22 Feb 2012
We refer to Mr Tan Kin Lian's letter ‘Let all purchases be GST-deductible to help smaller companies' (TODAY, 20 Feb 2012). We would like to explain how the GST mechanism works, and to address some of the viewpoints he had expressed on GST refunds and compliance.
GST is collected at all stages of the business supply chain. A GST-registered business charges and collects GST on its sales, but is able to claim a refund of the GST it incurs on its purchases from other GST-registered businesses. It is unable to claim a refund on purchases from a non-GST registered business because the latter has not charged GST on its sales. Mr Tan's suggestion that GST-registered businesses be allowed to claim GST refunds on all purchases, regardless of the supplier’s status, will result in the Government reimbursing GST that is not collected from the non-GST registered supplier’s sales in the first place.
Mr Tan has further suggested that small businesses that are exempt from GST registration are put at a competitive disadvantage vis-à-vis GST-registered businesses because the former’s customers are unable to claim a deduction in respect of the purchase. We wish to clarify that small businesses with less than $1 million in annual turnover are exempt from GST registration so that they do not have to incur the costs of collecting and accounting for GST to the Government. In addition, as non-GST registered businesses do not charge GST on their sale of goods or services, they enjoy a pricing advantage over GST registered businesses on sales to domestic consumers, or to other non-GST registered customers.
Nonetheless, businesses with less than $1 million in annual turnover may choose to register voluntarily for GST if it is in their interests to do so after taking into account their own unique circumstances. For example, if the business has many GST-registered suppliers and customers, it may choose to register for GST notwithstanding its turnover, so that it can claim back the GST charged on their purchases and their GST-registered customers can in turn claim the GST charged by the business.
We also wish to clarify that businesses do not have to maintain separate sets of records purely for GST purposes. The same set of records for financial and income tax reporting can be adapted for GST accounting purposes. Similarly, commercial invoices issued by businesses can be easily adapted into GST tax invoices.
To ease GST compliance for businesses, we have simplified the GST accounting requirements by aligning GST accounting with commercial accounting based on invoice or payment date. We will continue to explore ways to ease GST compliance for businesses.
We thank Mr Tan for his feedback and suggestion.
Claire Chua (Mrs)
Director (Corporate Communications)
Inland Revenue Authority of Singapore