Additional Cost of Implementing Multi-tiered GST for Exemption of Basic Necessities
Ministry of FinanceSpeakers
Summary
This question concerns Ms Hazel Poa’s inquiry about the additional implementation costs of a multi-tiered GST to exempt basic necessities. Minister for Finance Lawrence Wong responded that the current system already achieves effective multi-tier rates through the GST Voucher scheme and subsidies, which specifically benefit low-income households. He stated that broad exemptions often benefit the wealthy more and that multi-rate systems increase compliance costs for businesses and IRAS. Citing international studies, the Minister noted that such systems lead to administrative burdens, legal disputes over borderline cases, and potential tax fraud. Ultimately, these additional costs would be passed on to Singaporeans as consumers and taxpayers, rather than making the tax system fairer.
Transcript
66 Ms Hazel Poa asked the Minister for Finance what is the additional cost of implementing a multi-tiered GST that will allow for the exemption of basic necessities.
Mr Lawrence Wong: As explained during the Budget debate, we have already achieved the effect of multi-tier effective GST rates, with higher effective GST rates for higher-income households. This is achieved by implementing GST with the permanent GST Voucher and the absorption of GST on publicly-subsidised healthcare and education. This is a more effective way of specifically helping the low-income Singaporean households, than exempting certain goods from GST for all who consume them. In fact, various studies have shown that an exemption for a basket of essential goods tends to benefit the well-to-do more, as they spend more on everything, not just luxury items, but basic necessities as well. So, such a move will not help to make our GST system fairer.
We do not have estimates of how much it will cost businesses and IRAS to implement a multi-rate GST system in Singapore. What we do know is that these costs will, ultimately, be passed on to Singaporeans, both as consumers and taxpayers. We also know that our conclusion is well supported by the experiences of other jurisdictions with multi-rate GST systems.
A 2021 study by the European Parliamentary Research Service noted that "a uniform VAT system, combined with direct instruments, such as direct transfers, would be more efficient"; that "differentiated VAT rates, exemptions, and registration thresholds lead to higher compliance costs"; and that "as a large proportion of compliance costs are fixed and independent of firm size, SMEs are disproportionately burdened". It further cautioned on "the costs of reduced VAT rates that go beyond revenue losses and include, for example, VAT fraud" which "are difficult to quantify"1.
A 2006 study of VAT compliance costs in Sweden estimated that the compliance costs would be reduced, on average, by roughly 30% if a single rate system replaced a multi-rate system2. A 2005 study by the Swedish Government also estimated that borderline cases constitute roughly one-fifth of all dispute cases referred to their tax tribunal. A conservative estimate of the cost of resources in the public and private sector expended on these borderline dispute cases was about 700 million Swedish krona3, or about S$146 million, based on the exchange rate then.