continuing basis even after the GST offsets have been distributed.

The government also cut direct tax rates, continuing its practice of lowering direct tax rates since 1986. As of 2010, the top marginal rates for corporate tax stood at 17% and personal income tax at 20%, with effective rates being much lower.

As a gesture of goodwill, and to assist lower-income groups, several supermarket chains absorbed the 2% increase in GST, ranging for a period of one month to six months. They included Carrefour, Cold Storage, Giant Hypermarket, NTUC FairPrice, Sheng Siong and Shop 'n Save. Besides FairPrice, NTUC also absorbed the 2% increase on NTUC Foodfare, NTUC Childcare, NTUC LearningHub, NTUC Club and NTUC Healthcare, for six months.

Committee Against GST Profiteering (CAP)

The Committee Against GST Profiteering (CAP) was set up in 1994 to investigate complaints and feedback on profiteering or unjustified price increases using GST increases as an excuse.

Tax progressivity

Some critics consider GST to be a regressive tax
Regressive tax
A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high to low, where the average tax rate exceeds the...

, meaning the poor pay more, as a percentage of their income, than the rich. However, defenders contend that GST can be considered a proportional tax
Proportional tax
A proportional tax is a tax imposed so that the tax rate is fixed. The amount of the tax is in proportion to the amount subject to taxation. "Proportional" describes a distribution effect on income or expenditure, referring to the way the rate remains consistent , where the marginal tax rate is...

 if tax payments are expressed as a percentage not of income, but of lifetime consumption; savings and investments are tax-deferred, and when converted to consumption are subjected to GST. Others point out that the more important question to ask is not whether GST is regressive, but whether GST is more regressive than the alternative indirect taxes, namely, sales, excise and turnover tax (not income tax because that is a direct tax). In addition, they argue that what affects poverty and fairness is not the impact of any particular tax, but the impact of the tax structure as a whole, and how tax revenues are redistributed. When GST is combined with progressive tax
Progressive tax
A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...

es, and the revenues distributed to the poor, the total fiscal structure can be progressive.

To maintain the progressive nature of total taxes and transfers on individuals, Singapore reduced income tax on lower-income earners, as well as instituted direct transfer payments to lower-income groups, resulting in an overall lower tax burden for most Singaporean households. These offsets included lower income taxes, lower property taxes, rebates on rental and service & conservancy charges for public housing, and additional subsidies for health, education and community services. As a result of the income tax cuts, additional tax reliefs and rebates in 1994, about 70% of individuals that used to pay income taxes no longer needed to do so.

The Singapore government has argued that the GST on its own is a flat tax but is part of an overall fiscal system that is highly progressive: higher-income earners pay the highest fraction of their income in taxes. When all taxes were taken into account (income tax, property tax, GST and other indirect taxes), the top 10% of households accounted for 38% of the taxes paid, while the top 20% contributed 53% of all taxes. In contrast, lower-income earners receive substantially more transfers than the taxes they pay. Low- and middle-income households effectively pay 'negative' tax. From 2006 to 2010, the second bottom decile of Singaporean households (ranked by income from work) received transfers (net of all taxes paid) amounting to 23% of their income, the 5th decile received transfers that netted off taxes paid, while the effective tax rate for the top decile was 11%. In particular, when the GST rate was raised from 5% to 7% in July 2007, a household in the bottom 20% had to pay additional GST of $370 per year, but received an offset package of $910 per year, in addition to permanent benefits of $1,000 per year.

Calls to exempt basic essentials from GST

Some critics contend that basic essentials such as food and healthcare should be made exempt from GST, in order to help lower-income households. The government argued that having such exemptions would actually help the higher-income more than poorer Singaporeans, because well-off households usually spend much more on essentials (whether food or healthcare or other basic necessities) than a lower-income household. In addition, lower-income households would not benefit much from such an exemption, as spending on essentials constitutes a small proportion of lower-income household expenditures. For example, for the bottom 20% of households, essential food items comprised only 6% of their total household expenditures; after including all other food items, the total was only 15% of their expenditures. If essentials were to be exempted from GST, there would be a need to make up for the revenue shortfall through a higher GST rate on other goods and services, which lower-income households would also have to bear. The government argued that the experience of other countries demonstrated that granting exemptions would distort production and consumption decisions, and result in a contentious and highly complex process of determining which goods and services merit exemption. This would increase compliance and administration costs for businesses, and these costs would be passed on to consumers. In addition, the experience of other countries have shown that exempting or reducing GST on certain items did not mean that tax savings would be passed on to consumers. Therefore, the GST should be kept broad-based in order to keep the GST low and the GST system simple, while help is directly provided to the lower-income through transfers and subsidies. In addition, the government has been absorbing GST in full for all subsidised patients in public hospitals and polyclinics since the GST was introduced in 1994.

Calls to reduce the GST rate

In response to the rising cost of living, members of the opposition have called for the GST rate to be reduced. The Singapore government has argued that reducing the rate of GST would benefit the wealthy more than the poor, as the bulk of GST is collected from foreigners and higher-income earners. In 2010, 84.2% of all GST paid was collected from foreigners and the top 40% of Singaporean households, while the bottom 20% of households contributed only 4% of all GST paid. The government argued that as the GST was a core part of a fiscal system that provides transfers to the lower income, reducing the GST rate would be costly and inequitable, and leave the government with less resources to help the lower income.

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