Is the Goods and Services Tax really fair?
Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam has said that the purpose of the Goods and Services Tax (GST) is to ensure that the tax system is fair (see HERE). This statement certainly raises a few questions.
GST is a broad based value added tax which is levied on almost everything save for sales and leases of residential properties, most financial services and the export of goods and international services which are zero-rated.
This would mean that necessities such as food and healthcare are subject to GST. Given that rich and poor alike need to eat and that illnesses do not distinguish between income levels, how does the current GST system ensure that the tax system is fair? In fact, the less well off end up contributing a bigger proportion of their income under the current system.
I note that the government has introduced a raft of reforms to the GST in the form of vouchers whereby various incentives will be given to Singaporeans who fall within certain preset categories (see HERE).
- Cash amounts will be given to Singaporeans whose incomes fall within the bottom 40 percent and who reside in HDB flats or the bottom 15 percent of private home dwellers.
- Annual top-ups will be given to the Medisave Accounts of older Singaporeans who are above 65 and living in HDB flats or who are above 65 and live in the lower-end of the private property spectrum.
- Lower and middle income households will benefit from permanent U-Save rebates which will permit such households to offset part of their utility bills.
To the layman, these amendments are needlessly confusing. If the intention is indeed to alleviate the financial burdens of those who are less well off, why not just a simple straight forward GST exemption for necessities such as basic food items and healthcare?
Secondly, the cash amounts and top ups do not seem to be in significant amounts either. In the examples Mr Tharman cited, the cash amounts will range between $100 to $250 per annum and “a 75 year old Singaporean will receive $350 if he lives in an HDB flat, or $250 if he lives in a lower-end private property”.
I am not against GST per se. There is some merit to the argument that a combination of indirect and direct taxes are essential to ensure that Singapore remains competitive. However, for the tax system to be truly fair, the GST system must accurately reflect the purchasing power of the tax contributor.
The GST is a consumer tax. The more one consumes, the more one pays. Theoretically, this would mean that the rich would pay more since they would have more money with which to consume. However, this would only work practically if GST is only levied on non essential goods because there isn’t an option not to consume the necessities. Take for instance rice. Rice makes up the staple diet of most Singaporeans. Both the rich and poor will therefore consume rice and you end up with a situation whereby GST is more punitive for the poor because he would be spending a larger proportion of his income on paying the GST levied on the rice.
I am not suggesting that there be a blanket exemption of GST on all foodstuffs. There is clearly a difference between caviar and bread. However, I do believe that there should be a list of GST exempt foodstuffs. Many countries the world over implement this system. The UK for example provides a list of items which are zero rated for the purposes of VAT (para 3.1 of HM Revenue & Customs).
For our tax system to be more equitable, it might be more direct to simply introduce a list of necessities which are exempt from GST. This would go a longer way to aiding the lower income group than a raft of amendments that appear perplexing and complicated.