GST hike: Businesses should prepare for impact

This article was contributed to and first published in The Business Times on 9 February 2022.

Minister for Finance Lawrence Wong is widely expected to make an announcement relating to the Goods and Services Tax rate hike on Budget Day. Given the "sooner than later" stance maintained by the government and the lead time required by businesses to prepare for the GST hike, it will be beneficial for companies to start their preparations early.

With the product end of the business often dominating much of management's attention due to disruptions from Covid-19, the tax function (much less a GST rate hike) is often passed over in view of more pressing day-to-day concerns. This mindset of tax being a secondary concern needs to change and the upcoming rate hike may well be the impetus needed for businesses to take a closer look at the impact of the GST on their operations and the state of their GST compliance. Here are some reasons why.

Growing importance of GST

The anticipated new GST rate of 9 per cent could likely lead to the GST becoming the next largest contributor to our tax coffers, after corporate income tax, in the near future. Its contribution can only grow over time given the broad tax design of the GST system and recent developments to bring more imported goods and services within scope of the GST.

A logical conclusion from this is that we can expect increased scrutiny by the tax authorities on GST compliance going forward.

Impact on non-GST registered businesses

GST costs (by themselves) have a direct impact on the bottom line unless they can be recovered as input tax credits under GST rules. However, input tax recovery is an exclusive entitlement of GST-registered businesses (with some exceptions). This means that for most non-GST registered businesses, the GST incurred on purchases becomes an added business expense. An increased GST rate would result in a corresponding rise in business expenses.

To mitigate such an impact, eligible businesses should consider applying to be GST-registered on a voluntary basis even if they are not required to do so under the GST rules. The purpose of the GST-registration threshold of S$1 million - rather high relative to international standards - was partly to relieve small businesses from the need to shoulder the burden of GST compliance. This is, however, not a silver bullet by any means. Apart from the need to put in place systems and processes to comply with the GST rules, there is also a need to consider the impact of GST on pricing. The decision often comes down to a cost-benefit analysis.

Larger impact on certain sectors

Not every GST-registered business can recover the GST paid on their businesses in full due to the nature of their business activities - banks, insurance companies, funds and residential property developers, for example.

For such businesses, irrecoverable GST costs are unavoidable and directly hit the bottom line.

To address this, such businesses may wish to re-assess if there is a basis to seek approval from the tax authorities for an input tax recovery formula that more accurately reflects the usage of resources (or inputs) to generate their supplies with the goal of reducing the amount of irrecoverable GST costs. In addition, they should ascertain if there are any current GST schemes that can help to alleviate the impact of the GST hike. A GST health check review can also help to identify recurring errors and potential opportunities for GST savings.

Automation of tax processes the way forward

Businesses often do not fully appreciate (until they are audited) that GST errors can be very costly. With the tax authority able to claw back up to 5 years' worth of understated tax liability from businesses, the impact of past and current errors coupled with penalties can make a serious and unexpected dent to the bottom line, especially if transactional volumes are large.

A clear way forward is the adoption of technology to automate the tax compliance processes to minimise errors. Despite government initiatives to support productivity and automation in recent years, tax compliance has largely remained a manual process. Resource-starved finance/tax functions often grapple with the challenge to do more with less (headcount). As a result, the barrier to change is often inertia. A good first step for businesses is to start identifying current pain points and weaknesses in the process and exploring which aspects can be automated, and how.

Rise of e-commerce and developments in international indirect tax space

E-commerce has enabled businesses to expand to overseas markets more easily. Governments have therefore reacted by introducing rules to ensure that consumption in their countries is taxed in the same way as domestic purchases. Many countries and regions such as the United Kingdom, the EU, Australia and New Zealand now require overseas service providers who supply digital services or low-value goods to consumers in their respective countries to register for VAT or GST and account for such VAT/GST collected.

What this means is that the need to manage indirect tax compliance for multiple jurisdictions may become more common for businesses who sell internationally. The challenge is keeping up to speed with the tax rules in the foreign jurisdiction on top of one's domestic tax obligations, exacerbating an already onerous task for businesses.

As it's said, knowing is half the battle. The other half is just as important and, as far as GST is concerned, there is no better time to take action than now. In particular, business owners should look into how the GST could impact their business and take the necessary steps to prepare for the upcoming hike.