 |
This article also appeared on todayonline
Why two GST rates are better than one
Introducing a lower rate of GST for certain products and services can help lower- and middle-income S'poreans
IT is reassuring to hear the announcements by Prime Minister Lee Hsien Loong and Minister Tharman Shanmugaratnam that Workfare will become a permanent feature of our social safety net and that there will be no rise in fees for government services for a year, following the proposed hike in Goods and Services Tax (GST).
But can more be done to alleviate the regressive effect of GST on lower- and middle-income Singaporeans, apart from the promised offset package?
Both leaders argued that an exemption of basic necessities and services from GST-a key idea put up by those who urge the Government to tackle the regressive effects of GST on lower- and middle-income Singaporeans- will create economic distortions. They said the rich consume more of these necessities than the poor, thus, such exemptions and zero-ratings of basic essentials are likely to benefit more the rich than the poor.
While a policy of zero-rating for basic necessities may be controversial, will an alternative strategy involving the introduction of two rates of GST create more win-win solutions for both the Government and the people?
Such "reduced rates" have been introduced in several countries with GST or value added tax (VAT), ranging from Britain to Norway to Sweden. In Britain, besides the zero-rating of 16 groups of products (including food, clothing, books and products for the disabled), consumers and producers of seven other groups of products pay a lower rate of 5 per cent for VAT- compared to the "standard rate" of 17.5 per cent. These include suppliers of domestic power, women's sanitary products and children's car seats. Similarly, in Norway, where the ordinary VAT tax rate is 24 per cent, suppliers of foodstuff enjoy a lower rate of 13 per cent. Consumers and suppliers of most forms of transportation need only pay 8 per cent and the suppliers of raw fish, a key industry in Norway, only pay 11.1 per cent of VAT.
In Singapore, introducing a lower rate of GST, say 3 per cent, for basic foodstuff such as all forms of rice, sugar, salt and vegetables, will alleviate the burden of lower- and middle-income Singaporeans.
A family of four which spends $6,000 a year on basic foodstuff can now save $120 a year with a 3 per cent GST rate, as compared to paying the equivalent amount more with a GST hike to 7 per cent.
The presence of a GST for basic foodstuff, albeit reduced, will help in preventing over-consumption of basic foodstuff by higher-income Singaporeans while achieving the target of assisting lower-income Singaporeans. In addition, unlike a zero-rating policy, the Government can still collect substantial amount of revenues from basic foodstuff.
As future demands of globalisation place greater pressures for the Government to raise more revenue to help lower and middle income Singaporeans, introducing "reduced rates" of GST can potentially open up policy options.
Future increases in GST to help the poor might be less controversial as a corresponding reduced rate of GST is available to help Singaporeans procure foodstuff at relatively cheaper prices, to maintain basic standards of living.
If the trial of having dual forms of GST proves successful, the Government may want to consider including more basic necessities in this band of "reduced rate" GST, in future rate increases.
In addition, differing rates of GST can also be a powerful policy tool to create incentives for the adoption of good practices. For example, the British government in 1998 introduced a lower rate of VAT of 5 per cent for energy saving products such as lamps, pipes and glass, in an attempt to induce the British to reduce energy consumption and thus reduce energy bills.
In Norway, to boost tourism rates and to assist the tourism industry, the government has, from Sept 1, introduced a lower VAT rate of 8 per cent for the letting of rooms in hotels, motels and tourist cabins and the hiring out of camping areas, cabins, holiday flats and other recreational accommodation.
In Singapore, will introducing a lower rate of GST for baby products create important incentives for more Singaporeans to procreate? In addition, introducing a lower rate of GST for energy and water saving products will not only encourage Singaporeans to be environmentally conscious by buying more of these products. It will also reduce their PUB bills as their energy consumption decreases with the use of these products.
Since introducing a lower rate of GST can assist lower- and middle-income Singaporeans, while creating more policy options, is it not time to consider introducing two rates of GST?
