GOODS AND SERVICES TAX (AMENDMENT) BILL

GOODS AND SERVICES TAX (AMENDMENT) BILL: Order for Second Reading read.

2.54 pm

The Minister of State for Finance (Mrs Lim Hwee Hua): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

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The Goods and Services Tax (Amendment) Bill 2007 comprises two groups of changes. The first group related to changes announced in Budget Statements 2006 and 2007. The second group covers other amendments to the Goods and Services Tax Act arising from regular reviews to improve our GST system.

A public consultation on the Goods and Services Tax (Amendment) Bill that was drafted for the 2006 changes was conducted from 8th September to 6th October 2006. The draft Bill has been revised to incorporate the suggestions made by businesses.

GST budget changes

Let me first highlight the amendments related to the budget changes.

(a) GST rate increase

To broaden our tax base, and to enable the Government to grow our economy and implement Workfare and other initiatives to strengthen social cohesion, the GST rate will be increased from 5% to 7% with effect from 1st July 2007. This change, which was actively discussed in this House during the recent Budget Statement debate, is reflected in clause 2 of the Bill.

(b) Zero-rating treatment for prescribed tools used in the manufacture of goods for export

Presently, the supplies of tools made to overseas clients but used in Singapore for the manufacturing process attract GST. To enhance the cost-competitiveness of local manufacturers and to recognise that such tools are business inputs and do not constitute private consumption per se, the supply of prescribed tools made to overseas clients will be zero-rated, if the tool is used in Singapore exclusively for the manufacture of goods for export. Clause 5 of the Bill reflects this change.

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(c) GST exemption for prescribed Shariah -compliant financing arrangements

To promote Shariah -compliant financial activities in Singapore, the effective return arising from the provision of prescribed Shariah -compliant financing arrangements, in relation to the purchase of non-residential property, will be exempted from GST. The change will harmonise the GST treatment of prescribed Shariah -compliant financing arrangements with their conventional loan product counterparts to ensure a level playing field. This change is provided in clause 11 of the Bill.

(d) Deemed input tax credits for insurers

Presently, there are no input tax credits for insurers on cash payments made upon the occurrence of an insured event even under an insurance contract. As a result, GST is collected on gross premiums which are not reflective of the true value-add of insurance services. To capture the true value-add and to reduce the business costs of insurers, insurers will be allowed to claim deemed input tax credits on cash payments made under certain insurance contracts that are subject to GST. Clause 6 of the Bill reflects this change.

(e) Reduction of record-keeping period from seven years to five years

Presently, GST-registered businesses are required to keep GST records for seven years. To reduce business compliance costs and to support enterprise and entrepreneurship, clause 8 of the Bill amends the GST Act to reduce the record-keeping period from seven years to five years. This change is in line with the general move to reduce the record-keeping requirement for businesses down to five years to provide consistency for businesses.

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Other tax changes

Let me now move on to the second group of tax changes covered by this Bill. These amendments arose from our regular reviews to improve the GST system.

(a) Advance Rulings System

Firstly, the advance rulings system. To provide greater clarity and certainty to taxpayers, an advance rulings system for GST will be formalised and enshrined in law with effect from 1st July 2007. Any ruling issued under the advance rulings system will bind the Comptroller of Goods and Services Tax to apply the statutory provisions in the manner as set out in the ruling. Clauses 10 and 12 of the Bill provide for binding advance rulings, the circumstances under which the Comptroller shall, may or may not provide the rulings, and their fee structure. This is similar to the advance rulings system for income tax, which was introduced last year. Under the advance rulings system for Income Tax, a non-refundable application fee of $525 is payable on the application for rulings. A further fee of $131.25 per hour is payable for any time beyond the first four hours, spent in considering the ruling by IRAS. More information on the fees for Income Tax rulings is available on IRAS' website.

(b) Revise GST rules for zero-rating of advertising services

Secondly, to revise the GST rules for zero-rating of advertising services. Sir, to simplify GST rules, the zero-rating treatment for advertising services will be revised from one that is tied to the advertising subject, to one that is tied to the nature of advertising services.

Where the nature of advertising services relates to concept development, artworks and media planning, the supply will be zero-rated when it is made contractually to and for the benefit of an overseas person.

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Where the nature of advertising relates to the sale of media space or airtime, the supply will be zero-rated when the advertisement is circulated outside or substantially outside Singapore. This change is reflected in clause 4 of the Bill.

(c) Time limit for claims relating to over-declaration of output tax in repayment returns

Thirdly, the time limit for claims. Presently, there is no time limit provided in law for claims relating to over-declaration of output tax in repayment returns. To provide clarity to taxpayers and to align with the reduced record-keeping period, the GST Act is amended to provide for a time limit of five years for claims of refunds relating to over-declaration of output tax in repayment returns. The amendments are provided in clauses 7(b) and 9 of the Bill.

(d) Consequential amendments arising from the reduction of GST record-keeping period

Fourthly, consequential amendments. Pursuant to the reduced GST record-keeping period, the time limits for GST-registered businesses to reclaim input tax that is paid late to suppliers and for the Comptroller to raise additional assessments will be revised to five years. Clauses 3 and 7(a) of the Bill reflect these changes.

Sir, I beg to move.

Question proposed.

3.05 pm

Mr Gautam Banerjee (Nominated Member): Mr Speaker, Sir, thank you for allowing me to join in the debate on the Goods and Services Tax (Amendment) Bill.

At the outset, let me declare my interest. My firm PricewaterhouseCoopers provides GST consulting services.

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Sir, I speak in support of this Bill, which seeks to improve, among other things, the efficiency of administering and collecting GST. I also commend the Ministry of Finance and the Inland Revenue Authority for the public consultation process which took place before the Bill was presented in Parliament.

Having said that, there are two points I would like to raise. The first point is on the public consultation process itself, and the second point relates to the proposed implementation of an advanced rulings system.

Let me start with the public consultation process. In seeking public comments, the Ministry stipulated that the scope of the public consultation was to obtain feedback on areas of the draft legislation that needed greater clarity. However, many were disappointed that the consultation exercise was not intended to be a consultation on the policies, judging from the following statement in the Ministry of Finance's website at the time, and I quote, "The policies have already been decided through the due process." We were left guessing as to what constituted "due process".

In this respect, I would ask the Minister to review the scope of any future public consultation, as there could be policies or matters relating to the fundamentals of the tax system that perhaps needed to be aired with the public at large. There are many cynics out there. So, if you give them reason to believe that you have already decided on a policy and are merely going through the motion of consultation on the peripheral issues, you will undermine the whole objective of getting public "buy-in".

On my second point, the present Bill proposes to introduce a new section 90A in the Goods and Services Tax Act. Specifically, section 90A intends to implement an advanced rulings system for

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GST, which requires the payment of a fee to the Comptroller of GST.

I recall that when the proposal was first made in the Goods and Services Tax (Amendment) Bill 2006 released in September last year, there were reactions from tax practitioners and others that having to pay for a GST ruling gives the wrong signal in a self- assessment system like the GST, whereby taxpayers have to determine the correct amount of GST to account to the Government. I remember this being discussed in the Business Times in an article on 7th November 2006.

Perhaps, at this juncture, I should explain, for the benefit of Members, the difference between the two main systems of tax collection - the official assessment system and a self-assessment system. Under an official assessment system, a taxpayer provides information to the tax authority to apply the law and calculate the tax liability. In Singapore, income tax operates on this system, where as long as there is full and complete disclosure, the taxpayer has discharged his or her responsibility.

With self-assessment, the responsibility to determine the correct amount of tax to pay is shifted to the taxpayer. The Singapore GST system operates on a system of self-assessment, which means that it is the responsibility of a GST-registered business to prepare its GST returns accurately and on time.

A self-assessment regime should make it easy for businesses to understand their tax responsibilities and obligations, because the tax department has effectively shifted the responsibility for determining the correct amount of tax to the taxpayer. However, in Singapore, there is a concern that many businesses may not fully understand their responsi

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bilities under a self-assessment system, which is still a relatively new system. This is borne out by the amount of tax and penalties collected from GST audits by the IRAS, which is consistently higher than that collected from income tax audits. Clearly, businesses in Singapore need more help from the IRAS to meet their obligations in a self-assessment environment. Paying for advanced rulings is not consistent with this objective.

While some jurisdictions charge for advanced rulings, we should take the cue from countries like Australia, which conducted a review of its income tax self-assessment regime in 2003. In considering the role of the Australian tax office and the provision of rulings, the Australian Treasury 2004 discussion paper questioned whether the tax office should continue to provide private rulings free-of-charge. The final review report concluded that private rulings should not be charged for. What it said was that, and I quote, "... within a self-assessment environment, taxpayers have the right to know the manner in which the tax laws apply to their circumstances (rather than being a privilege that would justify charging a fee)."

In its response to the public comments, the Ministry of Finance has said that the charging of a fee is to deter frivolous requests and that the Inland Revenue Authority of Singapore would continue to respond to normal inquiries. I am not aware of the number and types of inquiries that the IRAS receives on a daily basis, but it would be difficult to see how its workload can be reduced if there is uncertainty in the law that requires a ruling. It is better to flush out problems and uncertainties upfront rather than for businesses to grapple with these uncertainties in computing their GST. After all, with the increase in the GST rate, the amount of tax collected will increase substantially and the IRAS should prepare

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itself for the extra workload to help businesses get their GST computation right the first time.

The Ministry has also commented that with the proposed fee, the GST ruling will be legally binding on the IRAS. On this point, I cannot recall circumstances where the IRAS has withdrawn its rulings in the past, unless, of course, the facts of the case and the law changed.

In conclusion, Sir, I support the Goods and Services Tax (Amendment) Bill. I would, however, request the Minister to consider the two points I have raised on fundamental issues of open and comprehensive public consultation and the administration of a tax which is fast becoming an important source of tax revenues.

3.10 pm

Ms Sylvia Lim: Mr Speaker, Sir, the Workers' Party opposes clause 2 of the Bill which raises the rate of goods and services tax to 7% with effect from July. We have already articulated our reasons in the Budget debate in February and I do not intend to repeat them here.

Sir, following up on what was mentioned by the Nominated Member, Mr Banerjee, I also have a clarification concerning the charging of a fee for advanced rulings, and this is more in relation to the quantum of fees to be charged. It seems, from the Schedule, that a trader who is seeking an advanced ruling is being charged time cost, as the initial fee of $525 for the first of four hours will be supplemented by an hourly fee of $131 per hour beyond the first four hours. The trader is also expected to reimburse the Comptroller for any external consultations which he may need to make in making the advanced ruling.

I would like to ask the Minister of State whether the trader would actually

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have an estimate of the approximate fee that he may have to pay for his application. Secondly, how strictly is the time cost enforced, in the sense that if the authorities are slow, would they be prepared to give a discount on the time that they have spent?

3.12 pm

Mdm Ho Geok Choo (West Coast): Mr Speaker, Sir, I rise in support of the Bill.

I welcome the amendments to section 21, especially those relating to overseas advertisements. While the amendments relating to the promulgation of advertisements outside Singapore extend the existing provisions of zero rating for exports and international services, I am heartened that they have now included overseas advertisements. Certainly, this new amendment will, I believe, contribute significantly to two critical areas. The first is to support Singapore's effort at becoming a media hub. I hope these amendments will attract more advertising agencies and media houses to locate in Singapore, as the advertisements they book for their clients out of Singapore will be zero rated.

Secondly, these amendments will enable and encourage our local companies to promote their products and services in international markets, thus supporting further our globalisation drive. By zero rating international advertisements, our local companies can drive and coordinate more effective international marketing and promotion programmes out of their home offices.

Sir, I am also heartened by amendments to section 21A, which relate to the zero rating of tools and other supplies from the manufacture of goods for foreign persons. I believe these amendments will help drive down the cost of doing business for our local companies doing sub-contract work for foreign companies.

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The effect of zero rating will help make our local sub-contractors more competitive.

In this regard, Sir, I wish to ask if such zero rating will also apply to manufacturing tools by Original Equipment Manufacturers (OEMs) and contract manufacturers. Both of these sectors are fast growing and attractive markets for our local companies, both large and SMEs.

Sir, the amendments to the Fourth Schedule to provide for exemption for Islamic financing is another exciting development that I fully support. These amendments will no doubt support the growth of Islamic financing, which is attracting a great deal of interest in the business community. My only question is, why is this exemption restricted only to non-residential property transactions? Why can we not extend this to other forms of business financing as well?

Members may be interested to know that Islamic financing and banking is not just for Muslims. In other countries which also practise Islamic finance, many financial institutions have reported that between 30-40% of their Islamic financing clients are non-Muslim companies. Because Islamic finance is not based on an interest rate paradigm, these companies have found that they enjoy greater predictability in their budgeting and they can protect themselves against sudden changes in interest rates. Sir, I hope the Minister for Trade and Industry can seriously consider extending this exemption to other areas of Islamic financing, therefore creating a new impetus to the development of this very promising sector.

Sir, on this note, I rise in support of the Goods and Services Tax (Amendment) Bill.

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3.15 pm

Mrs Lim Hwee Hua: Mr Speaker, Sir, first, I would like to thank the Members for the support of the Bill. Let me take the questions in turn.

Sir, the comments by Mr Banerjee on the advance ruling and the implementation issues are well noted and well taken. Currently, as he has noted, IRAS gives GST advice free of charge but these are not legally binding on the tax authorities. The proposed Amendment Bill will allow businesses who want certainty to obtain an advance ruling that is legally binding. IRAS therefore levies a fee for advance ruling because more work is needed to do the necessary due diligence and such ruling applications are generally more complex than enquiries and require more detailed analyses. I would like to assure him and Ms Sylvia Lim that the fees are based on a cost recovery basis of the resources needed in issuing the ruling. We are charging a fee, as he has pointed out, in order to deter frivolous requests. The rulings are usually specific to the company and provide the company with tax certainty. Let me recount the experience of the Australian system. When they implemented this legally binding advance ruling system, there was actually an overwhelming increase in the number of requests and therefore the deterrent nature of the levying of a fee is in place.

The details of the charging will be reviewed over time, and I would like to give assurance that the applicants will not be charged beyond what is the fair rate, in terms of the actual time used. Let me assure Mr Banerjee and Ms Sylvia Lim that even with a GST advance ruling system, taxpayers can continue to approach IRAS for non-binding tax advice on GST queries. And IRAS will continue to educate taxpayers on the correct GST treatments through the e-Tax guides. To date, IRAS has published more than 60 e-Tax guides on the website, clarifying all

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the various treatments that are applicable to GST.

On Mr Banerjee's point about consultation, let me assure him that MOF had carefully considered the various policy changes proposed in the GST Bill, including the advance GST ruling, before we launched the draft Bill for public consultation. So the public consultation is not limited to only the actual process itself. But I agree with Mr Banerjee that we should have made it clear that we welcome feedback, not just on the drafting of the legislation for compliance, but also on the policy changes as well. And I would like to assure him that MOF values the feedback/inputs from the public and the business community, and we will continue to take them into account.

Mdm Ho has raised two points on the zero treatment for prescribed tools in the manufacture of goods for exports, whether it is applicable to Original Equipment Manufacturers (OEMs) and contract manufacturers as well. The answer is yes. They will be able to zero-rate the supply of tools if they satisfy the prescribed conditions. The main conditions are that the tools must be supplied to an overseas person and used to manufacture goods for export.

On her other point of exemption from GST for Islamic financing, I would like to assure her that this would not be restricted to only non-residential properties transactions. Currently, Islamic loans and deposits as well as sale and lease of residential properties are already exempted from GST. Only Islamic financing arrangements involving non-residential properties would attract GST. Hence, with the proposed Bill, the effective return earned by financial institutions on the sale of non-residential arrangements under qualifying Islamic financing arrangements would now also be exempted from GST. So this is really to close the loop.

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I agree with Mdm Ho that Islamic financing is a promising growth area for Singapore and MOF will actively monitor the developments and consider the need for exemption of GST for new forms of Islamic financing arrangements when they are proposed.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [Mrs Lim Hwee Hua].

Bill considered in Committee; reported without amendment; read a Third time and passed.

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