Monday, December 28, 2015

How to replace the Goods and Services Tax

I dislike the Goods and Services Tax (GST). It increases the cost of living and hits the low income people hardest. It adds to the cost of doing business, by imposing a burden on traders to collect the tax on every transaction and to account the collection to the government.

The government needs revenue to meet its operating expenses and to provide welfare and public service to the people. The GST represents an important source of revenue for the government. If it is discontinued, we will need a suitable replacement.

The government can increase the income tax rate to replace the loss of revenue from stopping GST. This was the situation prior to the introduction of GST. However, this could bring the income tax rates to a level that is higher than other countries.

Another way is for the government to introduce payroll tax to replace GST. A payroll tax of 3.5% is sufficient to replace GST of 7% on the assumption that most people spend 50% of their income on expenses  that now attract GST.

For self employed people such as hawkers, taxi drivers and small contractors, the government can introduce a licence fee of $50 to $250 a month, depending on trade. This would be equivalent to the payroll tax collected from an average employee.

The alternative of payroll tax/ licence fee can be set at a level that is adequate to replace the revenue from GST. It has an advantage over GST. It is a cost of doing business, similar to the salary and CPF contributions.

While it will increase the consumer price by the increase in cost to the business, it avoids the multiplying effect imposed by GST, i.e when GST is increased by x%, the consumer prices usually increase by more than x%.

This will free the traders from the added cost of administering the GST.

I believe that countries will be better off by replacing the broad based GST with the payroll tax/ licence fee. They can still introduce a selective sales tax on certain types of expenses, such as hotel bills, restaurant bills, lawyer billings, stamp duties.

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