Singapore’s goods and services tax will be raised to 8% in January 2023.

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Come Jan. 1, Singapore will raise its goods and services tax, otherwise known as the GST, from 7% to 8%. It’s the first of two scheduled hikes of the GST, with the second slated to take place in January 2024, when the GST will be raised from 8% to 9%.

The GST is a consumption tax imposed on nearly all goods and services in Singapore. Starting Jan. 1, 2023, GST will be imposed on imported low-value goods valued up to S$400., Currently, only imported goods valued above S$400 are subjected to the GST. With the change, all goods and services imported into Singapore, including imported goods purchased online, will be subject to the tax.

Businesses based in Singapore with an annual turnover exceeding S$1 million (US$742,000) are required to register for GST and charge GST on all taxable goods at the prevailing rate.

Singapore’s parliament passed the bill to amend the GST in November, despite members of parliament from Singapore’s opposition parties coming out against the hike, citing poor timing amid inflationary pressures.

Inflation rate in Singapore hit a 14-year high of 7.5% in August. Inflation has eased slightly in recent months, with November’s annual inflation rate at 6.7%, but that’s significantly higher than the 2% inflation that the country’s central bank recommends for overall price stability,

Who will be affected the most?

economists who spoke to CNBC held conflicting views on whether the tax hike would hit the nation’s lowest earners harder than others.

Singapore’s lowest earners, whose wages are rising the least among all income groupswill also experience the biggest jump in household expenditure as inflation rises, according to DBS,

Low-income people tend to save less and consume more, said Antonio Fatas, professor of economics at INSEAD. “Given that this is a tax on consumption, the immediate effect might be felt more by them,” he said.

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Singapore recently made a The S$1.4 billion increase to a $6.6 billion fund designed to cushion the impact of the GST hikes. Payouts from the Assurance Package, which now stands at S$8 billion, will be dispersed over five years starting December 2022. Up to 2.9 million adult Singaporeans are slated to receive cash payouts that vary depending on their income and property ownership status.

The Assurance Package is designed to cover at least five years of additional GST expenses for most Singaporean households, and about 10 years for lower-income households, according to Singapore’s Deputy Prime Minister and Minister for Finance Lawrence Wong.

Euston Quah, head of economics at the Nanyang Technological University, said those offsets would spare low-income households from the tax hike’s effects.

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“The lower-income group will not be affected, as there are offsets, rebates, and sufficient transfers for them,” Quah said.

Upper-income people will not be affected much, Quah said, since they have the means to carry on with their lifestyles.

Middle-income Singaporeans could be the most affected by GST hikes, since they neither qualify for financial aid and rebates nor are they necessarily able to afford higher prices, he said.

Business sectors and price-sensitivity

Some business sectors may be more affected than others, depending on the “demand elasticities” of the goods and services they provide, Quah said. Elasticity measures how sensitive demand for a product is to changes in price.

Businesses selling products whose demand is sensitive to changes in price, such as luxury brands and high-end restaurants, will be more affected by the hike than businesses such as supermarkets that sell basic necessities, Quah said.

Ride-hailing services in Singapore are divided in their responses to the GST hike.

Grab told CNBC that its drivers will pay the 1% GST increase to tax authorities, but Grab will continue to absorb the existing 7% GST. The company said it’s offering six months of “rebate” on the 1% GST to drivers who are most affected.

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Ride-hailing firm ComfortDelGro said it will extend its daily rental waiver of 15% until March 31, 2023 to help its drivers cope with the rising cost of living. Its commission fees will remain unchanged.

Another service, Ryde, said it has no plans to increase commissions or fees from current levels of a 10% service fee for drivers and a 30-cent fee for passengers. “We keep commissions low so that drivers can take more home for every job,” Ryde CEO Terence Zou said in a statement to CNBC.

Most businesses should not be significantly affected by the hike, but charities and non-profit organizations may be, because they cannot claim the GST incurred for free non-business activities, such as free medical services, said Ajay Kumar Sanganeria, partner at accounting firm KPMG.

A spike in purchases of big-ticket items is expected prior to the implementation of each GST hike, he added. Customers make purchases such as furniture and cars ahead of new taxes to avoid paying the added cost, Sanganeria said.

Why now?

The markets have probably already priced in a recession — and a fairly significant one at that: UOB

“It is not difficult to realize that Singapore needs to find more fiscally sustainable ways to fund its social, environmental and healthcare needs.”

The number of citizens aged 80 and above has increased by over 70% since 2012, according to this year’s population reports, By 2030, around one in four Singaporeans will be 65 or older, the report says.

According to Singapore’s Ministry of Finance, Healthcare spending is expected to increase from S$11.3 billion today to S$27 billion by 2030.

Singapore is one of the fastest-aging countries around the world due to low fertility rates and longer life expectancies.

How Singapore compares with other countries

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