In a speech at the PAP Convention last November, Singapore Prime Minister said: “[Finance Minister] Heng Swee Keat was right when he said that raising taxes is not a matter of whether, but a matter of when”.
With the 2018 Budget announcement only a few weeks away, it’s very likely that the Singapore government will announce a tax hike. But Singapore businesses shouldn’t be worried, though. In fact, there are reasons for business owners to be excited.
More on that in a minute.
First, let’s understand why taxes are likely to go up.
Why might taxes go up?
It is predicted that by 2030 1 in 4 Singaporeans will be over 65. With an aging population, the government of Singapore will need to spend more on health care programs to take care of the country’s elderly population.
Furthermore, the Singapore government has hinted at plans to spend more on infrastructure, especially, Singapore’s train network.
In the same speech last November at the PAP convention, PM Lee stated, “Actually if I may be bold and say so, we have a first class transport system in Singapore. But we want to be even better”.
Both increased healthcare spending and infrastructure improvements will add to Singapore’s social development spending, which as of Q2 2017, made up 55.5% of the government’s operating expenditures.
Singapore has never issued nor has plans to issue external debt to fund the budget.
To support government spending initiatives, Singapore raises its funds through a competitive tax system with its main components being corporate tax, personal tax, and goods and services tax (GST).
Furthermore, in more recent years, Singapore has been able to achieve a budget surplus from the earnings on it’s estimated S$1 trillion in fiscal reserves. With that much money tucked away, couldn’t Singapore tap into its national reserves to meet the rising spending needs?
That is unlikely. Not if you look at the sentiment from Finance Minister Heng at last December’s Straits Times Global Outlook Forum:
“Having those reserves gives our economy long-term stability and allows us to weather crises in a way that many other economies cannot…We need to leave (the reserves) to future generations so that their future is more secure.”
If Singapore won’t touch the reserves and does not intend to issue debt to meet budget needs, then the remaining option is to raise taxes.
Experts believe that to maintain a budget surplus, the Singapore government will very likely raise GST.
How will a rise in GST affect Singapore businesses?
GST, as a tax on spending, will impact businesses. Prices will rise throughout the economy as businesses will be required to pass the GST increase down to consumers. This could cause a drop in overall consumer spending.
But even if there is an increase in GST on Budget Day, the Singapore government will likely enact a plan that will soften the blow.
As Minister of State for Finance stated at a visit to the AWWA Health and Senior Care, “Individuals will have time to plan their finances, businesses will get time to study the impact on them and poor and vulnerable Singaporeans will get relief.”
Historically this has been Singapore’s stance; when taxes increase the government takes precautions to minimize the burden of such increases on the economy.
The last time GST increased can serve as a good example.
On Budget Day, February 15, 2007, then Finance Minister Tharman Shanmugaratnam announced a GST increase from 4% to 7%. When the GST increase became effective in July 2007, the government of Singapore also introduced GST credits; cash bonuses for the elderly and low income; and basic services and utility rebates to offset the rising costs and to maintain demand.
In the short term, a rise in GST should not affect Singapore businesses significantly. Furthermore, in the long term, the government is likely to implement new strategies to generate tax revenue that will ultimately benefit Singapore businesses.
Creating a win-win scenario
In 2017, corporate tax revenue, at an estimated S$13.6 billion (USD 10.3 billion), was the largest contributor to the Singapore budget. Going forward, for Singapore to maintain a tax surplus, the government will almost undoubtedly need to raise more tax revenue through corporate tax.
To generate more revenue from corporate taxes, the government could raise corporate tax rates. However, that is highly unlikely.
Singapore’s economy has thrived in part due to its low corporate tax rates. Raising tax rates now would decrease the country’s competitiveness as a global business hub, a risk the political elite of the country is unlikely to take.
Rather than raising corporate tax rates, Singapore can increase total corporate tax revenue in two ways:
- By increasing the total number of taxable companies incorporated in Singapore
- By helping those companies grow, therefore generating more income
In other words, make the pie larger.
This is the view held by the chairman of the SME committee Lawrence Leow. Mr. Leow believes Singapore should add new tax incentives and grants to attract billion-dollar startups to set up in Singapore. Furthermore, tax incentives and business assistance schemes could promote collaborations between large corporations and SMEs that would drive economic growth.
Mr. Leow isn’t alone in his views. Minister of State for Finance Indranee Rajah also noted the importance of growing Singapore’s economy:
“One of the most important things is the economy, you have to make sure that the economy grows,” she said. “We are going to be paying a lot more attention to the economy, how can we expand Singapore’s growth.”
Singapore has a strong track record of providing government business assistance schemes with grants, tax incentives and funding for SMEs and startups. With further support from the government, SMEs and startups can help to grow Singapore’s economy and maintain a budget surplus, without the need to raise tax rates.
Always stay ahead of taxes
Whatever the outcome of Budget 2018, be certain that your company is maximizing its use of the incentive schemes the government has to offer to help your bottom line. An expert corporate service provider can help you discover these opportunities and to ensure that your company is correctly meeting its GST obligations. Contact us if we can help you review all tax exemptions, incentive programs and business assistance schemes that may be suitable for your company.
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