On 18 February Budget 2022, Mr. Lawrence Wong makes an announcement regards to the GST rate hike on Budget Day and it will be beneficial for companies to start their preparations early.
The growing importance of GST
GST will become the next largest contributor to our tax coffers right after the corporate income tax and it can only grow over time given the broad tax design of the GST system and developments to bring more imported goods and services within the scope of the GST, so we can expect increased study by the tax authorities on GST compliance going forward.
Impact on non-GST registered businesses
For most non-GST registered businesses, the GST incurred on purchases becomes an added business expense. An increase in the GST rate would result in a corresponding rise in business expenses.
Eligible businesses should consider applying to be GST-registered voluntarily even if they are not compulsory to do so under the GST rules.
The GST registration is a threshold of S$1 million and rather than a high relative to international standards was partly to relieve small businesses from the need to shoulder the burden of GST compliance.
Apart from the need to put in place systems and processes to comply with the GST rules, there is also a need to consider the impact of GST on pricing.
Larger impact on certain sectors
Not every GST-registered business or company can recover the GST paid for their businesses in full, due to the nature of their business activities like banks, insurance companies, funding and residential property developers.
If there is a basis to seek approval from the tax authorities for an input tax recovery formula that more accurately reflects the usage of resources to generate their supplies to reduce the amount of irrecoverable GST costs.
They should ascertain if any current GST schemes can help to alleviate the impact of the GST hike.
A GST health check review can also help to identify recurring errors and potential opportunities for GST savings.
Automation of tax processes the way forward
Businesses often do not fully appreciate it until they are audited. GST errors also can be very costly. With the tax authority able to claw back up to 5 years' worth of understated tax liability from businesses, the impact of past and current errors coupled with penalties can make a serious and unexpected dent in the bottom line, especially if transactional volumes are large.
A clear way forward is the adoption of technology to automate the tax compliance processes to minimise errors.
Government initiatives to support productivity and automation in recent years, tax compliance has largely remained a manual process.
Resource-starved finance/tax functions often grapple with the challenge to do more with less headcount.
A good first step for businesses is to start identifying current pain points and weaknesses in the process and exploring which aspects can be automated, and how.
Rise of e-commerce and developments in international indirect tax space
E-commerce has enabled businesses to expand to overseas markets more easily. Governments have reacted by introducing rules to ensure that consumers in their countries are taxed in the same way as domestic purchases.
Many countries and regions like the United Kingdom, the EU, Australia and New Zealand are now required overseas service providers who supply digital services or low-value goods to consumers.
The need to manage indirect tax compliance for multiple jurisdictions may become more common for businesses that sell internationally.
The challenge is keeping up to speed with the tax rules in the foreign jurisdiction on top of one's domestic tax obligations, exacerbating an already onerous task for businesses.
There is no better time to take action than now for people who want to have a business company and business owners should look into how the GST could affect their business.
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