WHAT THE FUSS ABOUT A MERE 1% INCREASE IN GST

I am a heavy drinker of coffee. I used to down about 10 to 15 cups a day. The most important routine to kick start my day used to be a cuppa and the morning papers. It was the 30 minute window that I really hate to be disturbed. I am never a coffee connoisseur to talk of Arabica and other fancy names. All I wanted is just the good old kopitiam coffee. It all started for me with the black brew from beans roasted by some local kopitiams. When this disappeared from the market by the 70's, I continued with whatever the kopitiam served. To make up for a deterioration in flavour, I switched from Kopi-O to Kopi with milk. Another lifestyle change was the morning papers which lost relevance in a digital world and disappeared from my breakfast table. Now with another round of price increase, the Kopitiam cuppa may be priced out of my life.

Here's to looking at an anatomy of GST through my favourite cuppa.

WHERE COFFEE SHOP IS GST-REGISTERED

(A) Before increase in GST (Assume supply chain is GST-registered)

	S$
1.	1.000	Cost Price
2.	0.080	Input tax @ 8%
3.	1.080	Gross Purchase
4.	1.296	Sales Price
5.	0.104	Output tax @ 8%
6.	1.400	Gross Sales
7.	1.296	Sales Price
8.	1.000	Cost of Sales
9.	0.296	Value Added
10.	0.024	GST @ 8%
11.	0.104	Output tax
12.	0.080	Input tax
13.	0.024	GST payable

Suppose the cost for a cup of coffee is $1.00. The coffee shop would have paid GST of $0.08. As it is not the final consumer, the $0.08 is recoverable as input tax.

Suppose a cuppa is priced at $1.296, add GST of $0.104 and end consumer pays at gross of $1.40. Consumer bears  the full GST.

GST is a value added tax. The coffee shop has added value of $0.296 (gross profit).  It is responsible for the tax on the value added --  $0.296 x 8% =  $0.24. 

The coffee shop collects $0.104 sales tax from consumer on behalf of government but recovers $0.08  output tax it has paid. The net GST payable is only $0.024. ( The balance of $0.08 of GST is paid to the government by the coffee shop's supply chain).

(B) Increase in GST (Assume supply chain is GST-registered)

	S$
1.	1.000	Cost Price
2.	0.090	Input tax @ 9%
3.	1.090	Gross Purchase
4.	1.296	Sales Price
5.	0.117	Output tax @ 9%
6.	1.413	Gross Sales
7.	1.296	Sales Price
8.	1.000	Cost of sales
9.	0.296	Value Added
10.	0.027	GST @ 9%
11.	0.117	Output tax
12.	0.090	Input tax
13.	0.027	GST payable

GST has now increased  by 1% to 9%. Suppose the entire supply chain adds 1% increase accordingly. A cupa now costs $1.413 (net sales $1.296 + 9%). 

For the coffee shop, its value added (profit) remains unchanged. But it now collects 9% tax of $0.27 from consumer on behalf of government.

For the government, a 1% increase in GST from 8% to 9% means an additional 12.5% ($0.117-$0.104) tax revenue. 

For consumers, it means an increase of about 1% ($1.413-$1.40) 


(C) Impact of rounding up prices in an increase in GST

	S$
1.	1.000	Cost Price
2.	0.090	Input tax @ 9%
3.	1.090	Gross Purchase
4.	1.376	Sales Price
5.	0.124	Output tax @ 9%
6.	1.500	Gross Sales
7.	1.376	Sales Price
8.	1.000	Cost of Sales
9.	0.376	Value Added
10.	0.034	GST @ 9%
11.	0.124	Output tax
12.	0.090	Input tax
13.	0.034	GST payable

For products priced by the unit, it is cumbersome to deal in small fractions. 1 and 5 cent denominations have fallen out of use. Vendors simply fix prices rounded up to nearest 10 cents inclusive of GST.

In this example, the cuppa would not be priced at $1.413 (gross) but rounded up to $1.50.

At this new price, Coffee shop's gross margin, or value added, increased by $0.08 ($1.376 - $1.296). This is a profiteering of 6.2% on the back of a 1% increase in GST.

For the government, a 1% increase in GST from 8% to 9% and vendor price rounding up means a whooping additional 19.2% ($0.124-$0.104) tax revenue. 

For consumers, a 1% increase in GST means an additional cost of  $0.10 ($1.50-$1.40) or 7%.


WHERE COFFEE SHOP IS NOT GST-REGISTERED

(D) Before increase in GST (Assume supply chain is GST-registered)

	S$
1.	1.000	Cost Price
2.	0.080	Input tax @ 8%
3.	1.080	Gross Purchase
4.	1.400	Sales Price
5.	1.080	Cost of Sales
6.	0.320	Value Added

When coffee shop is not GST-registered, then it is the end consumer of whatever it purchases. The input tax becomes a cost of their business. It does not collect any GST on behalf of the government.

Overall the government collects less revenue because  the last leg of the supply chain does not attract GST.

Consumers do not pay GST. But it makes no difference. Consumers simply pay whatever the coffee shop charges. Just a point to note. When a non GST-registered vendor advertises that it absorbs the GST for you, it is a fallacy. There is no such thing.

(E) Increase in GST (Assume supply chain is GST-registered)

	S$
1.	1.000	Cost Price
2.	0.090	Input tax @ 9%
3.	1.090	Gross Purchase
4.	1.400	Sales Price
5.	1.090	Cost of Sales
6.	0.310	Value Added

If coffee shop does not respond to GST increase, its value added or gross profit decreases because the increase in GST by its suppliers has increased the cost of sales.

It makes no difference to government since the coffee shop does not collect GST.

It makes no difference to consumers since they do not pay GST.

(F) Impact of rounding up prices (Assume supply chain is GST-registered)0.

	S$
1.	1.000	Cost Price
2.	0.090	Input tax @ 9%
3.	1.090	Gross Purchase
4.	1.500	Sales Price
5.	1.090	Cost of Sales
6.	0.410	Value Added

Coffee shop increases sales price by a rounded up $0.10 and profit improves by $0.090 ($0.410 - $0.320) or profiteering by a hefty 28.2%.


Conclusion:

An increase of GST from 7% to 8% in 2023 and from 8% to 9% this year provides IRAS substantial revenue upticks from numerous goods and services of 14.3 % and 12.5% respectively making a total of 26.8%. Computation (C) shows that price rounding up by vendors can increase GST revenue by a much higher rate. For the 2% increase in GST over 2023/24 revenue could be as high as 30% - 40% in many cases.

A 1% increase in GST on essential goods is not a very big problem for consumers, see Computation (B). It is the price rounding that presents a serious challenge. This is practically the situation for all lower priced goods. Computation (C) shows price rounding up for a cup of coffee increases the cost to consumers by a significant 7%.

Vendors may not be wilfully profiteering from hefty price increases. However, the rounding up of prices for low cost items in response to a small 1% adjustment for GST results in very high margins. These works out extremely well for supermarket and retail store chains as well as F&B operators including hawker stalls.

The rounding up of prices is extremely profitable for non GST-registered vendors as shown in Computation (E). Many retail stores and hawkers are in this category.

GST is a regressive tax. The lower income earners suffer a higher burden relative to income. 

The government narrative is increased GST revenue is necessarily in order to meet rising health care cost for an ageing population. This is understandable. But the demographic situation did not happen overnight. Where we are now, and in the short term future, has been projected, studied and planned for, decades ago. What happened? Why did we run out of resources?

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