10 Common Myths About Basic Understanding of Singapore Goods & Services Tax

To all my subscribers, Happy New Year!

On the first day of 2022, I understand that you are busy with the New Year’s Celebration with your loved ones.

Instead of writing on the topics about new year’s resolution, how to set your goals in 2022, I have decided to write my newsletter on this topic because of a call I received from my contact on New Year’s Eve about her liability to register for Singapore Goods & Services Tax (GST). After discussing her situation in 2021, I advised her to register for GST with the Singapore tax authorities, and the deadline for her is 31 January 2022.

Do you agree that it’s the first day of 2022, and yet, there’s not much time left?

With that in mind, I would like to devote the topic “Common Myths About Singapore GST” to this newsletter and trust that it would give you some insights into the complexity of this tax.

Let’s Go Back to 2018

Singapore introduced GST on 1 April 1994, starting from 3% then to 7% now. Our GST law is heavily modeled the UK Value Added Tax and the GST Law in New Zealand if you are interested in the history.

In the Budget 2018, the former Finance Minister, Heng Swee Keat, first mentioned raising the GST rate. This was what he said in his Budget Speech:

“a. This GST increase is necessary because even after exploring various options to manage our future expenditures through prudent spending, saving, and borrowing for infrastructure, there is still a gap. b. Increasing GST by two percentage points will provide us with almost 0.7% of GDP per year. To support these recurrent needs, the Government plans to raise GST by two percentage points, from 7% to 9%, sometime in 2021 to 2025. The exact timing will depend on the state of the economy, how much our expenditures grow, and how buoyant our existing taxes are. But I expect we will need to do so earlier rather than later in the period.

c. This boost in revenue will be vital in closing this gap. We will continue to manage our expenditures and the need for other future revenue measures carefully and plan early for our overall revenue and expenditure needs.”

In the 2020 Budget Announcement, the Finance Minister decided to keep the GST rate at 7% in 2021 due to the COVID-19 situation.

A year later, in the 2021 Budget Announcement, the Finance Minister said that the Government could not put off the GST rate hike for too long and declared that the move would be during 2022 to 2025 (and sooner rather than later) as without this GST rate increase, the Government would not be able to meet its rising recurrent needs, in particular, healthcare spending).

Finally, the Verdict is Out on 31 December 2021

On 31 December 2021, Prime Minister, Lee Hsien Loong, hinted that the GST rate hike would be discussed in the upcoming Budget Announcement, to be delivered by the Finance Minister, Lawrence Wong, on 18 February 2022.

Even though GST has been introduced in Singapore for more than 26 years, and you and I have been paying GST daily on local consumption of goods and services, it is my experience that there are still several myths about the execution and compliance with this indirect tax in Singapore.

This newsletter will discuss the ten most common myths about the Basics of the GST, and hopefully, you will have a better understanding of how GST works and prepare mentally for the arrival of the GST rate hike from 7% to 9%.

Myth 1: I am already paying income tax in Singapore. Why do I still pay GST? That’s DOUBLE TAXATION!

Income tax in Singapore is payable on income derived by a person from Singapore (e.g., business income, employment income, and rental income) or received in Singapore from overseas. Certain income may be exempted based on the prescribed conditions set out in the Income Tax Act.

On the other hand, GST is payable to the local consumption of goods and services.

Thus, income tax is a tax on income, whereas GST is a consumption tax. They are two different types of taxes imposed in Singapore.

It is not considered “Double Taxation.”

Different taxes imposed by a jurisdiction have different objectives and scopes.

I don’t believe anyone can avoid paying GST in Singapore, “ unless the person does not eat, drink or consume any services in Singapore at all,” a joke I typically make to my participants in my GST training in Singapore.

Myth 2: GST is only applicable to companies and not self-employed

In Singapore, the liability to register for GST can be determined retrospectively or prospective.

A business must be registered for GST if the annual value of its taxable supplies has exceeded S$1 million in a calendar year or is likely to exceed S$1 million in the next 12 months.

Contrary to some people’s understanding, the liability to register for GST applies to companies, self-employed, and partnerships.

The taxable turnover is determined for the self-employed based on the COMBINED revenue, fees, and income the proprietor earns from business, self-employment, profession or vocation, rental of commercial properties, furniture, and fittings. If the person has a few businesses, the liability to register for GST will be determined based on his income from ALL of his businesses.

In short, if a self-employed’s value of taxable supplies exceeds the registration threshold, he is liable to register for GST (i.e., this is an obligation and not a benefit).

Myth 3: The S$1 million registration threshold is determined based on “net.”

Here is a scenario. Suppose Mary, self-employed, runs a business with gross revenue of S$1.2 million in 2021 (and she was not registered for GST before that). She has to pay her staff salaries, rent, and other business operating expenses. Her net business profit was $700,000 in 2021. The question is whether Mary is liable to register for GST.

The registration threshold is determined based on the “GROSS” turnover (i.e., S$1.2 million in the above example) for GST purposes. She is liable to register for GST by notifying the Singapore tax authorities by 31 January 2022. The effective date of GST registration, in this case, will be 1 March 2022.

For income tax purposes, she will include the net business profits of $700,000 (assuming all expenses are tax-deductible here) as part of her income in her income tax return. When filing her income tax return, she must also include her income derived in 2021 from other sources (e.g., rental income from her investment properties in Singapore).

Myth 4: To avoid the GST registration, the best way is to split my business into smaller units so that the gross revenue from each unit will not exceed the registration threshold of S$1 million.

Really?

As mentioned above, the GST registration threshold for the self-employed is determined based on ALL businesses, not any individual businesses. This idea does not work for the self-employed.

I worked with some companies concerned about the potential risks and obligations associated with the GST registration. Some clients asked me whether this idea would work.

From a GST perspective, this proposal could be challenged by the Singapore tax authorities because splitting businesses into smaller units with the primary or dominant reasons for avoiding taxes is considered tax avoidance (unless the taxpayer can justify it with bona fide commercial reasons).

My response is, “this is a red flag!”

Suppose it is considered a tax avoidance transaction. The Comptroller of GST must under the law make the appropriate adjustment to “counteract any tax advantage obtained or obtainable by that person from or under that arrangement.” Furthermore, in this case, the taxpayer might be liable to a surcharge equal to 50% of the amount of the additional tax to be recovered by the Comptroller of GST.

Myth 5: As a GST-registered person, I can continue issuing commercial invoices or debit notes to my customers

This myth originates from my work with some GST-registered businesses. All GST registered persons are subject to the GST invoice requirements prescribed under the GST Regulations, which can also be found on the Singapore tax authorities’ website (click this link).

You may think that there is no big deal if you don’t comply with this requirement. Unfortunately, fines and penalties could be imposed by the Singapore tax authorities when GST-registered businesses fail to comply with the GST invoicing requirements.

Really? This is another red flag.

In short, if you are a GST-registered person, think carefully or seek professional help on this issue if you are thinking of issuing commercial invoices or debit notes. This is a red flag as far as I am concerned.

Myth 6: Once registered for GST, a GST-registered business can claim input tax on all purchases

First, the purchaser must ensure that he receives a proper tax invoice issued by the vendor. If not, not only the vendor may commit an offense under the GST law, the purchaser who claims input tax credit on such purchases may likewise commit an offense under the GST law, too, even though the underlying purchase is related to his business.

Another red flag is that input tax is “blocked” on certain purchases under the GST regulation. The common one is private car expenses. Any input tax incurred on private car usage (e.g., petrol, car park charges) is not allowed to be claimed even though the private car is used for business purposes. This is just one of the unique features of our Singapore tax system.

Really?

Finally, the purchaser has to ensure that the purchase is made in the course or furtherance of his business. In other words, it must be business-related. Input tax on non-business purchases is not allowed to be claimed for GST purposes.

Myth 7: I don’t need to charge any GST to overseas customers.

Some clients told me that they had been told not to charge GST if the invoice is issued to overseas customers. Unfortunately, this is a myth.

Really?

As I explained in my GST classes, if the supply is a taxable supply (i.e., the place of supply is made in Singapore), GST-registered businesses must account for GST output tax at the prevailing rate even though the customer is from overseas. We detail how the place of supply rules work in Singapore step-by-step and identify other ways to deal with such arrangements legally, morally, and ethically.

Myth 8: Export of goods is always zero-rated

Similar to Myth 7, my clients told me this is the advice they receive from some accountants in Singapore. Unfortunately, this is also a myth.

Not all export of goods can be zero-rated.

When read correctly, the GST law said that it is zero-rated only if the Comptroller of GST is satisfied that the arrangement falls with the meaning of “exports” under the GST Act. In practice, this means that the GST-registered business has to ensure that it meets the Export Documentation Requirement (“EDR”). The Singapore tax authorities have published guidelines to explain the EDR (Click this link).

Really?

Myth 9: The Singapore tax authorities are too busy to catch the big fish, and thus, they won’t catch me

This is my experience after practicing tax in Singapore for more than 27 years. Some companies prefer to adopt the “wait-and-see” approach, thinking there is no need to worry unless the Singapore tax authorities knock on the door.

GST in Singapore is self-assessed, and thus, the Singapore tax authorities will impose hefty penalties for non-compliance with the GST rules and regulations by default. On the other hand, the authorities welcome “voluntary disclosure” of any errors or mistakes made by GST-registered businesses. If accepted, the penalty can be waived or significantly reduced.

Hence, I always recommend that my clients conduct an Annual Review of their GST filing to identify possible errors or mistakes and report to the Singapore tax authorities. I am aware that there will be costs involved in conducting this exercise. At the same time, businesses can carefully consider the possible saving of penalties that may arise if mistakes and errors on GST are picked up by the Singapore tax authorities (and this would be considered voluntary disclosure).

Myth 10: After all, GST is just about charging someone 7% and claiming back 7% charged by someone

This can be right in a minimal context. When I started training my participants on GST 10 years ago, I said,

“GST law looks simple but is difficult to apply because GST is a transaction tax.”

The practical problem is that different businesses have different transactions. The proper application of the GST rules on a particular transaction can be complex sometimes. I recalled many years ago, and I had to research the UK case law to determine if my client’s supply was a supply of goods or services. And the reason why this issue is important is that the place of supply rules are different between goods and services. I believe we, the tax practitioners, are around for reasons.

Depending on your circumstances, I can assure you that I can discuss at least 30 or 40 myths about Singapore GST. And let’s pause here for a while, and I am happy to deal with some more myths about Singapore GST in our newsletter in the future.

We trust that you will find this article helpful.

Let us know if you have any questions regarding the discussion above.

Jack HM Wong Professor in International Tax Taxpreneur Accredited Tax Advisor (Income Tax & GST)

Originally published at https://www.linkedin.com.