Raising taxes during an inflation: 5 things you need to know

Gan Hwee Leng, Partner, Indirect Tax, KPMG in Singapore

A hike in taxes is often more acceptable during a period of economic growth and increase in spending by individuals. Understandably, Singaporeans will be concerned about rising prices during an inflation and whether an increase in GST could put additional pressures on them.

However, in the same way that prices are rising for goods and services, Singapore’s healthcare and social expenditures are also going up exponentially. If taxes are not collected to fund these additional costs, individual households may end up shouldering the heavier burden of healthcare and social costs. This would be challenging especially for lower income families.

Raising Singapore’s GST remains one of the most fiscally sustainable methods to increase tax revenue to fund these costs. Hence, it is expected that the GST hike here will inevitably need to proceed as planned.

That said, the GST rate increase is staggered, which would go some way in preparing Singaporeans to reconsider their spending patterns and explore alternatives for goods and services.

• Those in the lower income group will also receive some relief from the impact of the GST hike, as the government has rolled out various schemes such as the S$6.6 billion Assurance Package and the extension to the GST Voucher scheme.
• Pay-outs for the GST Voucher scheme has been in place for several years while others such as the Assurance Package will begin before the GST hike kicks in.
• The recently announced S$1.5 billion support package to help businesses and residents cope with inflation is also focused on ensuring that lower-income households will be sufficiently supported.

Gan Hwee Leng, Partner, Indirect Tax, KPMG in Singapore

The Government could consider increasing “sin taxes” i.e. raising taxes on tobacco and other goods and services deemed harmful to society. Tobacco excise duty, which is levied at the moment of manufacture rather than at point-of-sale, was last raised by 10 per cent in 2018. This could provide another source of revenue while discouraging the consumption of such goods.

That said, given that it is a broad-based tax, the GST has proven to be a reliable revenue contributor and less susceptible to recession as compared with other types of taxes. A one-percentage point increase in the GST rate would add $1.6 billion in revenue to Singapore’s coffers each year. This is a significant amount, which could see GST eventually overtaking individual income tax as Singapore’s second-largest generator of tax revenue. With a targeted approach in addressing the regressivity of GST, pressing ahead with the GST increase remains necessary to strengthen the country’s fiscal position amid rising spending needs. 

Moreover, as GST is only paid when goods and services are consumed in Singapore, it could in fact, encourage more savings, which was one of the rationales when GST was introduced back in 1994. It should not, by itself, contribute to inflation. 

Gan Hwee Leng, Partner, Indirect Tax, KPMG in Singapore

While some countries have called for a petrol tax “holiday” amid rising fuel costs, it is necessary for Singapore to retain taxes on petrol and diesel as part of its wider move to manage car ownership here. This is also in line with the country’s climate agenda.

Taxes on petrol and diesel, along with other taxes on car ownership, are avenues to steer more residents towards utilising Singapore’s efficient public transport. These concerted efforts can help with tackling the rising population of motor vehicles on our roads, while contributing to some of the government’s revenue.

Mark Addy, Partner, Energy & Natural Resources, Telecommunications, Media & Technology, Tax, KPMG in Singapore

Implementing the global minimum tax of 15 percent by 2023 has always been an ambitious timeline. Following recent developments in Europe, it seems likely that this could now be delayed till 2024 at the earliest across most countries.

However, as the momentum for a global minimum tax is still very strong, the wider economic situation is unlikely to push its implementation back further than 2024 at this stage. Companies that may be affected should continue to model the financial impact on their business, review their existing structures and prepare their finance teams early in anticipation of the commencement date.

It has been well documented that the new global minimum tax will be of particular concern for companies which benefit from tax incentives in Singapore, with low-taxed profits set to be “topped-up” to 15 percent once the rules kick in. However, it’s not all doom and gloom, and we may even see some companies looking to expand their footprint in Singapore to take advantage of its relatively low headline tax rate of 17 percent. There’s little doubt, though, that current economic conditions combined with potential tax rises will not be warmly welcomed by the business community. 

Gan Hwee Leng, Partner, Indirect Tax, KPMG in Singapore

This is unlikely to happen if consumption patterns remain the same.

With a tighter labour market as Singapore recovers from the pandemic, wages are likely to increase at a steady pace. The Government has also said that Singaporeans can expect real wage growth this year, with salary increases likely to outpace inflation.

That said, amid global uncertainties and challenges, consumers should remain prudent in their spending and take proactive steps to manage their expenses in the short- to mid-term. They could consider spending less on luxury items or opt to travel on public transport instead of owning a car. Making these slight changes to their lifestyle habits would contribute towards coping with any increases in taxes.