Saturday, February 27, 2010

Replace GST with a payroll tax

GST is a bad tax. It is very costly to administer and require a lot of work to keep track of countless transactions, including identifying transactions that should be exempt, zero-rated or taxable and the inputs that are allowed to be recovered. This wasteful cost is added to the cost of doing business in Singapore and make us less competitive internationally against countries that do not have this burden.

GST can be replaced by a flat rate tax on wages and investment income. To replace GST at 7%, it should be possible to levy a flat rate of 4% - based on the assumption that most workers will spend 4/7 of their wages on the items that are covered by GST.

Employers can be made to contribute a payroll tax of 4% on the wages. They can recover this amount from workers earning above a certain threshold, so that the low income workers are exempted (i.e. the payroll tax is borne by the employer).  This flat rate of 4% can also be levied on investment income. For income from property, this tax can be added to the tax based on annual value.

The government can collect an equivalent amount in taxation (to replace GST) and businesses can be relieved of the administrative cost of keeping a separate set of records and employing accountants to account for GST.

The accounting firms and tax officers will be unhappy to see GST disappear, as they make profits and earn good salaries with GST. But, we are already short of accounting staff to do the ordinary accounting work (other than GST) - so they can be redeployed for more useful purpose. 

But can Singapore afford to waste scarce resources on doing wasteful work on GST, when there is a simpler and more efficient way to achieve the same goal?

Tan Kin Lian


Anonymous said...

Good idea.
Simple is better.

Chrisloup said...

erm, gst taxes all consumers, eg; foreign workers, IR casino goers etc.
a payroll tax only taxes domestic workforce.

I believe GST is chargeable when you purchase a new condo?

What about payroll taxation on self employed people like insurance agents, tutors, freelancers, karang guni etc I believe many already don't top up medishield/medisave at the moment.

Anonymous said...

Isn't there already a payroll tax in Singapore or has it been scrapped?

I agree that computing GST is really wasteful work. But then, when do we ever have simple systems in Singapore. Even taxi fares are made complicated and difficult to understand.

That is why they need to pay such sky high salaries to ministers and their subordinates to think up such complicated systems.

Anonymous said...


Anonymous said...

What wage tax ? We already pay income tax, so plse don't even suggest this to the gahment. Because they will be very happy to make their wallet thicker since you volunteer to pay "wage tax". Then after the election, you see another big increment for them...

Anonymous said...

Countries with GST tend to have much better tax compliance. Without GST you are penalising the "honest" taxpayer in favour of the dishonest taxpayer who succeed in evading tax through creative accounting practices. Malaysia will soon introduce a GST in order to tackle tax evasion and it is foreseeable that many businesses will now be unable to underdeclare their transactions in order to evade tax.

If you replace GST, and in doing so reduce administrative costs, you are also making tax evasion progressively easier. Cutting 5% here and 10% there (i.e. I purchase 10 units and instead declare 11 in order to increase my costs and consequently lower my net profits) is extremely difficult to detect without a system of value added taxation. If the administrative costs are indeed high (I admit I do not know about the costs) it still remains to be shown that sufficient incentives remain in place to dis-incentivise tax evaders. How much would those incentives cost on their own?

Tax evasion inevitably only benefits the business owners. Note that socialist market economies in Western Europe and Scandinavia tend to have horrendously high levels of VAT together with the highest levels of social equity. What does that tell you, especially if you are supposed to be aspiring to be like them?

Anonymous said...

What is the purpose of collecting GST? I know that the road tax is used to build and maintain road and infrastructure. ERP is collected to control traffic jam. Income tax is probably collected for the government to fund its project. Each of the type of fees is targeted to a group of people and has objectives.

But what is the purpose of GST? Can anyone tell me?

I Share what I know... said...

GST is a tax on spending.

When you buy anything, there is a tax on it.. either at source ( at the point of manufacture or import of the goods) or at the point of sale.

In other words: pay for buying anything.. goods or services.

You cannot escape GST. Unlike other countries like USA, where sales tax does not include basic items such as milk and bread, here in Singapore, everything is taxed!

What is the purpose?.. to increase and maintain income for the operation of Government. They have reduced the personal and coporate tax rates, so to make up for this short fall, they tax you when you spend your money.

Left hand gives to right hand.. its an illusion.. the net result is even more revenue for the Gov.
Because, even tourists in Singapore are taxed when they buy a bottle of water.
Thats why they build IR, increase migrants.. they need the volume!

How else are they going to pay the ministers salary which is pegged to GDP??

Smart eh?

They learnt this from Harvard.
( it wasnt original )

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