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Navigating the GST rate hike

Five key questions that need to be addressed

The previous GST rate hike (from 5% to 7%) took place on 1 July 2007 – some 14 years ago. Many would have forgotten the experience and some may have not entered the workforce then. More importantly, the upcoming and much talked about GST rate hike, from 7% to 9% announced in Budget 2018, affects all businesses (whether GST registered or otherwise). With this in mind, we have identified five key questions that need to be addressed before the new GST rate takes effect.

1. When should I account for GST at the new rate?

The details of the transitional time of rules will likely be announced by the IRAS after the date of the GST rate hike is confirmed. It is important to adhere to transitional time of supply to ensure that your GST is accounted for at the correct rate.

We expect transitional time of supply rules to be introduced which would govern if a transaction should be subject to the existing rate or the new rate. For instance, if an invoice is issued before the rate change but the goods are delivered and payment is received after the GST rate hike, the supplier will likely be required to account for GST at the new rate under the transitional time of supply rules.


2. What is the impact of a GST rate hike on my pricing strategy?

While GST-registered businesses have to account for GST at the new rate to the IRAS after the GST rate hike, it does not necessarily mean that additional GST has to be collected from the customers. The prices charged by you to your customer is a private arrangement. Hence, you should consider your customer profile and price sensitivity of your products  in your pricing strategy, especially if they are not GST registered and are unable to recover the GST charged. This will in turn drive your decision on whether or not to absorb the GST rate hike. If you choose to absorb the full GST amount (such as “GST absorbed” promotional campaigns) or only the GST rate hike, such pricing strategy will eat into your bottom line.


3. Do I need to make any changes to my systems and processes?

You should think about the following in preparation for a GST rate hike: 

  • Review and make adjustments to your point of sales, invoicing, procurement and accounting systems to incorporate the new GST rate and to take into account the transitional time of supply rules; 
  • Update price displays (where applicable) 
  • Train your accounting, sale and procurement staff on the implications of a GST rate hike
  • Introduce additional controls to manage the GST risks arising from the transitional time of supply rules 
  • Ascertain if contracts needs to be reviewed to clarify the party responsible for bearing the GST

4. How should I mitigate the impact of a GST rate hike on my cost?

Most GST registered businesses are able to recover the GST incurred on their expenses and a GST rate hike should not have a direct impact on costs. However, there are compliance costs and cash flow costs to consider. For GST-registered businesses with significant imports, you may consider applying for import GST relief schemes such as Major Exporter Scheme, Approved Contract Manufacturers and Traders Scheme and Import GST Deferment Scheme to alleviate the cash flow impact of the import GST. 

Some GST registered companies such as banks, insurers, brokerage firms, residential property developers, charities are not able to recover the GST incurred on their expenses in full due to the nature of their businesses. Such businesses may consider bringing forward their big-ticket purchases and conducting a review of your input tax recovery formula. They can also consider seeking the IRAS’ approval for a special input tax recovery formula if your current formula does not accurately reflect the usage of resources in making the different types of supplies.

A higher GST rate means that GST errors made by the business would be a more costly affair. A GST health check review can help to identify recurring errors (before they get larger) and opportunities for GST savings.


5. Should I apply for voluntary GST registration?

If you are not GST-registered, your costs will likely increase after the GST rate hike as your suppliers will likely pass on the GST to you.

While a voluntary GST registration offers you the avenue to recover the GST incurred on expenses, it is not always the appropriate option. You should carefully consider the following pros and cons before you proceed with the decision to apply for a voluntary GST registration:

  • Benefits
    • The ability to recover the GST incurred on business expenses (subject to conditions) which reduces costs of inputs. 
  • Costs
    • Compliance costs such as making changes to your systems, processes, invoice format and price display, filing of GST returns and attending to queries from the IRAS
  • Impact to your customers
    • There should be minimal or no impact to your customers if your sales are zero-rated or if your customers are able to recover the GST charged in full
    • Your product will become more expensive with the GST rate increase if customers are not able to recover the GST charged. You should consider if you can still be price competitive after GST-registration.   

Starting your preparation early

Starting the preparation early is crucial. What is clear is that the cost of non-compliance with the GST rules will only increase with the rate hike and this needs to be carefully managed. A good place to start is looking into these areas:

  • How should the rate change be managed?
  • What are the solutions available to mitigate the impact of irrecoverable GST costs, where applicable?
  • Are my controls robust enough to manage the risks of any material GST exposure?

Get in touch with our authors

Kor Bing Keong

Goods and Services Tax Leader, PwC Singapore

+65 9112 6982

Email

Lin Weijie

Senior Manager, Goods and Services Tax (GST), PwC Singapore

+65 9758 3678

Email

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