Forging ahead with sustainable growth

GST changes to bolster recurrent revenue

Goods and services tax rate increase - Not now but sooner rather than later

Amid economic headwinds, the Government decided that the goods and services tax (GST) increase will not take place in 2021. Although no announcement was made on the specific date for the GST rate increase, the Government’s move is much in line with expectations.

The Finance Minister however emphasised that the GST rate will need to be raised sooner than later, within the timeframe of 2022 to 2025, given the pressing need to bolster Government revenue to fund rising recurrent healthcare expenditure. In Budget 2018, the Government had announced its intention to increase the GST rate from 7% to 9% sometime between 2021 and 2025.

Given the lead time needed by GST-registered businesses to prepare for a GST rate increase, it would appear unlikely that this will take place in 2022. A more likely timeframe would appear to be 2023 or 2024, depending on the economic outlook at that point in time.

To cushion the impact of the GST rate increase on the less advantaged, the Government has set aside a $6 billion Assurance Package. The Permanent GST Voucher Scheme will also be enhanced when the GST rate increase takes place. The Government will continue to absorb the GST on publicly-subsidised education and healthcare.

In preparation for the GST rate change,

GST registered businesses should:
- Review the changes required to be made to their systems and processes in the event of a GST rate increase.
- Review their contracts with customers and suppliers to determine which party should bear the increase in the GST rate, e.g. for goods-in-transit at the time the increase takes effect.
- Consider GST cashflow relief schemes for imports such as the Major Exporter Scheme, Approved Contract Manufacturer and Trader Scheme and Import GST Deferment Scheme
Non-GST registered businesses should:
- Consider the pros and cons of a GST registration and the appropriate timing to apply for a GST registration.

Extending GST rules to tax the digital economy and non-digital imported services

With effect from 1 January 2023, the Government will extend GST to:

Low-value goods imported via air or post that are valued up to and including $400 (the current GST import relief threshold). The scope of GST charge will be extended to imported non-digital services and online sales of low-value goods by overseas suppliers/marketplaces to Singapore consumers if the goods are to be imported into Singapore. This is intended to level the playing field between local and overseas vendors.
Business-to-consumer imported non-digital services. Overseas businesses supplying services and low-value goods to Singapore consumers will soon have additional GST compliance obligations in Singapore if a wide definition is applied to “non-digital” services beyond e-commerce businesses.

For the consumers, this would mean an end to GST-free online shopping.

As for local businesses, they should be mostly unaffected by the rule changes unless they are businesses in sectors such as financial services and real estate, and non-profit organisations, which typically are not able to fully recover their input GST. In addition to applying reverse charge (i.e. self-accounting of GST) on imported services, such businesses would also need to account for reverse charge on low-value goods.

It is not surprising that the scope of GST has been expanded only one year after the implementation of the digital services rule, given that e-commerce volumes continue to grow. The move is in line with the international trends, where major jurisdictions such as Australia, Switzerland, and the United Kingdom have also introduced indirect tax on the importation of low-value goods subsequent to digital services tax.

Implementation details are to be announced by the IRAS. Given the potential wide reach of the new rules, overseas businesses providing goods and services to Singapore consumers should consider if they would be affected by the new rules. Affected businesses should get ready early and allow ample lead time for the systems and process changes required to fulfill their registration and compliance obligations.

Change to zero-rating rules for media sales

With effect from 1 January 2022, a supply of media sales will be zero-rated if the contractual customer belongs to a foreign country and the direct beneficiary of the services is either from outside Singapore or is GST-registered in Singapore.

Currently, zero-rating applies to a media sale when the place of circulation of the advertisement is substantially outside Singapore. For online advertisements, the IRAS will regard an advertisement as substantially circulated outside Singapore if there is no restricted access to the website or if there is restricted access, the website is accessible by viewers from Singapore and overseas.

Given that online advertising has grown significantly over the years, the manner in which an advertisement is delivered to the targeted audience has also changed. The place of circulation rules may no longer apply well to current business models for online advertisements. The current GST rules also posed challenges for suppliers of online advertisements to determine the place of circulation, and hence, to correctly apply the zero-rating rule when raising an invoice to the customer.

A number of other jurisdictions e.g. Australia, New Zealand and the United Kingdom are relying on the customers’ belonging status to determine the GST treatment for a supply of media sales.

We hope the Inland Revenue Authority of Singapore will provide greater clarity on this issue when it revises its e-Tax Guide for the advertising industry. In the meantime, affected businesses should start reviewing the changes required to be made to their systems and processes to prepare for the change in rules.

Adoption of green technologies

Investment Allowance - Energy Efficiency scheme extended and enhanced to ensure sustainable growth

The Investment Allowance - Energy Efficiency (IA-EE) scheme will now be known as the Investment Allowance for Emissions Reduction (IAER) scheme.

The current IA-EE scheme provides investment allowance for EE improvement projects (including Green Data Centres which are subject to additional qualifying conditions) approved by the Economic Development Board (EDB). Budget 2021 ushers in the following changes:

The scope will be expanded to include projects involving a reduction of greenhouse gas emissions.
The scheme will be streamlined with updated qualifying conditions. These will apply to all projects (i.e. there is no longer a distinction between data centres and non-data centres).

The above will apply to projects approved by the EDB from 1 April 2021 to 31 December 2026 (both dates inclusive).

The expansion in scope covering projects or equipment to reduce greenhouse gas emissions gels well with Singapore’s aim to halve its 2030 peak greenhouse gas emissions by 2050 and its longer term net-zero emissions target.

As more companies commit to long-term net-zero or decarbonisation ambitions, they would be looking to invest in solutions which can reduce their emissions. In recent times, such projects are much sought after as they can potentially enhance a company’s financial value (e.g., increased investment returns by acquiring more sustainable plant and machinery), as well as reputational value. However, these might require heavy upfront investments.

The extension and expansion of the above scheme is timely as the additional allowance can ease the investment burden of companies embarking on such projects.

Accelerated Depreciation Allowances for Highly Efficient Pollution Control Equipment

The Accelerated Depreciation Allowances for Highly Efficient Pollution Control Equipment (ADA-PCE) scheme will be withdrawn from 17 February 2021. It was introduced in 1996 to encourage businesses to purchase and install clean technologies to improve air quality in Singapore. Since its inception, regulatory standards controlling emissions have increased significantly and the scheme is no longer needed to incentivise businesses to adopt such clean technologies.

Tax changes for vehicles

Singapore aims to phase out internal combustion engine vehicles by 2040. In line with this ambition, the rebates structure for the purchase of electric vehicles has been enhanced whilst petrol duty rates have been raised.

Enhancement of Electric Vehicle Early Adoption Incentive

Buyers of electric cars and taxis get a 45% rebate off the Additional Registration Fee (ARF) from January 2021 to December 2023 at a cap of $20,000, with an ARF floor of $5,000. It was announced that the ARF floor will now be $0.

Petrol duty rates revised

Petrol duty rates for premium grade petrol and intermediate grade petrol will increase by 15 cents and 10 cents per litre respectively, with effect from 16 February 2021.

To ease the burden of the increase in petrol duty, road tax rebates will be provided for petrol and petrol-hybrid vehicles for one year from 1 August 2021 to 31 July 2022. In addition, taxi, private hire car drivers and individual motorcycle owners will receive petrol duty rebates, LTA will release further details in April 2021.

Carbon tax

Carbon tax was introduced in 2019 and set at a rate of $5 per tonne of greenhouse gas (GHG) emissions. Then, the Finance Minister had forewarned taxpayers that the rate would be reviewed by 2023 with a view to increasing it to between $10 and $15 per tonne of GHG emissions by 2030.

With climate change becoming an increasingly urgent risk, the need to deal with the consequent challenges meant that the trajectory and level of carbon tax will have to be reviewed in an accelerated time frame than initially announced. This will be done in consultation with industry and expert groups.

The announcement that the Government will maintain the carbon tax at a rate of $5 per tonne of emissions till 2023 provides affected businesses with the much needed certainty in the current difficult economic environment. However, it is likely that the rate increase will come sooner rather than later so businesses should assess the potential impact, plan for investments and changes needed to achieve long term reduction of GHG emissions.