Is GST really a fairer tax for the poor and SMEs?

This is a first in a three-part series of commentaries about the impending GST hike. In this first part, I will examine the impact of GST on the lower income earners and small businesses. Part 2 will analyse the government’s and media’s “spin” accompanying the announcement of the hike. In Part 3, I will explore some of the alternative sources of revenue that can be used to increase social assistance to the poor yet balance the budget, as well as ways to cushion the impact of the GST hike for the poor.

On Monday, Prime Minister Lee Hsien Loong announced that Singapore’s Goods and Services Tax (GST) will be increased to 7 per cent in 2007, from the current 5 per cent.

The decision to increase in the GST requires much greater scrutiny by the public, consumer groups, small businesses and the Opposition. The government needs to stop its political spin and be fully transparent with Singaporeans on this issue. It needs to explain clearly why the GST hike is necessary, whether any alternative solutions have been explored, and outline exactly what it intends to do with the increased revenue from this tax increase.

So far Singaporeans have been told by the government and the media that the extra revenue will be used to fund increased social assistance programmes that will benefit the lower income groups.

While it is laudable that the government intends to increase public spending to help needy Singaporeans, it is disingenuous to put out a message that this tax increase will benefit the poor.

The GST, unlike income tax, is widely recognised as a regressive tax. This is because it taxes both rich and poor for all items, including essential goods and services such as clothing, food, utilities and transport. Since the poor have less disposable income, the GST effectively takes a higher percentage of income from the poor than the rich.

Impact on businesses and the economy

The GST hike will also negatively impact the bottom line of small businesses. Currently, businesses with less than $1 million in revenue a year cannot pass the GST costs of their goods purchases (their “input GST”) to their customers if they are not GST-registered (which most aren’t). So a mama shop owner (a small sundries retailer) will be paying 7 per cent tax for all the goods he purchases from wholesalers, but will not be able to collect any of it back from his customers.

An increase in consumption tax will also reduce consumer spending. While this may be good for individual savings, will be bad for many businesses and could impact the overall economy of the country.

The Singapore Chinese Chamber of Commerce & Industry (SCCCI) issued a statement yesterday expressing “great concern and disappointment” at the impending GST hike. SCCCI added that “the proposed hike is likely to have an immediate and detrimental effect on local spending, and add to the cost burden for many local companies. Our long-term competitiveness will also suffer.”

The GST has been pitched in the past as “a fairer tax”. But fairer to whom? If the government is really keen on improving the lot of the poor and small businesses, a GST hike is certainly not the best way to go.

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Coming up next…Putting the “spin” on the GST hike.

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3 thoughts on “Is GST really a fairer tax for the poor and SMEs?”

  1. Hi Gerald,
    We all generally agree that tax collection is necessary in order to carry out any govt’s fiscal policies. The challenge is what is the most equitable way so that poor are not disadvantaged. I have read Andy Mukherjee’s opinion and I think it is balanced.

    I just feel sorry for the poor. They are dependent on hand-outs from the govt and so many fall thru social net cracks as they don’t qualify for these.

    The rich of the world and international capital will flow towards countries with low tax regimes ( hence corporate tax rates are dropping), and they shift their OHQ’s from London to HK to Timbuctoo if they want, but our McDonald uncle only shift from corner provision shop to NTUC and still cannot make ends meet. The corner provision shop is also getting squeezed now, as unless they register GST or mark-up price ( and lose to Cheers or 7-11), they either absorb or close shop!
    I just hope the help package is really what it promises to be.
    Sigh!

    Dr.Huang
    (Gerald: I have copied these comments to my blog comments too)

  2. Dr Huang,

    Sorry for the late reply. I think we (and the govt) have to accept that there will always be that bottom ‘x’ per cent of people who simply won’t be able to cope with the effects of globalisation. I am therefore of the opinion that there needs to be an unconditional, needs-based safety net for them (like what the WP is proposing).

    No one is asking for S’pore to become a welfare state. But this bottom-income group really needs help, otherwise their poverty will end up perpetuating down the generations.

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