Singapore pursues a policy of including as many taxpayers as possible. The tax philosophy of Singapore is that the
tax base should be as wide as practicable to drive home the message that the costs of public services have to borne by the
citizens. This is evident from the number of tax brackets in the personal income tax structure. In 1987, the personal income
tax rates ranged from 3.5 percent to 33 percent with 13 brackets. At present, the rates range from 2 percent to 28 percent
with 10 income brackets. With the introduction of the GST on 1 April 1994, a significant number of taxpayers have been removed
from the income tax net mainly due to the generous income tax rebate and personal relief. This however does not imply that
the percentage of taxpayers has declined. More people in fact are paying taxes under the GST system. Even the young whom have
not entered the labor force and the old whom have left the workforce are not excluded from paying GST. As long as one consumes,
he or she is likely to have paid the tax. One may see that the GST is a fairer tax since everyone is involved. In the GST
form, the whole population contributes to the tax revenue of the government. The difference is that, instead of the working
population paying direct taxes to the government, the residents in Singapore are paying indirect taxes in the form of GST.
The government in other words has moved from collecting direct taxes to indirect taxes.
The reason for the transition is to enhance the level of competitiveness in Singapore. It is the intention of the government
to lower the direct taxes like the personal income tax and company tax to compensate for the high land and labor costs. The
government perceives that with lower direct taxes, more foreign talents and foreign companies would work and invest in Singapore
respectively. Lower direct tax rates of course also benefit the local residents and the firms since they are entitled to the
newer and lower tax rates. It should be noted though that tax rates is not the only factor considered in determining the level
of investment and intensity of work. Companies care about the labor cost, rental, industrial relations, infrastructure standards,
the economic environment and stability of the government as well. While lower tax rates are welcomed, it is not the only factor
considered. Companies will still fail to invest in Singapore or shut down if the other factors are non-favorable. The recent
failure of ‘One .99 Shop’, citing high rental costs, did not signal well in investing in Singapore despite the
low company tax. Likewise, a foreign worker may consider the cost of living and cultural adaptation as relatively more important
than direct taxes when deciding whether he or she should work in Singapore. It is therefore wiser to look at the whole package
incorporating other factors besides tax rates when one talks about enhancing Singapore’s level of competitiveness, a
fact that is well recognized by the Singapore government.
The introduction of the GST
corresponds to lower direct tax rates. The top personal income tax rate in Singapore was reduced from 33 percent to 30 percent while
the company income tax rate was reduced to 27 percent from 30 percent with effective from the Year of Assessment 1994. This
basically lowers the direct tax burden of the working population and companies operating in Singapore. More recently, in the
budget statement 2002, the Minister for Finance Lee Hsien Loong (who is concurrently the Deputy Prime Minister) reduced the
corporate and top personal income tax rates from 24.5 percent and 26 percent respectively to 22 percent for the YA 2003. In
this year’s budget statement 2003, the Minister did not change the rates but reiterated the government’s stance
to further bring down the tax rates to 20 percent by YA 2005. The increased in the GST rate in 2003 was an effort to offset
the loss of direct tax revenue as a result of these changes.
The government also offered
rebates to the residents in Singapore to lower the direct tax burden of the working population. This essentially brought down
the percentage of the working population from paying personal income tax. When GST was first introduced, a rebate of S$750
was provided to all the taxpayers and this figure was gradually reduced by S$50 each year until it reached S$500, and thereafter
it remained at that level. As a result of the rebates, the proportion of labor in the income tax net fell sharply from 73
percent in 1995 to 23 percent in 1994. The main beneficiaries of the above were the lower income individuals with annual income
of less than S$30,000. The proportion of taxpayers in this category fell from more than 50 percent in 1993 to just 6 per cent
of the total employed labor force in 1994. While the government aimed to lower the number of individuals in the income tax,
the number of taxpayers in the higher income group (defined as taxpayers with annual income of more than S$30,000 per annum),
as a proportion of total employed workers, had increased marginally, from 16 percent in 1993 to 17 percent in 1994. These
rebates were meant to soften the negative impact of introducing the GST.
To soften the impact of the
recent increment in the GST rate from three percent to four percent, the government offered the Economic Restructuring Shares
(ERS) and other rebates as spelt out by the Minister for Finance Lee Hsien Loong in his recent budget statement 2003. The
ERS amounts to S$3.6 billion to be given out in a bond-like system over three years. Applicable only to Singaporeans, a total
of between $600 and S$1,400 of shares will be distributed in cash form or in the form of dividends, a choice to be decided
by the individuals themselves.
The other rationale for introducing
the GST and increasing its rate is that the GST is basically a tax on consumption, and not applicable to savings and investments.
The argument for GST then is that, with the GST, individuals will be encouraged to save more therefore leading to more investments.
The argument is not a strong one in the case of Singapore. There are two reasons. First, as an attempt to retain the domestic
funds in Singapore and to attract back funds currently held offshore, the government has already exempted interests earned
from savings, current and fixed deposits in the local bank, the Post Office Savings Bank (POSB), from tax. The Minister for
Finance announced this in the budget statement 2003. Currently, depositors with the POSB enjoyed tax exemptions on the interest
from the first S$100,000 earned. With effect from YA 2004, a further exemption on the interest exceeding S$100,000 will be
given to the standards savings, current and fixed deposits in the POSB. Exemptions for the full amount of these deposits will
be rewarded with effect from YA 2006. Even without these exemptions, one should note that tax on interest represents only
one of the factors considered when one wants to decide whether he or she should save more or otherwise. The interest rates,
inflation rates, exchange rates, and the net benefits of other means to use the excess funds are some of the other important
factors that a potential saver would take into consideration. Second, high savings in Singapore have already been incurred
through the compulsory savings in the individuals’ Central Provident Funds accounts. If the notion that Singapore residents
are ‘assets rich and cash poor’ is right, then it is unlikely that the level of savings would respond very much
to tax rates. It would be difficult and not very practical for them to increase their savings further even if the interests
earned through savings are tax-exempt.
Earlier, I noted that one of the rationales for introducing GST is that it is deemed to be a fairer tax whereby everyone contributes
to the revenue funds of the government. This is in contrast to the direct taxes where some individuals or companies are prone
to tax evasion. For example, it is relatively easy for self-employed persons to under-declare their earnings to the tax authority
in minimizing their tax liabilities. It is not easy for the tax authorities to verify the statements submitted by the self-employed
persons. Tax evasion is deemed undesirable from the society’s point of view. Lower revenue collection affects the quality
and quantity of the public services offered. If the level of public services were to be maintained, then higher tax rates
would have to be imposed, therefore imposing higher tax burden to the rest of the society. Indirect taxes like the GST helps
to tackle the problem to some extent since the GST is paid on consumption. Even the self-employed in this case are taxed as
long as they spend their money on consumption. While the argument is valid, the problem is that evasion of GST tax is also
likely to take place. Why is this so? GST could increase non-compliance to the tax regulations among the companies. One reason
is that higher compliance costs are incurred. More paperwork is involved, as the companies have to take the extra effort to
account for the purchases. As pointed out in Gale (1999), compliance costs to GST regulations are high because the GST is
‘not integrated with business income taxes for auditing and control purposes’ (p. 479). Moreover, some smaller
businesses may see the GST as a drain on the amount of resources available for distribution or reinvestment, instead of something
that is added on to a selling price. Visible costs have to be incurred by the companies to understand the workings of the
new tax system, to keep track of their transactions (for claimant purpose) and to familiarize their businesses with the tax.
The above costs of compliance are particularly prevalent to business owners with relatively modest income.
Administratively, detecting GST tax evasion is not easy. For one thing, household purchasers do not usually keep or need receipts
upon transactions for tax purposes, therefore hindering attempts to double-check the submissions made by the companies. Detecting
GST tax evasion is perhaps more effective at the custom points where goods are being brought into the country. Custom officers
could detect GST evaders who try to bring in more goods that what is declared in the custom permit. A successful case of detecting
GST evaders was reported in 1998 in the Singapore press. The report highlighted how a businessman had attempted to evade GST
taxes (in November 1998) by loading more than the recorded (declared goods) from Indonesia. The custom permits did not cover
the consignments brought in. The court found the offender guilty of evading GST since July 1997, amounting to S$310,199, and
imposed a fine on him totaling S$1.55 million, which comes out to about five times of the amount of GST evaded (The Straits
Times, 16 July 1999). Tax officials also cannot rule out tip-off from third parties or informers for valuable information
to fight tax evasion.
In the case of
Singapore, my view is that the impact of the GST on the severity of the tax evasion is not likely to be severe. There are
several reasons. First, a single-tax rate system (currently at four per cent) is adopted in Singapore. This should minimize
the level of complications and costs of compliance. Second, the exemption granted to companies, with annual turnover of less
than one million dollars (SGD) from GST also dampens the severity of tax evasion. The high threshold exempts almost four-fifth
of all businesses including small players like hawkers, retail, provision shops and self-employed businesses, which have the
highest tendency to evade and avoid tax payments.[i]
Third, the GST
rate of four per cent is not sufficiently high to influence the companies in undertaking the risk to evade tax payment. Comparatively,
the value-added tax in Singapore is lower than the OECD countries, which ranged from five per cent in Japan to 25 per cent
in Denmark, Hungary and Sweden. Fourth, given that GST is a multi-stage tax, the probability of detecting GST tax evaders
is higher, therefore deterring companies from under-declaring and/or non-declaring their levels of income. This is facilitated
by the adoption of information technology in helping the tax administrator, the Inland Revenue Authority of Singapore (IRAS),
to account for the taxes.
Fifth, the exemption
on GST granted to financial transactions also helps to mitigate the problem of non-compliance, given the difficulty involved
in identifying the value added produced by the financial institutions, partly because of uncertainty over the true nature
of the services provided. Sixth, the GST tax system in Singapore is more certain and minimizes complications since all goods
and services are taxable with the exception of financial services[ii] and the sale or lease of residential properties.[iii],[iv] The government basically recognizes that providing exemptions to items (like the essential
goods) from the GST is not wise after taking into consideration the potential complications involved in distinguishing between
those items that should be exempted and those that should not. Providing exemptions to as little items as possible is perceived
to be more ideal in minimizing complications in administering the tax. The Singapore government instead provides offset package
to offset the negative impact of the GST rather than relying on the exemptions option. Seventh, not all imports require payments
at the border or at the point of importation. Exceptions, for instance, are given to traders that are under the Major Exporter
Scheme and Bonded Warehouse Scheme, therefore reducing congestion problem along the borders, and therefore the incentives
to evade taxes.
This section touches on the impact of the GST on the Singapore economy. I will first
discuss the negative impacts of the GST followed by the discussion on a positive impact.
One of the problems with the GST is that the poorer individuals are likely to pay a higher
proportion of their income in GST tax as compared to the rich. In the economics jargon, we say that the GST is regressive.
A regressive tax is one where the amount of tax collected from the poor as a proportion of the income earned, is greater as
compared to those paid by the rich. A tax is said to be regressive if the average tax rate (ATR) decreases as the level of
income of the individuals’ increases. The GST is an example of a regressive tax. Consider two individuals A and B who
earned the annual income equivalent to $50,000 and $100,000 respectively. Assume that they purchased an item costing $1,000
each. With the GST rate at four percent, the amount of tax paid in the form of GST amounts to $400 applicable to both individuals.
The amount of tax paid accounted for 0.08% of the income for individuals A, while for B, the amount of tax paid only accounted
for 0.4% of his or her income. The less well off individual A paid a higher proportion of his or her income in the form of
GST, as compared to the better off individual. A regressive tax therefore is more unequal in nature such that the poor are
being taxed more than the rich.
The regressive problem faced by the consumers is more serious in the case where the goods
concerned are relatively more price inelastic. Examples of price inelastic goods include food, clothing, medicine and cigarettes.
The reason is that with the GST, the suppliers would reduce its supply therefore potentially raising the price of the goods.
Since the good is price inelastic, it would imply that it is difficult for the consumers to leave the market, which has become
unattractive as a result of the tax. The consumers end up bearing a higher percentage of the tax as compared to the suppliers.[v]
As part of the effort to soften the impact of the GST on the residents (particularly
those from the lower income group), the Singapore government offers the offset package to its residents which includes the
Economic Restructuring Shares for all adult Singaporeans, rental rebates for HDB flats and rebates for HDB Service and Conservancy
Charges (S&CC). It should be noted that the government has officially announced that the main intention of introducing
the GST and increasing its rate is not to raise additional revenue for the government, but to offset reduction in the direct
taxes aimed to enhance Singapore’s level of competitiveness. The offset packages were expected to be more than sufficient
to soften the negative effect of the GST on its residents.
Introducing GST is indeed inflationary where the general price levels are expected to
increase. Although the GST is imposed on the sellers, the sellers can pass on some of the tax burden to the buyers in the
form of higher prices. The increment, as recorded in the official statistics like the consumer price index and GDP deflator,
however is one-off. In Singapore, the inflationary pressure did not appear to be significant when the GST was first introduced
in 1994. Despite the imposition of the GST at three percent, the consumer price index increased by less than two percent in
1994 and 1995. With only a percentage jump in the recent attempt to increase the GST rate, the government did not expect the
higher GST rate to have any significant effect on the general price level.
One of the problems with the introduction of the GST is the potential unfair increment
in the price of goods and services from the retailers. The profiteering incidence is likely to exist more severely in the
neighborhood stores where the retailers would take the opportunity of the GST to raise the prices charged more than the stipulated
increased in the GST rates. In Singapore, following the government’s announcement from the government in raising the
GST rate from three percent to four percent, the government has set up the Committee on Profiteering and Inflation to look
into any complaints from the residents over unjustified increased in the prices. Headed by the Minister of State in the Prime
Minister’s Office, Chan Soo Sen, the committee did receive complaints from residents over some incidences of profiteering
as reported in the local media. However, the committee was not able to do much in tackling the problem, highlighting the fact
that the sellers had the right to raise their prices deemed necessary and that it was really up to the consumers to decide
whether the prices charged were fair and reasonable or otherwise. It noted that the consumers had the option not to buy from
the sellers which had engaged in profiteering. While this is true, the buyers would be worse off in the process. Not only
that they might end up paying higher prices if they failed to identify those companies engaged in profiteering but the buyers
would incur additional searching costs in search of those sellers that had not engaged in profiteering.
The introduction of the GST imposes a negative impact on the fixed income earners. Basically
a tax on consumption, the GST is paid whenever consumption is incurred. And GST is inflationary. The fixed income earners
in this case are relatively worse off since they would have to pay for something that is more expensive over the years while
the income received are fixed in nature. Essentially, the real earnings fall meaning that with the same amount of income received,
the fixed income earners are not able to purchase the same quantity of goods and services. Instead, they will get a smaller
quantity. The reason being this is that the income received is not protected against inflation. Examples of the fixed income
earners include pensioners and annuity holders.
The introduction of the GST may also increase
the size of the underground economy (UGE) through the consumers and taxpayers. The UGE is defined as the part of the national
output that is not officially recorded. For example, some companies may deliberately under-declare the production in the preceding
year from the government authorities in their attempt to minimize their tax liabilities. As a result, the reported national
income is less than the actual national income leading to problems like policy ineffectiveness since policies introduced are
based on the government’s analysis on the reported income (which is underestimated) failing to take into consideration
the hidden component of the national income. How is GST linked to the growth of the UGE? The perceived unhappiness among the
consumers for having to pay more for the goods and services consumed with the implementation of the GST could stimulate them
to participate in the UGE. The consumers may engage in the irregular labor market to earn some extra income stimulated by
the increase in prices. Taxpayers may retaliate and attempt to ‘adjust their accounts’ and/or under-declare the
income earned to re-coup the costs incurred in filing and tracking the transactions (for business entities) and higher prices
paid for goods and services (for non-business entities).
The implementation of the GST also complicates
tax administration to the tax regulators. The tax regulators have to provide trainings and information on GST compliance to
the companies at least in the initial stage and to newly incorporated companies. More emphasis and resources are likely to
be spent within the Inland Revenue to audit and monitor the records and accounts provided by the companies. Over time, the
administration problems and costs may decline as the tax regulators gain more and more experience on the job. However, this
may be true only if there is an effective in-house training or its equivalence available for its internal staff and/or the
staff turnover in the Inland Revenue is not excessive - at least to prevent the deterioration of standards and services. In
the case of Singapore, the use of the Internet has facilitated the tax administrator in Singapore the IRAS in administering
its work. The use of the Internet would help in a great way in minimizing tax administration problems. It is the intention
of the IRAS to minimize the cost of compliance to the tax regulations where the taxpayers can now file their tax returns at
the comfort of their homes and offices. A lot of the tax information can now be obtained from the IRAS’s website. This
is part of the IRAS overall philosophy in promoting voluntary compliance. In conjunction with the philosophy, tax forms have
been simplified to encourage greater compliance from the businesses. For example, sole proprietors and partnerships
need to submit only a four-line statement in their tax forms indicating their turnover, gross profit/loss, allowable deductions
and adjusted balance. For the Year of Assessment 1999, company tax return (Form C) has also been simplified. The number of
pages of Form C for the Year of Assessment 1999 has been reduced from eight pages to six pages. Furthermore, businesses with
turnover of less than S$500,000 need no longer submit their statement of accounts with their tax returns. Also, the IRAS takes
the effort to inform the public about its latest changes in the tax system so as to minimize uncertainty. This is done via
the media and its publication COMPASS. In addition, the IRAS conducts seminars and holds dialogues with trade associations/professionals
and field audits to clarify tax laws with taxpayers, obtain feedback and educate the taxpayers.
So far, the discussion concentrates
on the negative aspect of the GST. It is logical at this stage to examine the positive impact of the GST on the Singapore
economy. Clearly, a positive aspect of the GST is its ability in raising Singapore’s level of competitiveness given
that the introduction of the GST and increment in the GST rates correspond to the lowering of direct taxes. The expected inflow
of foreign direct investments is likely to create employment opportunities to the people therefore contributing to lower unemployment
rate (bearing in mind that tax rate does not represent the sole factor in consideration). With the government’s intention
in attracting high value added industries in operating in Singapore, more highly paid jobs will be offered to the residents
of Singapore, contributing to higher standards of living. Of course, with the inflow of the FDI, the balance of payments account
will also improve further increasing the already high foreign reserves in Singapore. These reserves act as safeguards in Singapore
against uncertainties in the economic environment. The government can use these reserves to help the residents at times of
economic downturn. These reserves can also be invested in financial instruments (say by the Government Investment Corporations)
to further build-up the long-term assets of Singapore.
[i] The threshold imposed by Singapore (at $1 million annual) before GST
payment is required, is relatively higher than Japan (0.048 million), Indonesia (0.048 million), New Zealand (0.025 million)
and UK (0.085 million), which had also implemented the consumption tax. Most provision shops, retail shops, hawkers and taxi
drivers in Singapore would be exempted from paying GST.
figures are in Singapore dollar and based on the exchange rate of USD 1 = SGD 1.60 as at end-March 1993 (Asher, 1993).
[ii] Financial services involve
mainly banking services, dealing in shares, insurance and related brokerage services. Providers of the financial services
charge no GST to their customers. The providers of financial services cannot claim the VAT from goods and services they purchase
from their suppliers. As a result, the cost of financial services provided includes the VAT paid to the suppliers. This is
sometimes known as ‘hidden’ or ‘sticking’ tax.
[iii] This is unlike the UK
where different GST rates are imposed on different goods. For example, special treatment is given to items like food, new
dwellings, passenger transport, books and newspapers, which are zero-rated goods. This makes defining the type of goods in
a particular good category difficult.
Singapore, all imported goods (whether for domestic sales or re-exports) are taxable unless they are specifically given GST
relief by the Comptroller of GST. The GST is collected by the Customs and Excise Department at the border or at the point
of importation with the exception of traders that are under the Major Exporter Scheme and Bonded Warehouse Scheme. If the
imported goods are to be used in the traders’ taxable activity, the taxable traders are allowed to recover the GST from
the Comptroller. Otherwise, the traders (or final consumers) are not allowed to recover the GST from the Comptroller.
[iv] Major Exporter Scheme
and Bonded Warehouse Scheme are two schemes introduced to help exporters.
the Major Exporter Scheme, major exporter with export sales in the preceding year exceeding 51 per cent of the total sales,
may not be required to pay GST on the imports at the point of importation. The scheme aims to alleviate administrative and
cashflow problems that the companies may face. If the companies are not able to meet the export percentage criteria, they
are still allowed not to pay the GST on importation provided that a bank guarantee is submitted to cover the GST payable on
imports for one prescribed accounting period.
the Bonded Warehouse Scheme, no GST is charged on any goods transferred from the Free Trade Zone and stored in a bonded warehouse.
GST is only charged if the goods are removed from the warehouse for the local market. GST is not charged if the goods are
removed from the warehouse for the purpose of re-exporting.
[v] See Sam (2002; Chapter 6) for a more thorough discussion on tax incidence.