Commentary: Why different GST rates for luxury and essential goods don't make much difference for Singapore

SINGAPORE: Come Friday (Feb 18), Singaporeans will get an answer to arguably the most anticipated questions of 2022 so far: When the 2 percentage point hike in Goods and Services Tax (GST) will take place and whether it’ll happen in one go.

The increase from 7 per cent to 9 per cent was slated sometime between 2021 and 2025 but had been held off given the economic impact of COVID-19.

The run-up to Budget 2022 has set the public speculating about whether it’ll take effect this year. Prime Minister Lee Hsien Loong said in his New Year message that the Government will have to “start moving” on the hike in Budget 2022.

But it comes at a time of concern about rising costs of living, amid financial woes from the pandemic and Singapore’s headline inflation for December 2021 hitting a near nine-year high.

Since the less well-off pay more GST as a percentage of their income than high-earners, perhaps the bigger question around this hike is this: Can we make GST less regressive?

More specifically, some people are asking if having different GST rates for essential and non-essential goods can help lessen the impact of the hike on Singaporeans.

MAKE GST LESS REGRESSIVE BY DIFFERENTIATING ESSENTIAL GOODS?

The reasoning goes, that everyone must buy “must-have” items which should be kept affordable, while the higher-income have room for discretionary spending on “good-to-haves” that could be taxed more.

Some countries, in fact, treat certain basic necessities as exempt supplies, including Asian countries such as India, Indonesia and South Korea, or subject them to a reduced GST rate compared to the standard rate. Foodstuffs, for example, are taxed at 5.5 per cent instead of 20 per cent in France, or zero-rated instead of 10 per cent in Australia.

Like Singapore, New Zealand charges a broad-based 15 per cent GST, and basic necessities are treated as taxable standard-rated supplies.

In Singapore, the Government has long resisted this move to treat basic necessities as exempt supplies since GST was first implemented in 1994. It opted instead for a broad-based system with very few exemptions that do not include food or healthcare.

The Government’s rationale is that exempting basic necessities from GST will help everyone but end up benefitting the wealthy more as they spend more.

Instead, it considers it a fairer approach to target assistance for lower- and middle-income households through measures like GST vouchers and absorbing GST for healthcare services consumed by subsidised patients. A S$6 billion Assurance Package was also announced to offset the upcoming hike for five to 10 years.

It is unclear how much a zero or reduced GST rate might affect tax revenue and hinder the Government’s ability to finance targeted assistance schemes, or to fund the increased public spending that motivated the hike in the first place.

A shortfall might mean the GST rate could be raised again in future or offsets that can be channelled to help the less well-off could be lower.

Counterintuitive as it may seem, a lower tax rate for certain goods and services may backfire in its goal of helping lower-income households.

TRICKY CONSENSUS ON BASIC NECESSITIES

But given that GST accounts for only slightly more than one-fifth of tax revenue on average, perhaps a stronger drawback of a multi-rate GST system is just how tricky and potentially costly implementation might be.

What qualifies as basic necessities to warrant lower GST rates?

In the United Kingdom, foodstuffs are generally exempt from value-added tax (VAT) but a government webpage details the conditions to determine if an item is zero or standard-rated. Roasted nuts are zero-rated if unshelled but draw a 20 per cent standard rate if shelled for example.

Some goods and services may also run up against the issue of fairness: Women in Germany used to fork out 19 per cent tax on sanitary products, the so-called “tampon tax” that categorised them as luxury items.

The law must be clear in defining the basket of goods in each GST category. Disagreement between tax authorities and taxpayers may lead to classification issues and potential legal disputes that can only be settled in the courts.

Multiple GST rates may be confusing, if certain goods and services potentially fall under different classifications. Imagine: If biscuits are charged 10 per cent GST while chocolates are charged 20 per cent, then what would the GST rate for a bar of KitKat be?

A single-rate system will also be simpler for both authorities to administer and businesses to comply with. Mechanisms needed for a multi-rate system also have a compliance cost that may end up being passed on to consumers instead.

The red tape of administrative bottleneck and potential legal disputes can impede collection of the GST and consequently hinder any economic activity.

WHAT ABOUT LIFTING GST EXEMPTION ON GOOD CLASS BUNGALOWS?

That said, a multi-rate structure is not the only way GST could be tweaked to be less regressive.

Currently, all residential properties, regardless of value and the number purchased, are regarded as exempt supplies and are not subject to GST, unlike commercial and industrial properties.

A way to increase GST revenue is for the Government to consider applying special GST rules within the class of residential properties – as a start, to no longer exempt Good Class Bungalows (GCB).

Such large, landed properties in prime districts are considered a rare asset and would only be affordable to the ultra-rich, say with a S$20 million threshold based on the open market value at the time of purchase. It will not squeeze the lower- and middle-income.

Specific application of GST on such properties would thus be in the same spirit as differentiating essential from luxury goods, compared to property taxes or Buyers’ Stamp Duty that have been revised in the recent past and for which there might be less appetite to revise so soon again.

Given the necessity of the GST increase to shore up Singapore’s revenues, such bold moves might be simpler and more helpful than a complicated multi-rate GST system.

Simon Poh is Associate Professor (Practice) of the Department of Accounting at NUS Business School where he specialises in tax matters.