When one plus one equals three: Why price hikes might be greater than the GST bump

AFTER Singapore’s goods and services tax (GST) rate rose a further one percentage point to 9 per cent on Jan 1, eagle-eyed consumers may have noticed disproportionate price hikes for some of their regular purchases.

From curry puffs to cleaning services, the rise in Singapore’s consumption tax may be passed on if companies raise prices to protect margins.

Indeed, price hikes are perhaps so expected that it is the absorption of GST, instead, that makes headlines – as was the case when supermarket operator FairPrice Group said it would hold prices unchanged for 500 essential items.

Yet while GST has gone up by one percentage point, consumer prices have risen by more than that. The Business Times examines how a higher GST rate affects businesses – and why a disproportionate price hike is not equivalent to profiteering.

How does GST work?

Businesses must register for GST if they have taxable revenue of more than S$1 million at the end of the calendar year, or expected taxable revenue of more than S$1 million in the next 12 months.

Once registered, these companies must then charge GST at the prevailing rate – that is, 9 per cent – on all taxable goods and services that they supply. The GST collected, known as output tax, must be filed and paid to the Inland Revenue Authority of Singapore (Iras) every quarter.

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When the GST rate goes up, consumer-facing companies have to decide whether to absorb the increase or raise their prices to reflect the new rate.

However, GST-registered businesses can also claim GST from Iras for imports or purchases from GST-registered suppliers that are used for business purposes.

For instance, if a GST-registered bakery pays S$5.45 to its GST-registered supplier for butter, the bakery can claim the 9 per cent GST – or S$0.45 – from Iras.

This GST incurred for business purposes is known as input tax, and also filed and claimed from Iras on a quarterly basis. The difference between a company’s input and output tax determines the net GST that is payable to Iras, or refunded by the taxman.

If prices go up by more than the GST hike, isn’t that profiteering?

The government’s Committee Against Profiteering investigates feedback about potential profiteering. But this is defined as “unjustified price increases of essential products and services” that use the GST increase as a cover.

In other words, companies can raise prices by more than the GST increase – as long as this is justifiable and the GST hike is not cited as the sole reason for doing so.

The committee focuses on commonly consumed food items such as eggs, chicken, vegetables and meals from hawker centres and coffee shops, along with non-food essentials such as household products.

The committee has received over 350 feedback submissions, with 32 of these involving specific allegations of GST misrepresentation, Minister of State for Trade and Industry Alvin Tan said in a parliamentary reply on Oct 3, 2023.

“The businesses concerned were cooperative, and have ceased the practices of GST misrepresentation,” he said.

So why are price hikes larger than the GST increase?

Businesses tend to time their price increases in tandem with macroeconomic factors such as the GST increase, said Chester Leong, managing director of accounting and tax services provider BoardRoom Group.

That is because such events provide a “cover” for businesses when they raise prices, he added – but stressed that most cases BoardRoom has seen are not opportunistic price hikes, but arise from genuine business needs.

Rising business costs have hit many businesses’ bottom lines, with some companies having held off on raising prices in previous years, Leong said. Such cost pressures include higher rentals, utilities and manpower costs.

But business owners may receive backlash from customers if they raise prices with no apparent trigger. This is why something like the GST increase can be a useful opportunity for businesses when raising their prices, he said.

“I don’t see it as them taking advantage of the government’s GST increase, but it’s a response to the increase in operating expenses,” he added.