Thursday, June 04, 2015

How to get rid of GST

I have made this statement many times - the Goods & Services Tax (GST) is the worst kind of tax that can be introduced by any government.

Every one has to make one or two dozen transactions every day - public transport, meals, drinks, small purchases. The less frequent transactions include seeing the doctor, going for haircut, paying for services each month.

Every transaction has a GST component to be collected and accounted for. By introducing the value added system, the collection and accounting is taken upstream to include the value added at each stage of the process. This is madness!

Although there are computer systems that can help to reduce the work, the data entry has still to be done manually. While a large part can be integrated with the normal accounting process, there is still the portion that needed to be taken out to report to the tax authorities.

To make matters worse, the government starts to have complicated rules about what are to be "exempted" or "zero-rated".  And the public argues that it is a heavy burden to impose GST on medical bills and essential food items that are needed by the low income people.

After more than 20 years of implementation, GST continue to be perplexing and unpopular.

Better ways to collect tax

There are better ways to collect the tax that is required to run the government.

The first question to be addressed is - does the Singapore government really need to collect GST as it runs a large surplus, by IMF standards, even without GST.

However, if we take the accounting method of the Singapore government and the removal of GST leads to a budget deficit, what is an alternative to GST?

A simple way is to increase income tax to the rate that existed before GST was introduced. But if this was not desirable, here is another way.

We need to collect tax on employees and the self employed people using an approach that approximates to the GST that they would have spent. The key difference is that we collect the tax in a monthly sum, rather than on several dozen transactions every day.

a) For the employed, we can collect a payroll tax based on a certain percentage of the salary or wage. The tax could be 5% (compared to 7% of GST). It allows for some of the earnings not being spent on items subject to GST.

b) For the self-employed, e.g. taxi drivers, hawkers, small time contractors - the tax can be paid as part of the fee that is required to obtain a licence to run the business.

Employers need to employ workers to run the business. So, they have to pay the payroll tax, just like they now pay a levy to employ a foreign worker. The employer will treat it as part of the cost of running the business and may reduce the salary of the worker (who now does not need to pay GST). This can be left to market forces, subject to regulations on recommended wages for certain occupations.

The self-employed need to get a licence to run the business. They will also pay the licence fee and will treat it as part of the cost of running their business. While some of these businesses will operate in the black market, the majority will be law abiding. This has been the experience in Singapore.

For the high income earners, such as doctors, lawyers, senior corporate managers - there is still the income tax to catch their income above a threshold.


It is possible to scrap GST and replace it by a payroll tax and a licence fee to run verious types of businesses. As the payroll tax is paid by the employer, the workers do not feel the pinch in their daily spending, although they will have to accept a somewhat reduced salary.

The benefit to the country is to remove the waste of the collecting and accounting of GST on tens of millions of transactions every day, and to reduce the constant arguments on what should or should be subject to GST.

1 comment:

Anonymous said...

Hi Mr Tan, what are your thoughts on the fact that GST is the most efficient form of taxation in theory?

Blog Archive