ASSESSMENT OF IMPACT OF GOODS AND SERVICES TAX

Mr Tay Beng Chuan asked the Minister for Finance if his Ministry will assess the impact and effectiveness of the goods and services tax in terms of achieving its original objectives and consider a downward revision in the tax by two percentage points to stimulate demand and reduce business costs in the light of the changing circumstances.

Dr Richard Hu Tsu Tau: GST was introduced in 1994 to achieve a better balance between direct and indirect taxes. With its introduction, both corporate and personal income taxes were cut substantially.

The implementation of the 3% GST was intended to be revenue neutral. Last year, GST collection totalled $1,927 million. Whereas revenue forgone from the cut in income taxes and other offsets was $2,273 million, so that the original objective was achieved.

The present economic downturn is due primarily to a fall in external demand. As domestic demand accounts for less than 30% of total demand, and the GST tax is only 3%, reducing or even suspending GST altogether will not raise total demand significantly.

A 2% reduction in GST will mean a major loss to the Government of an important source of revenue. The Government has been lowering taxes and charges wherever possible to reduce business costs, and will continue to do so. However, the Government will adjust other taxes rather than the GST, for two reasons.

Firstly, the incidence of the GST is widely and evenly distributed across all types of economic activity. So for the same amount of revenue collected, the burden of the GST is felt less heavily than taxes which levy a higher tax rate on a narrower range of activities, such as property tax.

Secondly, any short term adjustments in taxes should be broadly consistent with our long term taxation policies. The Government had stated when the GST was introduced that the GST rate would remain unchanged for at least 5 years. Reducing the GST rate from 3% to 1% may mislead the public as to the Government's long term plans, and cause unnecessary anxiety and misunderstanding later when the GST rate has to be restored.