A SMALL business, with revenue of less than $1 million, is exempted from the requirement to charge goods and services tax (GST) to its customers. This is intended to help small businesses, but has unintentionally disadvantaged them instead.

A GST-exempt business (say, X) is still required to pay GST on its purchases from its supplier (say, Y). The GST becomes part of the cost of operations of X when X sells its products to its business customer (say, Z). When Z further sells the product, it is not able to recover the GST on its purchase from X, although a significant component of the cost is in the GST that has already been paid to Y. This has resulted in double taxation of GST.

To overcome this disadvantage, many small businesses have voluntarily registered to be subject to GST and incur the additional cost of keeping a separate set of records to comply with GST. The Inland Revenue Authority of Singapore (Iras) also has the burden of collecting small amounts of GST from small businesses.

To simplify the administration for Iras, to reduce the GST compliance work for businesses and to help GST-exempt small businesses, all eligible purchases should be allowed for computation of GST, regardless of whether the supplier is subject to or exempt from GST.

In preparing the GST return, the business can use its normal accounting records, without having to keep a separate set of records to identify the GST.

The policy decision to allow GST exemption to small businesses is welcome, but should not be done in a way that results in double taxation or increases the compliance cost on small businesses.

Tan Kin Lian

This article was first published in The Straits Times.