Raising Goods and Services Tax (GST) in Singapore

Background

One of the key guidelines of this blog is that it should be apolitical but sometimes business, politics and social issues are all intertwined and you can't discuss one without the other. The recent discussion about raising Goods and Services Tax (GST) in Singaporeis one such issue. The current GST is 5% and it is expected to be raised to 7% next year. The Singaporegovernment explained that the reason for raising the GST is to enable the government to have more firepower in the future years to help the poor. In short and in simplistic terms, the GST increase is to rob a little bit of the rich Peter so that we can pay the poor Paul in years to come. The idea is to narrow the income/wealth disparity by taxing more from the consumers, especially the wealthy ones now. As a businessman with a natural fear for taxes coupled by an attention span of 10 seconds on things not related to my business and/or things I can’t possibly change, this is how I understand it.

Global Comparison of GST

Deloitte has a fantastic website that compares the global indirect taxes (GST/VAT/ Sales tax) of various countries. I have merely extracted the GST from a few countries for illustration:

• Australia 10%,
• Canada 6%-14% (depending on state),
• Malaysia 10% (to be changed in 2007),
• New Zealand 12.5%
• Singapore 5% (may be changed to 7% in 2007)

Check this out http://www.deloitte.com/dtt/article/0,1002,cid%253D5028,00.html

I was mildly surprised that Singapore GST was relatively low compared to many countries. Is that a good gauge of budgetary prudence or social welfarism at work? I really don't know. Hopefully, our gentle readers can throw some light here.

Raising taxes to help the poor

We know raising taxes is never popular. An American President lost an election because of it. "Read my lips- No New Taxes", said Mr Bush. Like the HAL Computer 9000 in the Stanley Kubrick movie "Space Odyssey 2001", American voters really read his lips and believed that there would not be any new tax and we knew what happen... It is also never easy to explain the benefits of raising taxes or adding new ones, no matter how noble the intentions.

But income disparity is indeed real in Singapore. I am sitting at VivoCity's Starbucks reading Warren Buffet's annual report, dissecting my company's latest quarterly results, making calls to my corporate lawyers, bankers, business associates and partners plus sipping my Christmas edition coffee. It is heaven - work and rest all in one. I feel guilty that I have such luxuries during weekdays. The luxury of time and bandwidth to spend it as I choose. To live to work and not work to live. As much as I want to look away, the disparity- be it income, social, opportunities and choice of leisure are getting more visible each day. If history has a habit of repeating itself, then the situation must not be left unchecked. First it will be envy, next will be anger, then it will be hatred and ultimately, revolt and chaos.

Income disparity - it is starting to rear its head 

Here is an interesting digression. When we give motivation talks to school children these days, we see them hugging their bags with their dear lives (as opposed to us who were school children in the 70s and 80s, we FLUNG our bags laden with textbooks as a sign of youthful rebellion). We were naturally curious. So we questioned them why they love their school bags so much. They revealed that all their latest tech gismos are inside their school bags - Apple Nano, Nokia cellphones or Sony handheld games, HP PDA, Creative video players etc. They can't lose their precious possessions and are constantly in fear that they may be stolen! Now, imagine yourself belonging to the "have-nots" camp and have to struggle with school fees and canteen break money. The disparity will become very stark indeed. It is probably too much to bear.

Understanding the need to solve the disparity issue (and be more aggressive in our progressive tax platform) is one thing. Linking it to a GST increase is another. The poor don't see themselves excused from the GST although we KNOW mathematically that they are the least affected. To many (and sometimes myself), it is universal - it hits the rich "tai tai" as much as the guy worrying about his next meal. That is the real problem.

We need to know how the poor is helped

The next issue is that Singaporeans really don't know how much the poor is being helped. Our government has this habit of taking pride in this creed "we assist those who help themselves and only help those who are totally helpless." We avoid misguided social welfarism. Again, maybe the government is more generous than this unfair perception but as private citizens, we really don't know how much work is done. There is not enough visual explanation in the media what is really done for the poor. We attribute poverty assistance to private charities, celebrities doing their bit and that's about it. The solution is to reverse this thinking. It is time the government go all out showcasing the real work done for the less fortunate. Nope, having a 30-minute docudrama on television won't help, nor a 60-minute Channel News Asia story on how the poor is funded by the Budget. It has to be at the street level, visual, simple and repeated. Unfortunately, most of the things I hear at the street level are that "the best the government can do for you when you are made jobless is getting you a taxi license". That is not true. The government does much more. Perhaps, this is a good time to explain to us what's done to help the poor. If the Singapore government succeeds, maybe, just maybe, we may find the GST increase tolerable. We may not like it but we can live with it.

Harold Fock

Comments

[James Seng]

"First it will be envy, next will be anger, then it will be hatred and ultimately, revolt and chaos."

Sound like Communism :-)

I agree that the rich-poor divide is not good for the stability of the society but classical capitalism is about market freedom. The divide is neccessary in order to drive others to higher economic height.

I suppose the most people wants in the deepest in their heart wanted economic equality yet but also want avoid the failure of a centralized planned economy under communisim.

[scratcher]

If the help package for the poor helps them earn money out of govt services, do you thinking 7% GST is too much? hehe!
http://dogahowl.blogspot.com/

[ccw]

" ...we KNOW mathematically that they (the poor) are the least affected. "

Refering to your above quote..how did you conclude that the poor are least affected by the GST which is regressive in nature?

For a poor man (household income) earning $1000 per month and spent $800. He has to pay $40 (5% gst) or $56 (7% gst).

which is 4% of his income and 5.6% of his income respectively.

For the rich tai tai whos husband earning is $10000 and spend $6000 per month. he has to pay ($300 5% gst) and ($420 7% gst) which is 3% and 4.2% of his household income.

and furthermore, the poor man family is spending most of his money on things which are essetial. and the rich tai tai are spending most of her husband's money for non-essentials... which the rich tai tai can choose to 'cut back'...and not for the poor man...

Read the link below for more calculation...

http://aaron-ng.info/blog/robbing-peter-to-pay-peter.html

[Harold Fock]

Dear Scratcher,

Sorry it took such a long time to reply to your excellent comment. My dad used to tell me this "Always stay within your area of competence and you won't look like a fool!" I obviously made some motherhood statements in my blog (the kind the civil servants are very fond of (e.g. The only constant is change.. yuck yuck yuck). The statement "...we KNOW mathematically that they (the poor) are the least affected" is certainly not within my area of competency.

Upon further research, some tax experts and economists told me that GST can be viewed as regressive. The worst impact is that businessmen raise prices on the pretext of GST. A $0.20 increase of a cup of $0.70 coffee is more than 2% and it has more impact to a poor family than a rich family, which buy Starbucks anyway :-) So there is obvious validity in your argument. Having said all that, in the coming months, what the government needs to show is how the extra tax revenue is put to good use to help the poor and the sandwitched class.

While reading up on this matter, I came across a funny story. An economist told me this "Do you know why tax experts are paid much more than ecnomists?"
Answer - Economists based their predictions on economic laws and equations while tax experts are governed by Accounting Standards. But Accounting Standards can be re-interpreted to suit the client. Therefore, tax experts make more money :-)

[Jason]

Doesn't matter if you're rich or poor.Starbucks coffee sucks.

[James]

I feel the 7% increase came at a bad time with the recent outcry over the Singapore Ministers' increased pay package.

Singaporeans can't help but feel that their extra 2% is used to fund the increase in Ministers' pay!

[kim teo]

Get you facts straight. Canada do not have states.
And GST is 8%

[Harold Fock]

Hi Kim Teo,
Think I typed too fast and use the word state. I should have used province. I recalled checking a site with a generic table listing all the various GST charges for USA and Canada. My error.

Please check out http://www.johncletheroe.org/usa_can/taxes/index.htm

The short answer is that it varies among the provinces (depending if you classify the provincial tax as part of th sales tax) and there is a tax on tax element that can reach 8% in Quebec and higher/lower in other places. I dont think there is a fixed component through out.

And relax, this is NOT an inland revenue site and I fully disclosed my limitations in this area (if you read my subsequent postings). As a businessman, tax is painful to me and I try hard not to look at it. That bit, i hire someone smarter than me to deal with it.

Harold

[God.. help me]

In Canada the goods and services tax or GST is a federal tax of six percent on most goods and services sold in Canada for domestic consumption. Some goods and services are exempt from the GST, for example basic groceries, prescription drugs and exports.

[God..help me]

The poor folk like me are struggling to cope with 2% GST increase in my basic groceries and medicine.

[God.. help me]

I do not wear Armani shirt instead wear 3 for $10 shirts which i bought from night market, I donot wear Nike shoe instead <=$15 'Made in China' brand shoes, I do not eat at restaurant instead cook at home and packets my meal to work. I don't drink Coke instead drink tap water. I don't own a flat instead rent a two room flat. I try no to go doctor when sick instead eat panadol and wish the my sick go away. I no internet, no computer instead use the one in library.