By: Ivan Chin Cheng Xin, Shauryaa Ladha and Bhavya Verma
Research Head: Shawn Tenh
Editor: Praharsh Mehrotra
Illustration by Chen Hsuan Ju Abstract
While it is not the first time that Singapore decides to increase its consumption tax, It is important to note that the upcoming GST hike is purely regressive and it is not accompanied by any reduction from other types of taxes such as income taxes. We will discuss the reasons for a GST hike and its implications that follows.
1. Beginning of GST in Singapore Before 1986, Singapore's corporate income tax rate and top marginal personal income tax rate both stood at 40%. The government then decided that it needed to shift from direct to indirect taxes, to maintain its competitiveness and create well-paying jobs for its citizens. Since GST’s initial implementation of 3%, the country went through several tax reforms and offset packages until its latest figure in 2007 of 7%(IRAS). It is important to take note that direct taxes are taxes that reduce wealth exogenously as compared to indirect taxes here (GST) which is endogenous such that it depends on consumption choices made by the individual. The GST hike is in view of the country’s increasing expenditures as well as the Singapore government’s key investments in infrastructure, healthcare, public transport and social services for the promotion of economic growth(Reliance Consulting, 2018). With the increasing proportion of the ageing population in Singapore, there is an urgent need for the government to boost tax revenues. As the proportion of the ageing population increases, the government will have to increase spending to take care of the elderly. This comes in the form of the proposed GST hike from 7% to 9%. GST is an indirect tax which is regressive in nature and it is universally applied irrespective of their income levels. 2. Implications of a GST Hike A hike would definitely increase the burden on people with lower income levels because of goods with inelastic demand like food and other necessities. However, the timing of this hike as well as other supporting packages will play an important role in the success of this policy. Furthermore, due to the rise of the new Coronavirus disease, many major economies including Singapore are experiencing a slowdown and a reduction in productivity due to health measures taken. There is also an increase in expenditure for the treatment and management of the virus on top of planned healthcare spending which places more importance in the timing of this hike. If it was to be implemented at the wrong time it could push Singapore’s economy into a recession due to lower employment, higher costs of living, and higher healthcare spending. However, because of the increased fiscal stimulus for the virus there might be a need to boost government revenue which could come in the form of this hike. Therefore, the government would have to take a decision keeping these tradeoffs in mind(Reliance Consulting, 2018).
A higher GST also means stricter penalties for delayed payments. GST-registered enterprises have to settle their tax liability within a month after the end of the accounting period. A 5 percent penalty with an additional 2 percent may be meted on overdue tax. This penalty may be increased, even to criminal prosecution. On top of that, firms that do not meet the GST registration requirements may face potential cash flow issues due to higher GST amounts that cannot be deferred. 3. Short run effects of a GST Hike Firstly, GST is a tax on domestic consumption and is thus ultimately borne by the consumers. It is regressive in nature, implying that the burden of taxation will be transferred to the consumers thus a reduction in consumer spending on goods and services in general since there are no other tax changes that negate this effect. It is also important to note that although tax relief packages are present, such measures are only temporary with credit-constrained households in mind to provide exogenous income while households are adjusting consumption choices. However, non-credit constrained households behaviour will not be affected greatly but may experience lowered savings due to higher nominal consumption. Secondly, there will be a decrease in lifetime disposable wealth of households due to distortionary taxes which will lead to higher labour supply in the economy, unemployment numbers will rise in the short run as there will be more people looking for jobs during the tax hike which may lower wages in general for labour markets to clear in the long run. Thirdly, on the goods market there will be a decrease in aggregate demand for goods and services which leads to an output gap in which there is excess supply in the goods market. Interest rates may not reflect any changes in the short run as other markets do not clear. It is important to note here that there will be an increased government spending accompanied by higher taxes collected but in short, it will be compensated with lower consumption from households. 4. Long run effects In the long run, we can expect wages to fall which is accompanied by higher labour force to curb the effects of GST, businesses in general are able to produce more from increased hiring of labour, decrease in consumption is compensated with higher government spending which mitigates the gap in output. It is important to note here that interest rates are unlikely to change in the long run as well which depends on the magnitude of change in the market which the government may or may not
adjust its interest rates for markets to clear. In conclusion, the GST tax hike does increase the capacity for government spending and intervention but it reduces household consumption and hence utility. It is very important for the government to decide on a good timing for the increase in GST such that there is enough time for citizens to adjust its consumption bundle and employment stance to adapt to the reduction in lifetime disposable wealth of households. In the perspective of its citizens, it is important to consider the marginal benefits trade offs between government initiated public goods and individual household goods before concluding GST hikes as a direct negative impact on their own utility levels.
1.Reliance Consulting. (2018, May 8). The Impact of Potential Goods and Services Tax (GST) Hike on Businesses in Singapore. Retrieved from https://www.corporateservicessingapore.com/impact-potential-goods-services-tax-gst-hike- businesses-singapore/
2.IRAS. (n.d.). Current GST Rates. Retrieved from https://www.iras.gov.sg/irashome/GST/GST- registered-businesses/Learning-the-basics/How-to-implement-GST/Current-GST-Rates/