GOODS AND SERVICES TAX BILL (As reported from Select Committee)

Order for Third Reading read. 1.07 pm

The Minister for Finance (Dr Richard Hu Tsu Tau): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Third time."

Sir, the rationale and timing of the introduction of the Goods and Services Tax (GST) and the impact of GST on the lower income groups and prices were discussed extensively during the introduction of the White Paper, the Budget and during the Second Reading of the Bill. However, despite the publicity in the media and efforts by the Income Tax Department and Members of Parliament speaking to individual groups of Singaporeans to educate them on the nature of the new tax, the reaction of the public reveals that whilst awareness of GST is high, people's knowledge of the tax is limited to certain basic facts, such as the 3% tax rate and the implementation date. This indicates that many people still see GST merely in terms of an additional 3% to prices which they have to pay. It would appear that many Singaporeans have not quite grasped the significance and the rationale for introducing the tax. Many people are also not fully aware of the tax reduction and offset package that have been introduced together with the GST. While price increase is a major and legitimate concern for everyone, it would be very unfortunate if most people associate GST only with price increases.

I would therefore now like to take this opportunity to reiterate that GST is part of a broader strategy of tax reform to make Singapore's tax structure fairer and to help the country stay ahead in an increasingly competitive world. Integral to this tax reform is a package on income and corporate tax rate reduction to stimulate growth and enterprise. The lower tax rates for companies would result in lower business cost and make Singapore more attractive to foreign investments and a more competitive place to do business. This will in turn benefit all Singaporeans by providing better paying and challenging jobs and allow us to enjoy a higher standard of living.

At the same time, the Government is fully aware of the effect of GST on prices and the tax burden the public has to bear. The Government has therefore introduced an offset package specifically designed to address the needs of the lower income group. This package will include rebates on rental and service and conservancy charges, property tax rebate, increased Edusave grant, increased public assistance and increased Singapore Allowance. In fact, many people, about 800,000 individual taxpayers, who currently pay income tax will no longer need to do so after GST is introduced. The reduction in individual income tax and the offset package will ensure that nearly all households will be better off after the GST is introduced than before. Indeed, in the first five years, the package of the tax deductions, offsets and rebates will exceed the estimated GST which will be collected.

I have also explained why Government has decided on a comprehensive GST with few exemptions. Allow me to reiterate. The experience of most countries which exempt or zero-rate various essential items shows that it leads to higher costs not only for Government but also for traders in complying with the tax. Moreover, exempting basic items will benefit the well-off more than the lower income households as the former spend more even on basic items than the latter. Instead, the Government has decided to provide offset packages which I have mentioned earlier. This direct approach is specifically targeted at those who need assistance and hence more efficient and cost effective.

Another major issue for the lower income group which had surfaced is the concern about profiteering by traders when the GST is introduced. I am glad that the Ministry of Trade and Industry (MTI) has activated the Committee on Profiteering and Inflation to work closely with other Government agencies to prevent unscrupulous traders from profiteering. The Minister for Trade and Industry will speak to the House later on the role of this Committee.

Sir, I will now turn to the findings of the Select Committee. The Goods and Services Tax Bill 1993 was read a Second time on 19th March 1993, and referred to a Select Committee for consideration. The Select Committee's terms of reference are to improve the administration and provision of the Bill. The Committee received 70 representations, the bulk of which were made by businesses. Of these, 17 representors whose submissions reflected a cross-section of those received were invited to give oral evidence.

The Report of the Select Committee was presented to this House on 7th September 1993. The Bill, as set out in Appendix I of the Report, incorporates various amendments made by the Select Committee. The explanations for the amendments are contained in Appendix VI of the Report.

The GST is a wide ranging tax on consumption of goods and services in Singapore. Unlike income taxes which are collected directly by the tax authority, GST is a tax collected through the businesses. It is therefore crucial for Government to ensure the effective implementation of the tax and to make the process of collection clear and easy to implement for the businessmen and shopkeepers, while making it easy for the ordinary housewife and shopper to know what they have to pay.

The setting up of the Select Committee is a concerted effort by Government to gather views from the public to achieve this objective. The Government has taken this task very seriously because, as observed by an international tax consultant in a Business Times' commentary recently, in some other countries where GST had been imposed without serious public discussion, it has taken them many years to unscramble the system to meet real-life circumstances. I would like to thank representors for contributing their views, many of which are helpful and constructive. The Select Committee has taken into account the representors' concerns and recommended measures to address them. The amendments made by the Select Committee will assist businessmen to streamline their operations and lower the cost in complying with the tax. This will ultimately benefit the consumers at large.

In addition, to better prepare the businesses and public for the tax, IRAS has embarked on an extensive Taxpayer Education Programme since the introduction of the White Paper. The GST teams have so far conducted nearly 300 seminars and dialogue sessions with trade associations. In addition, the teams have visited 1,600 traders at their own premises. Presentations have also been conducted at the Community Clubs to explain to the public the basic concepts of the tax and how it would affect them. Such educational efforts will be further intensified nearer the implementation of the tax. IRAS GST teams will visit all traders who asked for advice and assistance. IRAS assistance programme has been helpful in explaining to the businesses how the tax would affect them and how they should prepare for it. The programme has also enabled IRAS to obtain feedback on administrative problems which the traders have. This in turn has enabled IRAS to fine-tune their procedures so as to make it easier for traders to comply with the procedures for the collection and accounting of the tax.

I will now highlight the substantive amendments recommended by the Select Committee. Group Registration

Many representors have asked that businesses with related companies should be allowed to register as a group for GST purposes. Allowing group registration should not result in any loss of revenue, and will reduce compliance cost by eliminating the need to account for GST on intra-group supplies. However, the Committee recognised that group registration does open up avenues for abuse. A new clause has therefore been added to allow for group registration, with the condition that the Comptroller may disallow grouping or input tax claim for the protection of revenue.

Reverse Charge

Where a Singapore business receives a service provided by an overseas supplier, clause 14 of the original Bill requires the Singapore business to account for GST as if it had provided the service to itself. The purpose is to place local and foreign suppliers of services on the same footing as far as GST is concerned.

Many representors have urged that the reverse charge provision should be removed. The Committee agreed that it is unnecessary to apply the reverse charge to fully taxable businesses. For exempt businesses, given that a majority of the services they received from overseas have no local equivalent, and that GST is not the only factor which businesses consider in deciding whether to use overseas suppliers, the Committee also recommended that no reverse charge be imposed. However, the Minister should be given the flexibility to make subsidiary legislation to apply the reverse charge to specific services, if the need should arise. If the need does arise, the Minister would also have the flexibility to exempt certain classes of businesses from the application of the reverse charge. Clause 14 has been amended accordingly.

Waiver of GST on Importation

The Committee shared the view of many representors that the payment of GST on imports would create cash flow problems for traders and companies which manufacture goods primarily for export. To overcome this, Government has earlier announced that exporters approved under a Major Exporter Scheme will be allowed to import goods free of GST and to account for GST only for that portion sold domestically at the time of sale. The Committee agreed with the suggestion by some representors that those who have 51% of their supplies directly exported should qualify for the Scheme.

The Major Exporter Scheme will also be supplemented by a banker's guarantee arrangement, which allows bankers' registered businesses which do not meet the export percentage criteria to have the GST waived in a similar way on importation so long as security in the form of a banker's guarantee is provided.

The Bill, as it stands, gives the Minister sufficient flexibility to effect the Major Exporter Scheme and banker's guarantee arrangement by way of regulations.

Zero-rating of Intended Exports

While exporters approved under the Major Exporter Scheme can obtain a waiver of GST on importation, they would still have to incur the tax on supplies obtained locally and claim a refund from the Comptroller later. A few representors suggested that the local supplies be zero-rated on the basis that they are eventually to be exported by the purchaser.

The Committee noted that the input tax on local purchases should not cause cash flow problems for most of the exporters because they would probably have obtained their purchases on credit. Hence, they would make payments for these purchases only after obtaining the refund from the Comptroller as exporters would generally opt for the one-month accounting cycle. This, together with the waiver of GST on importation, would solve the bulk of the cash flow problems faced by exporters.

Furthermore, allowing zero-rating of local sales will complicate the administration and result in a loss of audit trail and hence weaken the policing feature of the system. The Committee was therefore of the view that sales to local parties should not be zero-rated, notwithstanding that the goods may eventually be exported.

Bonded Warehousing Regime

The Committee has amended clause 37 of the Bill to extend the bonded warehouse regime to imported non-dutiable goods. Under this arrangement, GST will be suspended on goods brought into the bonded warehousing regime. Any supplies of goods while they are remaining in the warehouse or transferred between bonded warehouses will be disregarded for GST purposes so long as they are not removed from the warehousing regime.

This scheme will benefit traders who bring goods into Singapore for storage and minimal processing before they are re-exported. Clause 20 will also be amended to allow input tax recovery for supplies made within the bonded warehousing regime. This will ensure that our warehousing facilities remain competitive.

Out-of-Scope Supplies

A number of Singapore companies are engaged in procurement activities where goods are shipped from a foreign source to another foreign destination. Such third country trading are supplies that are outside the scope of our GST. Under the original GST Bill, the input tax incurred in respect of such out-of-scope supplies is not recoverable. Many representors express concern that this would erode Singapore's competitiveness as a procurement centre.

As such procurement activities are essentially exports of services, the Committee has amended clause 20 of the Bill to provide for the recovery of input tax attributable to such third country trading.

International Services

The export of services which are zero-rated are specified in clause 21 of the Bill. Under the original provision, a service will be zero-rated only if it is provided to a person who does not have a business establishment in Singapore. Many representors felt that this was unduly restrictive. The Committee shared this view and has decided that the "business establishment" requirement be replaced with the condition that the recipient must belong in a country outside Singapore.

The Committee, however, felt that for that category of services which are performed wholly outside Singapore, zero-rating should be given only to those which are physically performed and enjoyed outside Singapore. These include cultural entertainment and exhibition services. Such a restriction prevents tax planning and round-tripping by suppliers who perform services in neighbouring countries to avoid payment of GST. Clause 21 has been amended accordingly.

Shipping and Port Activities

Several representors suggested that the supply and repair of ships and other services rendered within the port, airport and oil terminal area be zero-rated. This is because ships and aircraft are internationally bound and hence the services provided to them are "consumed" overseas. This suggestion has been accepted and new subsections have been added to clause 21 to zero-rate the supply, including the sale, lease, charter and hire of ships and aircraft, with the exception of recreation or pleasure craft. Services provided in the port and airport area for handling them are also zero-rated.

Financial Services

The original Bill exempts specified financial services where it is difficult to identify the charge for services rendered by financial institutions. Where the supplies are exempt, they will not attract GST. However, the input tax incurred in making the supplies will not be recoverable. A few representors asked that they be allowed to recover input tax in full to maintain their competitiveness.

The Committee disagreed as full input tax recovery for exempt supplies is tantamount to zero-rating the service. However, the Committee recommended that businesses be allowed to recover input tax on exempt supplies made to other taxable businesses. This will remove the tax cascade problem, without zero-rating the exempt services to end consumers. Under this method, the Comptroller can work out with the businesses concerned a simple input tax apportionment formula based on the proportion of the institution's business with other taxable parties. Such a system will be simple for both the financial institutions and the Comptroller to administer. The same approach can be used for other partially exempt businesses where applicable. The Committee has therefore amended clause 20 of the Bill to enable regulations to be made to allow credit for input tax attributable to supplies made to taxable persons for business purposes.

The list of exempt supplies is specified in the Fourth Schedule. As a result of consultation with the financial community, the Committee has amended the Fourth Schedule of the Bill to make clear that trading in financial derivatives, for example, swaps, forward rate agreements and options, as well as the credit portion of a hire purchase or instalment credit are exempt from GST. Paper trading in commodities such as rubber, gold and oil are also exempt provided that the commodities remain unallocated and no physical deliveries take place.

The Fourth Schedule of the original Bill exempts payment and collection services which are essentially fee-based. Since it is easy to identify the charge for these services, such services should be taxed rather than exempt. The Fourth Schedule has been amended to remove such services from the exemption list.

Fringe Benefits

Several representors suggested that GST should not apply to fringe benefits as they are an integral part of a remuneration package and are incurred in furtherance of the business.

The Committee disagreed with this view. As fringe benefits are consumed by employees, GST should apply. Otherwise there may be a tendency to build more fringe benefits into the remuneration package to avoid GST. Hence, with the exception of food and accommodation, the employer would have to account for output tax on the taxable supply it makes free to its employees. In the case where an employer pays for expenses incurred for the private use of his employees, such as medical bills, recovery of input tax will be disallowed.

In-house Exchange Rate

The Committee has accepted the suggestion by some representors that in-house foreign exchange rate be used for GST purposes. The Third Schedule of the Bill has been amended to allow the Comptroller to determine the exchange rate applicable for a specified period or accept such other exchange rate as may be proposed by the taxable person on his supplies.

Penalties

In response to the concern expressed by several representors, the penalty provisions of the Bill have been suitably amended to make a distinction between innocent errors and fraudulent conduct.

Under the original Bill, the penalties in relation to fraud, other than that pertaining to fraudulent refund, entail an imprisonment term not exceeding seven years. Clause 62 has been amended to extend the offence of fraudulent evasion of tax to include fraud by way of obtaining a fraudulent refund. This is to ensure consistency with the penalties for other types of fraudulent conduct.

Bad Debt Relief

The Committee agreed with a few representors that the proposed one year requirement for the claiming of bad debt can be shortened in cases where the debtors' businesses become insolvent. Details of bad debt relief will be spelt out in regulations made under clause 25(3).

Cash Accounting and Six-month Accounting

To lower the compliance costs to small traders who may wish to voluntarily register for GST, the Committee recommended that the Comptroller be given the discretion to allow smaller businesses to account for GST on a cash basis and to allow them a six-monthly accounting period. This will address the concerns raised by some representors. Clause 41 contains adequate provisions for the Minister to make regulations for cash accounting and a six-monthly accounting period.

Re-zoning of Land

The original Bill provides for land re-zoned as non-residential to be treated as taxable, and for GST to be accounted for by the taxable person. The Committee agreed with a representor that since GST on non-residential land is recoverable, the re-zoning of land should not be regarded as a taxable supply. Where the Government has granted written permission for more intensive developments on residential land, there should also be no GST since residential properties are exempt in the first place. Clause 10 has been amended accordingly.

Free Gifts

The Committee has increased the concession whereby free gifts will not attract GST from $100 to $200. Gifts of "commercial samples" will also not attract GST. The Committee is also of the view that if no input tax is incurred in the making of the gift, the supplier will not have to account for the deemed output tax. This is fair because the supplier will not be able to claim input tax if the gift is purchased from an exempt trader. The Third Schedule of the Bill has been amended accordingly.

Second-hand Motor Vehicles

The Committee has amended the Third Schedule of the Bill to provide for a discount factor of 50% to be used in computing the value of a second-hand motor vehicle to which the GST is applied. This will effectively reduce the GST payable by 50%. This discount factor is to correct the distortion created by the COE and ARF on the market price of a second-hand motor vehicle as GST is not levied on these components of the price of a new vehicle. The 50% discount factor will not apply if the vehicle is purchased through a margin scheme as under the scheme, GST is payable only on the profit made by the dealer and not on the sale price of the vehicle.

Accounting of GST by Customers

The Committee finally noted that in many other countries, such as the UK, there have been many instances of fraud involving gold, whereby the supplier absconds with a high amount of output tax collected. The Committee has, therefore, inserted a new clause 38 to the Bill to enable the Minister to make regulations to provide for the recipient to account for the output tax if the need arises. This provision covers precious metals, precious stones and land.

Sir, I beg to move.

Question proposed.

Dr Ow Chin Hock (Leng Kee): ( In Mandarin): Mr Speaker, Sir, I support the motion standing in the name of the Minister for Finance. I would like to reiterate that, in principle, I support the GST as part of our tax reform in Singapore to enhance the competitiveness of Singapore. I also believe that the package of rebates on service and conservancy charges, tax rebates, subsidies, etc. will be able to cushion the impact of GST on the lower income groups.

The Select Committee on the Bill received 70 representations. Most of them came from industrial and commercial organisations as well as individual industries. What they have said are mainly the concepts and definition in the GST Bill, and the problems and difficulties in implementation. The Minister has already announced the acceptance of certain recommendations and has made the necessary amendments to the relevant clauses, for example, group registration and reverse charges for overseas services. However, concerning the interests of consumers, there is only one representation from CASE. We must remember one premise. Whether they are companies or enterprises, they are agents that collect GST on behalf of the Government. The eventual taxpayers are the consumers in Singapore. While to improve the efficiency of the machinery of tax collection and to reduce compliance cost may be important, the protection of the consumer's interest and the public's acceptance of GST are even more important.

Under this premise, I would like to ask the Minister for Finance and the Minister for Trade and Industry a few questions. First, on the interests of consumers. According to feedback from the community and trade union leaders as well as the feedback collected by the Feedback Unit after the publication of the White Paper on GST, prices have increased. I would like to ask the two Ministers: up to now, what measures has the Committee on Profiteering and Inflation taken to prevent profiteering? What will be the additional sum the Ministry of Finance will put aside for the benefit of CASE so as to enable CASE to play a more important role? What laws will be amended in order to give CASE more legal power to protect the interests of consumers?

Secondly, after the implementation of GST, I believe that, apart from internal transfers, IRAS as well as the Customs and Excise Department (CED) will need to engage new staff to handle the implementation of GST. I would like to ask the Minister for Finance how much additional manpower will be required, and how many new posts will be created. In the current tight labour market, within the next six months, will the two departments be able to recruit the staff needed? Will IRAS and CED be competing with the private sector in the recruitment of accounting assistants, accounts clerks and computer programmers and thereby lead to wage increase of these categories of employees, and hence increase the burden of the private sector?

Furthermore, do these two bodies require new software for the implementation of GST? If there is such a need, what will be the development cost for the software, and what will be the recurrent cost involved? On the whole, I hope the Minister will be able to inform this House what is the average cost to collect $1 of GST? What is this ratio compared with the ratios of personal income tax and company tax? Is it higher or lower?

Thirdly, after the publication of the White Paper on GST, my impression is that the Government departments' publicity and education programmes appear to have been concentrated on the businesses, ie, how to collect GST and how to handle the related administrative problems. My question is how would the GST Steering Committee inform and educate the public to enable them to understand better the principle and objective of GST so that they will be able to accept this new tax? Currently, many people still have doubts and reservations about GST. As the Minister has already admitted, not many people know about GST. They remain silent probably because, GST is not yet implemented. We must strengthen our publicity and education programmes to ensure the smooth implementation of GST next year. Here, I would like to ask the Minister for Finance and the Minister for Trade and Industry whether, before the implementation of GST, they intend to speak to the public on television and radio to explain GST so that the people will have a better understanding.

Fourthly, on 16th February, the Feedback Unit conducted a dialogue session. Most of the participants agreed that GST should be calculated separately from the prices of goods and services in the same way that cess is calculated as a last item. Their concern is that if every item is calculated to include the 3% GST, then the increase will be more than 3% because of rounding-off. People are concerned that retailers will not round off, but they will round in. So I would like the Minister for Finance to clarify this question.

Finally, I have noted what Mr Low Thia Khiang has said in his report on the Cost Review Committee in relation to GST. Two questions have been raised. One is whether GST will be increased after five years and, second, after the rebates have been abolished, what will be the impact on the lower income group. I hope that the Minister will answer these two points so that such remarks will not mislead and confuse the public.

On these two points here, I would like to make two suggestions. One, after the implementation of GST, the relevant Government department should conduct a sample survey every year, or regularly, to assess the impact of GST on the lower income groups. If necessary, rebates and subsidies should be extended. We should handle these matters sensibly. We should not rigidly say that these should be taken off after five years. If, after five years, there is an economic recession and there is adverse effect on the lower income groups, then it is necessary to extend the rebates and subsidies. My second suggestion is that the Government should, as far as possible, avoid raising the GST rate after five years. Of couse, this will be determined entirely by future economic performance and the need for tax revenue. If there is a need for adjustment, I hope that the Minister for Finance will include the adjustment of tax rate in his Budget statement for the approval of this House.

Dr S. Vasoo (Tanjong Pagar GRC): Thank you, Mr Speaker, for allowing me to join in the debate.

Sir, I support the GST Bill because it will enable Singapore to be competitive and also meet the economic and social challenges ahead. These are macro issues which a lot of people may not really understand. What is most crucial is to look at how we could sell and promote GST to make the people see that it is positive. I think this is the question that we need to address.

Sir, I note that the Minister has assessed that the people look at GST on the basis of the 3% tax rate. This is understandable because at the end of the day, people are going to ask whether they are going to pay more, or they are going to pay less. As a result of this, they would then view whether the GST Bill is positive or negative, and what impact this will have on their cost of living. I think these are some of the crucial issues that the Ministry will have to deal with and to reassure the ordinary working people that GST will, in the long term, be better off for them. Unless and until we can convince and ensure that the impact is minimal at the grassroots level, the people are likely to become sceptical about the overall interest and the overall value of GST itself.

Sir, the GST Bill is fairly complex. It is very difficult for people to really understand the complexities of this Bill itself. The procedures are complex and, therefore, I share the sentiment that the ordinary average citizen will never be able to understand the mechanics of this Bill. So the ultimate consequence is to see how we can deal with the spillover effects of this GST Bill. The spillover effects of this GST Bill are likely to be felt at the grassroots level, ie, the ordinary households in the various housing estates.

Sir, despite Government's assurance that there will be a small increase in the prices of goods and services when GST is implemented, there are some lingering doubts about this. Residents living in housing estates are now beginning to see price adjustments at various retail shops and food centres. Some of them have taken advantage of it. Some residents have brought to my attention that even before GST is imposed, some hawkers and shopkeepers have jacked up their prices by 10% to 20%.

Sir, when GST is instituted, there could be further attempts at overcharging at the neighbourhood level. The blame for the steep rise in prices will be assigned to Government. So how do we overcome this? How do we explain that this is overcharging that is being made at the local level? The overcharges are expected to be further generated when GST is implemented.

Sir, it is this mindless overcharging and the impact of GST at the grassroots level that we should address our attention. I would like to ask how the Ministry would go about in assessing the impact of GST at the local level, and the types of monitoring system the Ministry would have in order to help it to assess and be sensitive in terms of taking various remedial actions against overcharging.

Sir, I also like to know what preventive measures that the Ministry would be taking against people who overcharge and take advantage of the GST. I know that the Ministry has announced that it will set up a monitoring unit. It will set up a section where people can complain and action will be taken against traders who overcharge. But how quickly would this be effected and how fast action would be taken against people who go on mindless overcharging?

Sir, I also see that there is a need to support the formation of consumer protection groups at the neighbourhood level. Would the Ministry be providing more grants to CASE although there have been suggestions that the grants to CASE will be increased? Would CASE also be given sufficient muscle for it to act against overcharging those consumers?

Sir, the second area which requires attention is the implication of GST on charitable activities. Many charitable organisations are concerned that their fund raising activities and programmes could be affected if donors see that the charities would be getting less from their donations as a result of GST. There are donation draws and various fund raising activities that are undertaken. Would these charities and their activities be affected in the longer term? How would the Ministry propose to deal with this problem? Could rebates or exemption from GST be accorded to charitable organisations? I think this is crucial because we are trying to set up a more caring community and we are trying to encourage various charitable activities and the communities to build up a better support network. I hope that various administrative decisions are taken to encourage people to contribute further and to support various community activities.

Sir, the other area of concern is the group of unsupported retirees and pensioners who are getting a very small income. Many of these retirees who have less than $500 income have no other sources of support. There is quite a sizable group of pensioners whose pension has been accorded much earlier and they now would be the ones who are likely to be affected, particularly those who have no other means of support. It is this group that the impact of GST will be most felt. I would like to know whether, for this group of pensioners, adjustments and support will be given to them, particularly those who really do not live in HDB flats for which rental and SC&CC rebates would be given. As we know, there is a sizable group of retirees who are living in rent-controlled premises and other small premises of their own.

For this group of low-income retirees and pensioners, there are very few recourses available. This group of people will have to be reached out fairly quickly and we need a good administrative system in place to assist and support them.

Sir, on that note, I would like to thank you.

Mr Speaker: I would like to remind hon. Members that the debate in the Third Reading should be confined to the contents of the Bill. Dr Soin.

Dr Kanwaljit Soin: Mr Speaker, Sir, thank you for giving me this opportunity to speak.

I rise to support the Bill but I would like to seek some clarifications from the Minister. Some of the points have already been alluded to by the hon. Member for Tanjong Pagar GRC. Specifically, I would like to ask three queries.

1. How can the financial cost of the effect of GST be minimised for registered persons or businesses who make donations in kind of more than $200 to voluntary welfare organisations? If this is not done, then there will be less likelihood of such donations in kind being given to voluntary welfare organisations.

2. Voluntary welfare organisations will suffer input taxes on their purchases and other services consumed where such purchases are supplied by a registered business. If the voluntary welfare organisation is not registered as a charity, then it will have to absorb the input tax suffered as an extra cost. On top of that, there will be the added one-off increased inflation rate caused by the initial imposition of GST. Are there any provisions being made to offset these additional financial burdens on the already heavily burdened voluntary welfare organisations?

3. There should be compulsory price tagging or labelling of all retail trade to prevent confusion and profiteering. I understand that this is already being done in Malaysia. If the Government is considering this, how will it be enforced?

Mr Koo Tsai Kee (Tanjong Pagar GRC): Mr Speaker, Sir, since the Second Reading of the GST Bill, several developments which have relevance to this Bill have happened. First, the GST Select Committee called for representations. It received 70 written representations, of which 17 were invited for oral representation, including one from CASE. Also, the Estimates Committee, which I happen to sit on, have independently asked the Ministry of Finance to present its plan for implementing the GST. The Estimates Committee have also asked the Ministry of Trade and Industry to tell us how it intends to monitor profiteering when GST is implemented.

Sir, CASE will work with the various Government agencies and some private organisations to monitor the prices of goods and services to ensure that profiteering does not happen and when it does, it will be highlighted.

The second development is that one of the main objections to the GST, also known elsewhere as the VAT, is being reviewed by a new generation of economists. In effect, a fundamental pillar of the anti-GST camp is under attack and this has happened since April this year. It has long been recognised, or so we had thought, at least, I had thought, that the GST penalises the poor more than the rich. Why? Because the theory holds that the poor spend a higher percentage of their disposable income on consumption. Welfare economists call the GST or the VAT a regressive tax. And because of this, MPs in this House and various commentators outside this House have urged the Government to implement a package of reliefs into the GST which the Government has done, so that the poorer households will not be penalised adversely because of the GST. But in April, came Princeton economist, Gilbert MetCalf and his gang, who argued that the conventional wisdom is wrong. He argues that the poor, in fact, pays a smaller proportion of GST than richer people do. His thesis is premised on the fact that many of the so-called poor are not really poor. They are, in fact, in transition. This includes young people who make a good living over their lifetime. Others are pensioners living off accumulated assets. For example, if a pensioner lives in his house whose mortgage has been retired, he has little disposable income but he is not really poor because he is asset-rich. Conversely, if a young man has a set income but he is retiring his mortgage, he or she may not be actually rich.

Thus, this economist, Gilbert MetCalf, reasoned that using GST over current income as a measure of regressivity is methodically flawed. The correct way, he argues, is to use GST over annual consumption. He called the latter "lifetime income". He confirmed his theory on 1,500 households captured in the consumer expenditure survey and found the results to be correct.

So my doubt begins. If MetCalf and his crude findings are correct, then isn't the package to offset the regressive impact of GST a bonus for Singaporeans? But, nonetheless, this theory is still empirical and is still debated widely, but there is an element of truth in it. The logic is understandable. The logic is believable.

Mr Speaker: Order. Mr Koo, can I ask you to confine your speech to the contents of the Bill? You are in breach of Standing Orders.

Mr Koo Tsai Kee: Sir, the third development after the GST Bill had been introduced is that the Cost Review Committee has come out with its report and made several recommendations which, I think, will help Singaporeans to be more aware about how profiteering can and cannot occur, and CASE will help Singaporeans to be aware of price differences in the market. So where information is transparent, CASE thinks that profiteering is unlikely.

Sir, these events, viewed in perspective, compel us to accept the GST Bill. I recognise two fears among Singaporeans: one, inflation, and the second, bureaucracy. As I said earlier on, inflation is unlikely, if information is readily available and is transparent. Secondly, I think we must tame bureaucracy. I have read the Reports from MTI and the Finance Ministry which were put up for the Estimates Committee. I am convinced that bureaucracy will be kept to a minimum.

Sir, we stand on this threshold of a very important event. Passing the GST Bill through Parliament now would save future generations from carrying the burden of a punitive direct tax needed to support an increasingly aging population. We stand at the cross-roads of history, either to be praised or condemned. Sir, the decision depends on Members of this House. I have made up mine. I support the Bill.

Mr Robert Chua Teck Chew (Nominated Member): Thank you, Mr Speaker, for allowing me to join in this debate.

As a Member of the Select Committee, I have the privilege of hearing from the representors as well. I want to take this opportunity to commend the Minister for Finance and the Select Committee for the way they have accommodated the various requests from the representors, especially businessmen who are concerned about losing their competitiveness, as a result of which many amendments were made to ensure that international trade and international competitiveness will not suffer because of GST. The impact on the cash flow of exporters and manufacturers was also taken into consideration. I would urge the Minister to keep this in mind when implementing the GST, just in case something goes wrong: that our international competitiveness and trade and cash flow on exporters and manufacturers will not be negative and thus affecting our economy.

There is only one concern which has not been addressed and that is exemption for an item which I think is very important, and I would like to urge the Minister to consider this. The GST is supposed to be a tax on consumption and not on investment. Yet, in Singapore we have been promoting the need to further the educational level of our people, to upgrade the skills of our workers and our human resources, which is our only resource we have in a major way. I would like to ask the Minister to consider exempting or zero-rating all educational fees or skills training cost so as to encourage this investment in human resource. I think it is wrong to tax an item which surely is an investment in the future of Singapore. I think we have overlooked this in some way and I would like the Minister to consider that this is an item worth considering for exemption or zero-rating.

We are also concerned about rounding up when the GST is implemented. That supermarkets and so on will round-up, and it will not be 3% GST, but effectively more than 3%. I also agree with the Minister that public awareness of GST and its implications in implementation are not quite well known. May I suggest that more publicity be given in terms of TV programmes, video tapes, or even using high-tech multi-media and computer-based instructions, and that these be made available to individuals and companies so that the message of implementation of the GST can be easily propagated to the public. I believe, through the companies, GST can be better explained with the help of the company accountants and executives. So a computer-based instruction system would definitely help. May I suggest also that a GST hotline be set up at the appropriate time to answer public queries.

I support the Bill.

Assoc. Prof. Low Seow Chay (Chua Chu Kang): ( In Mandarin): Mr Speaker, Sir, GST will be introduced in Singapore for the first time next year. When we implement this tax system, there will be a lot of problems that we may not have anticipated. That is why after receiving representations from the various quarters, the Select Committee on the Bill made a 43-page amendment. The care taken by the Committee is indeed praiseworthy.

On the proposals by the Committee, I have some observations. Firstly, on second-hand vehicles. The Committee proposed to levy tax based on 50% of the value of the car. I think this way of calculation is not scientific. I can give you two extreme examples to illustrate why it is not scientific. One example is this. In the case of a recently-registered second-hand vehicle, the actual price is not 50% of its actual value. If we deduct the ARF, the COE, and the import duty from the market value, the actual value of the second-hand car is about 25% of its market value. It is not 50% of the value. Another extreme example is that in the case of a ten-year old Japanese car, the value of the car is as good as the PARF. If you minus the PARF, then the actual value of the car is zero. So it is zero percent, and not 50%. From these two extreme examples, we can see that the real value of the second-hand car is something between 0% and 25%. It is not 50%. I hope the Minister will look into this matter and explain why he feels that 50% is the correct value for a second-hand car for the purpose of GST.

Secondly, the imposition of GST on second-hand vehicles is unfair to the public. Why? If I buy a new car, I do not have to pay GST. When I buy an old car, I have to pay GST. Both are consumption. Why is it that for the new car, there is no GST and for the old one you have to pay GST? I think it is unfair. I hope the Minister will explain.

In the Committee's Report, paragraph 12, it is said that GST is payable on club members' subscriptions and condominium dwellers' service charges. From my personal point of view, I think these two categories of services are not profit-oriented. They do not make profit. There is no value added. Whatever fee you receive will be spent on purchasing services and the GST levied on the services. So you collect tax on the one hand and pay off on the other hand. It is meaningless to collect GST from these people.

There is a new problem arising out of this. For example, for some clubs or management corporations of the condominiums, they collect large sums of money in terms of the sinking fund. It is treated as a reserve. Having collected these fees, they have to pay GST to the Government. If they want to use the reserve fund years later for a major repair, they have to pay another another round of GST to the contractors. In other words, there is a double taxation. They have to collect GST twice. I think there is something wrong here. I hope that the Minister will be able to make some arrangement to avoid the unnecessary double taxation of GST in this kind of situation. Personally speaking, the implementation of GST is very wide and extensive. Some people may have some reason for not having to pay tax previously. They will be affected by GST after its implementation. In other words, they will be made to shoulder a certain amount of the tax burden. I think it is very fair. In the process of implementation of GST, some adjustment is made to the personal income tax. Those with an annual taxable income of less than $10,000 will not have to pay tax. The result is that if we have any special need to increase the GST in future, then any futher reduction of personal income tax would not benefit the lower income group anymore. So if we increase GST by 1%, then the lower income people will have 1% extra tax burden. I think it is not wise.

The Minister has already agreed that within the next five years there will be no change to the GST rate. What about after five years? Will there be a need to increase the rate of GST? Why will happen? At that time, reduction in the personal income tax rate will not serve the interest of the lower income group. In what way will the Minister be able to help the lower income group, as we have done now? I hope that if, in future, there is a need to increase the rate of GST, serious consideration will be given to look after the interest of the lower income group so that they will not carry an extra burden.

With that, I support the Bill.

The Minister for Trade and Industry (Mr S. Dhanabalan): Mr Speaker, Sir, the Bill, as amended, after the Select Committee meetings, takes into account all the various concerns of our businesses which were not sufficiently addressed in the Bill that was originally presented. As the Minister for Finance has explained, amendments have been made to ensure that our export industries, shipping, air services and the re-export trade are not adversely affected by the GST Bill. The procedures for these types of businesses to be outside the GST net will be fine-tuned in the light of experience. I think the important point that we should note is that the Government's thinking is fully in accord with that of business, ie, the GST should not affect our export competitiveness.

I would like to address two issues, Sir: that relating to refunds for tourists and the concerns over profiteering. The Bill provides for exports to be zero-rated. The question is: how do we deal with exports which are in the nature of tourist purchases in Singapore which the tourists take out of Singapore? The Government has agreed, in principle, that the GST imposed on tourist purchases should be refunded. We have asked the Tourist Promotion Board to work with the retail industry on a suitable GST refund system. While the Government will facilitate the setting up of a refund system, retailers themselves will have to operate the system. Retailers have indicated that they support the GST refund system and that they will implement the system with effect from 1st April 1994, that is the date on which the GST comes into effect.

The retailers propose to start with a system similar to the old United Kingdom system of refund where the tourist pays the GST to the shop and fills in a GST refund form containing details of the items of purchases and the amount of GST paid. The tourist then goes to the airport and presents the form together with the receipts at the Customs' Inspection Counter. The Customs officer at the counter will inspect the goods and stamp the form. The tourist will then drop the refund claim form into a mail box next to the counter. After the tourist has left the country, the shop would mail the refund to the tourist which - the retailers who have been speaking to us have said - would generally be not later than two weeks from the date of the tourist's departure from Singapore.

The Customs Department will also be looking into the problems of heavy and bulky check-in goods which obviously they cannot carry with them into the plane, and cannot be produced after Immigration checks for verification. We will have to have a special system for that. The Customs Department is looking into how to resolve this problem.

For the longer term, the retailers are studying the feasibility of setting up a company to make refunds at the airport. In other words, the tourist can collect his refund before he leaves the country. The Singapore Tourist Promotion Board will facilitate the setting up of this refund company by the retailers. The retailers have also decided that the minimum qualifying value for GST refund will be set at $500 for the refund system to be viable. Based on this minimum limit, the amount refunded will be $15 less any administrative charge that the retailers may want to impose. Some retailers have already indicated that they will waive the administrative charge for a start. To-date, about 300 retailers have indicated that they would have the system ready by 1st April 1994. These include major retailers like Emporium Holdings, The Hour Glass, Robinson, Tang, and so on.

I turn now, Sir, to the question of profiteering. The Bill itself does not address the problem of profiteering for the simple reason that the Bill is a GST Bill. While the Bill itself does not address this, the Government understands this concern and would take various measures to address it. I think the fears are more psychological than real. The majority of countries which have introduced GST did not experience inflation higher than the GST rate. In a few countries where the inflation was higher than the GST rate the cause of the inflation was not the introduction of the GST itself but other fundamental economic problems such as excessive wage demands and loose monetary policy. As long as we in Singapore continue to adopt prudent economic policies in these areas, prices should increase only moderately when GST is introduced, and this increase will be a one-off increase.

Fears about profiteering, I think, are over-blown. Profiteering can only exist - and I want to repeat this, because I have stated this many times before, but I keep hearing the same arguments again and again - if the seller has a monopoly on the supply of that commodity, or, if there is a real shortage. The supplier can therefore hoard whatever he has and release it only to those consumers who are prepared to pay exorbitant prices. In this situation, of course, the consumer has no choice and the seller can dictate the price. But in Singapore there is no shortage of goods. We have no problem in importing any amount of essential items that we require, and we have many suppliers and competition is very keen. The consumer, therefore, has many choices as to where he wants to buy the goods that he wants. And traders cannot take advantage of the introduction of GST to raise prices excessively because they will risk losing their customers to other competitors. The possibility of widespread profiteering as a result of GST is therefore remote.

Nevertheless, the Government has to take note of the public's concerns, as well as the recommendations of the Cost Review Committee, on how to counter profiteering. Through the Committee on Profiteering and Inflation set up in MTI, we will undertake certain measures to ensure that there is price stability before and after the GST is implemented.

First, we will ensure that there is adequate supply of essential goods in the marketplace, especially before the date of implementation of GST, so that any speculative increase in demand can be accommodated without exerting pressures on prices. We expect that many people would try and buy essential goods before 1st April 1994, and there is bound to be a surge in demand. And if shopkeepers stock supplies in the usual way, they will not be able to meet the surge in demand. So we will ensure that there will be adequate supplies.

We already have, for example, a rice stockpile policy to deal with contingencies and sudden increases in demand or a shortage of supply. And this policy and system proved its effectiveness during the Gulf War period when there was a short spell of panic buying of rice.

MTI will soon meet major importers, wholesalers and retailers of household and other consumer goods to get their support and cooperation in ensuring adequate supplies before 1st April 1994.

Second, we will step up our consumer education efforts by working closely with CASE and the media to release price information to the consumers. CASE has been asked to provide a price information service to disseminate prices of common household items to consumers, while the press will be encouraged to publish price watch columns to compare prices of consumer goods across different outlets.

As to the amount of Government support for CASE, CASE has been asked to put up a detailed paper on its requirements and my colleague, the Minister for Finance, has told me that the extent of Government support will be determined after the paper is studied. So we will give adequate support to enable CASE to carry out its function.

Third, monitoring of prices and consumer feedback will be stepped up ahead of the implementation of GST. The Department of Statistics has already started to track more closely the prices of various consumer goods and services to see whether traders are increasing prices ahead of GST. The Department already routinely for its CPI collects prices from thousands of outlets and as part of this exercise to track the events leading to GST, it will track some of the prices more closely.

There is no evidence so far of any unusual price increases. There have been reports of very sharp increases, but when we checked out on these reports, there was no foundation to these reports. Prices go up and down. For example, if there is a long rainy spell, prices of leafy vegetables go up. If the weather is good and supply of leafy vegetables increases, prices go down. We know this. And if you go to the market, or you speak to your wife who goes to the market, you will know that this happens all the time. When the price of anything goes up due to the normal seasonal reasons, people at once jump up and say it is because of GST. The tracking so far has not shown any special movement up in preparation for GST. Far from that, I think the few stories that we have been reading in the papers talked of various hawkers slashing their prices in order to compete.

A price feedback hotline will also be set up in the Department of Statistics before the implementation of GST for consumers to report any instance of sharp price increases which they encounter. Similarly, CASE will also be tracking price movements more closely.

Fourth, public pressure will be brought to bear on those who seize the opportunity of GST to increase their prices sharply. As I have said, I do not think this will happen. But if it does, we will have to generate certain public pressure. We will work with CASE, consumers' watch groups and the media to publicise such errant traders. Checks will be conducted on shops suspected of profiteering. In cases where licensing is required to carry on a trade, for example, a coffeeshop which requires a beer licence, we can revoke or suspend the licence, if necessary.

IRAS will also be asked to conduct closer tax audits on errant traders. If necessary, we can also consider legislation to require compulsory price tagging.

Finally, as a last resort, and only if the situation warrants it, the Government will be prepared to use its powers under the Price Control Act to control any widespread profiteering in any particular commodity. But I must emphasise that price control measures should not be resorted to except in very special circumstances. Singaporeans can also do their own part by being well informed and vigilant. They must know their rights as consumers, learn to shop wisely and boycott high-price outlets.

Ultimately, the best possible defence against profiteering is not legislation or the threat of punishment, but the existence of abundant supplies of goods and free competition together with a well-informed public. The Government will work on these basic principles to ensure that prices remain stable in Singapore, despite the introduction of GST.

Dr Richard Hu Tsu Tau: Mr Speaker, Sir, as you have pointed out, although I thank the Members for supporting the Bill, most of the questions raised in fact are not relevant to the Third Reading of the Bill. Nevertheless, as the subjects raised are of public interest I will respond to them.

Dr Vasoo and Dr Soin were concerned over the impact of GST on charities. I think the request is that they should be exempted from GST. The point we have made during the Second Reading debate and the Budget debate was that if charitable organisations conduct taxable activities such as running a bookshop or a commercial shop, and these activities exceed a turnover of $1 million a year, then they would be subject to GST, like any other business. Exemption for these reasons would not be equitable because they are competing directly with other businesses.

However, other non-business activities conducted by charities will not be taxable. Examples are running an old age home or a children's home where the services are provided to the poor without charge. Donations in cash to charities without any benefit or return are not subject to GST. However, if a taxable business donates its own goods to charities, then it would be subject to GST. However, in cases like this, in order to avoid discouraging companies from donating their own goods to charity, the Income Tax Department will consider accepting a low sale value for these goods. So the actual GST, although theoretically payable, would not be significant.

Dr Vasoo has also expressed concern about the plight of retirees and other low income people. This question has been dealt with at previous discussions on the subject. But, nevertheless, I would reiterate that we are concerned about the impact of GST on these people and there is a special provision of funds for CCCs to help such cases when they are identified. In general, most pensioners and retirees will be covered under one or more of the rebate schemes announced in the Budget. Those with taxable incomes would benefit directly from the tax reductions proposed. Others living with their families would have their children claiming aged parents' relief.

In the case of retirees who are Government pensioners, the Singapore Allowance has been increased. So they are also being looked after. But, nevertheless, I think we recognise there will be a core of people who fall between all our provisions, and special attention has been paid to them. We will certainly consider their cases carefully.

Dr Ow has asked a series of questions. The first two deal with CASE and measures against profiteering which the Minister for Trade and Industry has already addressed and I shall not repeat them.

He has asked some questions on the cost of implementing GST and the number of people who might be involved. IRAS and Customs and Excise have estimated that a total of 296 new staff would be required, of which 100 will be transferred from the existing IRAS staff pool, because their services will no longer be required following the introduction of the tax cuts and reduction in the taxable pool of people. Therefore, there would be a net requirement to recruit 196 additional people. There is no problem in recruiting accountants and other tax officers. These are mostly at the level of polytechnic graduates and we do not believe that these requirements will drive up the wages of accounting clerks and computer programmers. In connection with computer programs, the IRAS is not introducing a sophisticated new system of computer program for the GST system. It will be using a really straightforward simple system, because the introduction of GST is not really complicated. The estimated total manpower cost will be about $16 million. Computer cost, including development cost, will be about $13 million, while total start-up cost is $29 million.

A question was also asked on the cost of GST collection relative to the collection of income tax. The estimate is that it will cost 2.3 cents to collect $1 of GST. The comparable figure for income tax is 1.65 cents per $1 collected. The reason why the figure for GST is higher is that the tax rate is lower.

Dr Ow is also concerned that there seems to be not enough focus and attention paid to the education and publicity for individuals who have to pay the tax. Soon after the introduction of the White Paper, and following the introduction of the Bill itself in Parliament, Ministers and MPs gave a series of talks at community centres to explain the purpose and the implementation of GST to all the grassroots people. After this, the main concentration of effort was by IRAS and the Government in explaining the implementation details of GST to the business community who have to implement it. Nearer the time of the actual introduction of GST on 1st April 1994, there will be a resumption of publicity and campaigns via television, media talks, and so forth, targetted at consumers who have to pay the tax. Memories are short and if we try to explain these matters well before the date of implementation, they will probably be completely forgotten. So we are going to mount a new campaign shortly before the implementation of the tax and follow it through for the first few months.

Finally, Dr Ow wants an assurance that, in future, all changes of GST will not be simply approved by the Minister through regulations. This is not possible. All tax changes, whether GST or corporate income tax changes, must be tabled in Parliament and approved by Parliament.

Mr Robert Chua has said that his only concern is that the Government should consider exemption or zero-rating of all educational institutions' fees and training programmes. We have, in the White Paper and during the Second Reading debate, explained quite clearly why we prefer not to do this. It is because the subsidies for education are basically not a tax matter. It is a matter of social policy, ie, how much we want to subsidise education. We have said that school fees will not be increased because of GST, and that the subsidy to schools and educational institutions will be increased to fully offset the impact of GST. In future, any additional subsidies we may want to introduce, either for education in general or for training programmes, we should explicitly provide through grants, rather than through a tax relief. This is so as not to confuse tax policy with social policy.

I must apologise to Prof. Low because he spoke so quickly in Mandarin that I lost touch with him half way through his speech. If I do not respond to his points adequately, we can discuss them separately outside the House. He was concerned about the formula used for calculating GST on used cars. The 50% discount factor is based on an average arrived at for different models of cars over a number of years. We are making a proportionate reduction for second-hand cars and not trying to assess the value of the second-hand cars, net of ARF and COE. Certainly, a more complex formula will be possible but it will make the administration very complex.

He has also expressed concern about the so-called double taxation of condominium management committees because of the GST system. I should point out that when a condominium management committee pays GST on goods and services, it should be able to claim the GST incurred as part of tax credit. So he is not taxed twice. Condominium dwellers essentially pay GST only once on their subscription fees. If he needs any more clarification on these matters, I would be happy to discuss with him separately.

Mr Speaker, Sir, I think that generally covers the questions Members have asked. I would just like to conclude by saying that the new tax is a fundamental change in the Government's taxation policy. It is designed to position our tax structure for the next century where we will have a more appropriate balance between direct and indirect taxation. It is designed primarily to ensure that Singapore remains competitive in attracting investors in the future, and to ensure that we generate jobs. Without jobs, subsidies would not help. We have gone thoroughly into these matters by introducing changes which meet businessmen's concerns. Nevertheless, I am certain that there will be snags in the actual implementation of GST but I can assure Members that in the implementation procedure, we will be as flexible as possible. Where we find a need to make changes, this will be done either through regulations or through amendments to the Act, to ensure that the new tax system does not unduly interfere in business operations nor reduce our competitiveness.

I will leave the discussion on Mr Low Thia Khiang's comments on GST to the debate on the Cost Review Committee Report tomorrow and the day after.

Dr Kanwaljit Soin: Mr Speaker, can I ask for clarification, please? There was no response to compulsory price tagging and labelling of all retail trade.

Mr Dhanabalan: I gave the response.

Dr Richard Hu Tsu Tau: The Minister for Trade and Industry responded to that.

Mr Dhanabalan: Mr Speaker, Sir, in the response, I said that, if necessary, we will consider legislation for price tagging, but not at the present moment.

Question put, and agreed to.

Bill accordingly read a Third time and passed.

Mr Speaker: Order. I suspend the Sitting and will take the Chair again at 3.10 pm.

Sitting accordingly suspended at 2.40 pm until 3.10 pm Sitting resumed at 3.10 pm