The Anti Neo-Democracy Theorist

I wrote on a similar issue some time ago but I just find it increasingly surprising that many people have continued to argue against zero-rating or having two forms of GST simply because it is “mah fan”, “ley chay” or in English, bothersome.

If it is really so burdensome to introduce zero-rating or two rates of GST, should we have one flat rate of income tax then? Should we also urge SBS to have one flat rate of transport pricing? Why not have one flat rate for all schools in Singapore, regardless of whether they are private or public? Furthermore, how about one flat rate for students in universities, regardless of whether they are overseas or local? Maybe one flat rate isn’t always the best policy option, even though it is the most efficient one? (Sometimes it can be though) Can we sacrifice some forms of efficiency in exchange for an alleviation of financial burden for the middle to lower income Singaporeans?

What exactly is 7% GST, 2% more GST for basic necessities? If you are a household that spends 1000 dollars per month per food before GST, you now spend 20 more a month on food. You do the maths on water bills, housing (shelter) and fan bills. [I am not advocating zero-rating or dual forms of GST to be implemented on water, housing and fan bills but just to illustrate that increase in GST does require significant financial commitments from Singaporeans; it is really different from raising the income tax for eg.]

I am very confident that our world class civil service, our top notch PSC scholars, our efficient ministry of finance and our ever-vigilant CASE would have little problems dealing with 2 forms of GST. In addition, having 2 forms of GST creates more public policy options for the government; it is much easier for them to increase GST in the future to raise more public monies, as most Singaporeans will feel assured that the taxes on their basic necessities would not go up.

P.S. I am a little bit pessimistic about the offset package; Will the expectations by the public not match the generosity of the government?

The Straits Times (Singapore)
February 10, 2007 Saturday
More handouts, and the poor should get the most;
Relief packages vary but in some countries, groceries and daily essentials are tax-exempt. Bryan Lee and Erica Tay examine measures adopted by Singapore and other countries to soften the blow of the GST

MR LEE Kim Seng is 34 and lives with his wife, and five children aged between two and 12, in a three-room Toa Payoh flat.

A former contractor, he has been jobless since September last year when he fractured his leg. The family relies on his wife, 31, who earns about $600 a month as a part-time supermarket cashier.

In their home, every cent counts. Few will argue that less well-off households such as Mr Lee’s should get the most help to cope with a consumption tax like the goods and services tax (GST).

That was what the Government did through ‘offset packages’ when the tax was introduced at 3 per cent in 1994 and again when it was raised to 5 per cent in two stages, in 2003 and 2004.

These packages have typically taken the form of rental rebates and other types of financial assistance. They are designed to match the amount of extra tax burden created from GST for a period of time.

Yet there is a common perception that not enough is done, especially for those who struggle to make ends meet, while others question why better-off people receive offsets as well. From the start, it has been widely acknowledged that GST hits low-income families hardest. While the well-to-do will pay more GST in absolute terms when they spend, the tax weighs more heavily on the pockets of the poor in proportional terms as they typically spend a larger part of their wages.

Moreover, less well-off households are also less able to curb their spending to save on GST, because much of their expenditure is on essential goods and services. The Government introduced extra handouts to poorer families when GST was introduced in 1994.

These took the form of rebates on HDB flat rents, service and conservancy charges and property taxes. Those living in smaller Housing Board flats received bigger rebates while those in larger apartments got less.

In the more recent GST rise from 3 to 5 per cent, the less well-off again received the lion’s share of a $3.6 billion offset package.

Besides rebates on HDB flat rents, and service and conservancy charges, the Government gave out Economic Restructuring Shares (ERS) which could be converted to cash immediately.

Again, property size and value determined the amount of rebates and shares given.

On both occasions, personal income taxes were also reduced. Mr Lee and his wife received about $1,200 in ERS last year but spent it straight-away.

‘We used the money to pay off our utility arrears and loans we had taken from friends,’ he said.

A Finance Ministry study estimated that a one-room flat dweller will have received a total of $2,068 in GST offset benefits between 2003 and this year, while savings from lower income taxes came to $92.

Compared with the $553 additional GST he would cough up over the same five-year period, he would be covered for the tax hike for another 13 years if his annual spending patterns do not change. Those in bigger flats would have their GST covered for at least eight years from 2003, according to that study.

Despite the handouts, the criticisms have persisted. One reason is that lump-sum offset handouts are easily forgotten once they are spent.

More controversial, however, is the fact that in the past, the offsets were given to almost every Singaporean, even the wealthy.

MPs interviewed recently by The Straits Times said they favour a more targeted approach to delivering GST offsets. With 90 per cent of adult Singaporeans receiving at least $1,200 in ERS and the rest getting between $600 and $800 each, it might have been better if the financial help was not spread out so thinly so that more could be given to the poor, they said.

The Finance Ministry study shows that residents of private property will be shielded from the GST hike for eight more years after this year.

While they received much lower direct offset benefits, they saved $4,581 from lower income taxes between 2003 and this year, much more than the additional $1,891 of GST they would have incurred in the period.

And they continue to enjoy the income tax savings for years to come, unlike the one-off offset package.

Citigroup economist Chua Hak Bin said this is not a surprising result as one of the big reasons for the GST hike was to finance a cut in personal income taxes to attract foreign talent to Singapore, while retaining top locals.

This is part of the restructuring of the Singapore economy in a more globalised world where competition is more intense than ever before.

Such individuals, he said, are needed and the net effect in the long run will be a robust local economy that will benefit all Singaporeans. In the upcoming GST hike, the Government is expected to be as generous, if not more so, as the income gap between rich and poor widens.

In an editorial in the latest edition of Petir, the People’s Action Party newsletter, Second Finance Minister Tharman Shanmugaratnam wrote that the Government will have a full set of measures to offset the impact of the GST hike on the poor.

‘If we do nothing, the wages of this group of Singaporeans will stagnate, while that of higher-income Singaporeans will rise.’

Experts say that housing type remains a good starting criterion in determining who should get the most assistance. But additional steps could be taken to ensure that the money reaches those who really need it.

Citigroup’s Dr Chua said that a further gauge based on the number of dependants an individual has could be a helpful refinement.

Stock brokerage CIMB-GK economist Song Seng Wun reckons help could be more targeted towards individuals, rather than households, and that could be addressed by the Government’s Workfare programme. Economists also note that middle-income families have generally felt the squeeze the most as they receive less offset benefits while enjoying smaller income tax savings.

Charging less GST for some items

BESIDES handouts to poorer households, some countries exclude basic items such as fresh groceries and babies’ clothing from GST, or apply a reduced tax rate to them.

The argument is that it helps to keep necessities affordable for the poorest households.

In Australia, fresh produce such as meat and vegetables, among other things, are exempt from the 10 per cent GST there.

In Canada, basic groceries and medical devices are among the goods exempt from its 6 per cent GST. Britain practises a system of varying consumption tax rates for different goods and services.

Its general value-added tax (VAT) rate is 17.5 per cent, but many basic grocery items are ‘zero-rated’ or VAT- free, while items such as sanitary napkins and condoms are taxed at 5 per cent.

Prime Minister Lee Hsien Loong said in last year’s Budget statement that reducing GST on certain goods and services such as food was not an effective way to help the poor, as much of the revenue lost from such concessions would go to richer households, who spend more on food.
The Singapore system of one standard GST rate was modelled on the New Zealand system.

For Singapore, only the export of goods and certain international services are zero-rated. Tax experts, citing the experience in other countries, point out that zero or reduced GST rating brings with it a major problem: It is simply too cumbersome to implement.

While the intentions might be good, Ernst and Young tax partner Yeo Kai Eng said: ‘The flip side is, it can end up as an administrative nightmare.’ Lists of zero-rated goods and services can run into pages, and minute details separate the taxable from the tax-free.

For example, certain countries deem hot takeaway food GST-taxable, but not freshly baked bread that happens to be warm. So where does that put hotdogs?

In countries where milk powder is GST-free, it is unclear whether products derived from milk are taxable, tax experts pointed out.

Even children’s clothes came under debate in Britain, noted PricewaterhouseCoopers tax partner Koh Soo How. Should clothes for small-size adults be taxed the full 17.5 per cent, when apparel for bigger-size children and teens are VAT-free?

‘Such definitional difficulties have led to court cases, some of which have gone all the way to the European Court of Justice,’ noted Mr Koh.

Said Ernst and Young’s Mr Yeo: ‘When you have a complicated list of what supplies are in and what are out, it is open to a lot of interpretation and confusion. There is then a need for clarification after clarification,’

However, this does not mean that zero-rating should not or cannot be implemented.

Mr Koh said: ‘If the decision is to apply a reduced or zero rate to food and basic necessities, we need to avoid the overseas experience of having to make distinctions between hot and cold food, uncooked and prepared food.

‘It should not matter if the food you purchased is cooked or uncooked, cold or hot, or bought from the hawker centre or a restaurant.

‘The lower or zero rate should be applied uniformly and across all categories of food if we want to avoid the complexities experienced overseas.’