Mr Speaker, Sir, the GST is the first tax that will fall on almost every Singaporean. So it is not therefore surprising that reaction is rather negative. Nobody likes to pay taxes. And I think no government introduces taxes just for the fun of it. The GST is new for Singaporeans compared to people in other countries. In most countries you have general import duties and almost the whole population pays tax of one kind or another. We being a free port have never had most of our imports subject to tax and, therefore, the indirect taxes that we have actually fall on a very few items. The GST, being a tax on the consumption of almost every good and service, is the first tax that we will have which will fall on almost the entire population. If we examine many of the arguments against the tax, I think we can summarise them under three headings. First of all, there is the question as to whether we need this tax at all, both from the point of view of the timing as well as from the point of view of whether such a tax is necessary at all because there are other sources of revenue in Singapore. Secondly, those who accept the principle of the tax have grave reservations about the regressive nature of the tax and the measures that have been announced to offset the regressive impact of the tax on the poorer income group. Lastly, the criticism or misgiving centres around the question of profiteering and the impact of GST on inflation. I would like to just take these three aspects one at a time. First of all, on the need and timing. It has been argued that Government's financial position is sound, healthy, that we have surpluses every year and, therefore, there is no need for GST and that even if there is a need, there are other sources that the Government should explore and that we should clearly demonstrate that there is a need for additional revenue before we impose GST. This reservation and criticism have been proffered in spite of the fact that the Finance Minister has said more than once that the GST is not being introduced at this stage to raise additional revenue and that, in fact, in the first five years, the tax deductions, offsets and rebates will exceed the estimated GST that will be collected. Nevertheless, I think we should examine this argument a little deeper. Under what circumstances will Government need to raise new taxes to raise additional revenue? The first situation will be one when the yield from existing taxes falls. And this, of course, can happen when the economy shrinks because of a recession, incomes are lower, profits of corporations are lower, the taxable base shrinks. Under such a situation when the Government is facing reduced revenue because the economy is shrinking, to introduce an additional tax would be the height of folly. That would be exactly the time when businesses and people need a boost of maybe a tax cut or some other incentive to promote business rather than a new tax to be loaded on them. And I am sure that those who have argued that we should wait until there is a clear need before a GST is imposed will be the first to argue against the GST when the need arises because the Government revenue is falling. The second situation under which Government may need additional revenue is when its expenditure has increased to a point where it is not covered by the current taxes and current revenue yields. Such expenditure can increase as a result of Government being put under pressure by the people to increase public services, to increase public subsidies, and all the other things that people look to the state to provide. To try and raise additional taxes after public expenditure has increased to a point where it cannot be supported by current taxes and current revenue would be really to close the gates after the horses have bolted. We should take action before the situation gets out of hand to ensure that expenditure never increases to a point where we need to increase our taxes in order to meet public expenditure. Let me elaborate this a little bit more. The GST, as has been pointed out more than once, will change our tax structure. Presently, our direct taxes, that is, taxes on income and corporations, yield 60% of Government tax revenue and indirect taxes yield another 40% of tax revenue. We hope that, through the GST and through reductions of income taxes over the years, we will reach a balance of 50% direct and 50% indirect taxes. But the GST is more than a change in the proportion of direct and indirect taxes. It means an enlargement of the tax base to cover the whole population. And this, of course, is precisely why many people object to the tax. But this is the intention of the tax, and I will explain why it is necessary. It is important to put in place a light but broad tax at this time when Government finances are sound and there is no need for additional revenue. Because at this time when Government's position is in surplus and there is no need for additional revenue, we can package this broad, light tax in such a way that we can minimise the impact on the lower income group and do all the other necessary adjustments to give away through tax reductions and other measures which are sufficient to offset the revenue from GST. So this is the right time to do it and the right time to put in place a broad tax. It is only in the present situation that the Government can afford to package the GST in the way that it has. Our direct income taxes, as the Prime Minister has pointed out, fall on a few in the population. In 1991, for example, 10% of the taxpayers accounted for more than three-quarters of all the income taxes collected. Our indirect taxes too are narrowly based. They are basically on petroleum, tobacco, liquor and cars. Our economy has done well over the years. Government has had surpluses year after year and we have a situation where the tax burden is, in fact, very narrowly focused. A few bear the major part of the tax burden which means that a few carry the cost of all public services. Therefore, there is a great danger that the people may come to believe that Government can provide more and more, either through more Government services or through increased subsidies, and that Government can be pressured to provide more and more without any additional cost to them. There is a dangerous belief prevalent in Singapore that somehow the state is separate from the individuals who compose it. Thus, when the state is asked to pay, there is a belief that somebody, other than the people, will foot the bill. And evidence of this woolly thinking is before us all the time. In Wednesday's Straits Times, Sir, there is a letter in the Forum page which illustrates this point. An argument was made by the SDP that the less well-off should be taken care of by the state without they even having to ask or compete for it. Sir, it is this kind of soft-headed handout policy that has landed so many of the Western countries in such a mess. There, for years welfare workers have been going around forcing aid on people who were too proud to ask for aid and welfare workers persuaded them that they were entitled to the aid, they should ask for the aid, until we have a situation today where it is considered as an entitlement, a right, an obligation by the Government towards them. I hope that we will never become seduced by these arguments. We should be glad that we still have a people who have a strong sense of responsibility for self, and pride in taking care of their own interest. The state is made up of individuals and we cannot, by argument, by a sleight of hand, transfer the responsibility from the individual or collection of individuals to some impersonal, unconnected third person called the state. We must, therefore, have a tax system that will make an immediate and direct connection between demands for public service and the private purse. People must know that if Government is asked to provide more, then people must pay more. Of course, the GST is not intended to be the sole or even the major source of revenue. There will always be other taxes, other sources of revenue which will be very progressive, which will tax the well-off, the rich, more than the poor. The progressive income tax system will remain in place and indirect taxes on petroleum, cars and all the sin taxes - tax on gambling, tobacco, liquor - will still continue to account for the major part of Government revenue. In fact, a rough calculation will show that, going by the figures given by the Finance Minister, the GST will not, in fact, account for more than 10% of the total Government tax revenue. So those in the higher income bracket will continue to bear a disproportionate part of the tax burden. But the GST is important. There is that component in the tax system which will ensure that every time there is a need to increase tax, everybody bears a part of the increase. And it is important that the Singapore population as a whole realises that public services cannot be increased without everybody having to pay for it. This is the best way to keep a lid on public expenditure. This is an important reason why we want to have the GST in place, a light but broad tax on all goods and services. It is an additional reason to those which have already been given in that, through GST, it is possible to reduce the income tax and corporate tax so that we make Singapore a more attractive place to invest, so that we encourage savings as against consumption, and so on. But a broad, light tax on the entire population is absolutely important and to always keep before the population this message: That you can't get more without paying a part of it. Let me now come to the regressive aspect of the tax and how the very poor should be assisted to cope with the GST. Government can help the lower income group offset the effects of GST in two alternative ways. One, through the GST system itself, that is, by exempting certain "basic essential" items. Or, two, outside the GST system, by other more direct tax reductions, rebates and grants. We have chosen the second approach. Exempting "essentials" is not only an inefficient way of helping the poor to tide over the GST, but it also creates numerous problems and these are not just theoretical, academic problems. Countries which have introduced GST with a host of exemptions face these problems and are, in fact, seriously examining how they can change the system to make the GST more general with less exemptions. We have chosen, as I have said, to offset the GST through a system of direct tax reductions, rebates and grants, and not through exemptions. Why? First, essentials are not consumed only by the lower income households. In fact, high income households consume far more of the "essentials" per household per month than lower income households. So exempting or zero-rating essentials will benefit higher income households more than lower income ones. It will also cost the Government much more than it will benefit the lower income households. In other words, the tax forgone by the Government would be far more than the benefit to the lower income households. The White Paper on GST has explained that on a per household basis, the top 10% of households, that is, the top 10% by income, spend 3 1/2 times more than the lower income households on food which we can assume as essential. Exempting food from GST will, therefore, mean that the top 10% will benefit 3 1/2 times more than the poor. Similarly, the top 10% of households spend eight times more on other items, which many of us will consider as essentials, such as health. If health is exempted, the top 10% will have eight times more benefit than the bottom 10%. This is true for all the other essentials also. Suppose we define "essentials" as basic foodstuffs, public transport, education and health. These four items form 40% of the consumption of households earning less than $1,500 per month. The total expenditure of these households earning less than $1,500 per month on these four items amounts to $870 million per year. This is derived from the survey on private consumption expenditure. So if we term those who earn less than $1,500 as among the lower income group, they together spend $870 million on these four essential items - food, public transport, education and health. But the total expenditure of all households on these four items is ten times this amount. It is $8.6 billion. If we zero-rate these items and we say that these are essentials that should not be subject to GST, the Government will forgo $260 million of revenue. But only one-tenth of this, that is, $26 million, will go to the lower income groups. All the rest will go as benefits to those earning $1,500 or more, the middle and higher income groups. The fact that the lower income groups get such a small portion of the revenue forgone is not the end of the matter. The Government has to make up this $260 million of revenue forgone. And how does it make up? The GST rate, therefore, cannot remain at 3%. It must go up. And since $260 million is about one-third of the total revenue that is expected from GST, the GST must go up from 3% to, say, 4%. But this 4% will, of course, again have a greater impact on the lower income groups because 60% of the expenditure of the lower income groups is on these "non-essentials". So the more items we exempt, the higher the GST has got to be and the higher the lower income groups will have to pay on the non-exempted items. Secondly, zero-rating certain goods and services will distort people's spending choices by making some commodities artificially cheaper than others. People want to consume a whole host of goods and services which are important to them and each family decides for itself what is important and what is not important. We cannot, as a Government, put all these into the exemption list. So we have to make choices. For example, if we exempt rice, do we exempt wheat flour? Because if we do not exempt wheat flour, then we are favouring rice against bread. And those who like to eat bread will complain against those who are exempted because they eat rice. The Government should not be asked to decide what is it that each family should consume or need to consume. Thirdly, exempting "basic essentials" creates definitional disputes and encourages people to cheat and misdeclare items to benefit from lower or zero-rate items. For example, does exempting rice or wheat flour mean that we should also exempt char siew pau, buns, pastries, biscuits, or confectionery? Or should we only exempt cakes sold in the HDB estates but not cakes sold in Shangri-la? On what basis do we make the differentiation? How do we decide? What should be exempted and what should be zero-rated and what not zero rated? Compliance and administrative costs for both businesses and tax administrators increase very sharply as we begin to exempt and zero-rate more and more items because we have to keep track of these items. And this will defeat the whole purpose of this GST exercise which is to make our companies more competitive. If companies spend their time on trying to find ways to dodge the tax rather than ways to produce more efficiently what they are doing, then they are directing their resources, energy and interest in the wrong direction. For all these reasons, Government has chosen to help the lower income households directly through measures outside the GST system. As we have said, we will reduce personal income taxes which will benefit more than one million taxpayers because with the tax rebates, three-quarters of households will not need to pay income tax any more. We will provide rebates for service and conservancy charges for 1-, 2- and 3-room flats and rental rebates for 1- and 2-room HDB flats. We have given property tax rebates for the smaller properties so that the lower income households can benefit. As a final safety net, we have also promised that we will give a grant to the Citizens' Consultative Committees to help those who do not benefit from all these tax changes and offsets that we have provided. The cost of all the offsets, when you tot them up, is not large precisely because these measures are well focused on those who really need help. Whereas a general exemption of so-called essentials will cost a lot because it is not focused on those who need the help. It will not be possible to completely offset the GST for the lower-income groups by zero-rating essentials, because there will always be some items on which they have to pay GST. The only way to ensure that the lower-income groups do not pay any GST will be to zero-rate all that they consume which, in fact, means no GST. Sir, our way of helping the lower-income households has, in fact, not been plucked out of the air, but something that has been drawn up as a result of studies of the system operating elsewhere. Countries, including Japan, Thailand and New Zealand, which have recently introduced GSTs, have also chosen to have a comprehensive system, like the one that we are adopting in Singapore. For countries which have introduced GST very early, like Britain, they have a fairly complex exemption system. And many people, including those who are studying the tax system in the UK today with its complicated multiple rates and zero-ratings, have come to the conclusion that it is far better to reform the system by removing all these exemptions and replacing them with a single but lower VAT or GST. The latest issue of the Economist, if some of you have seen it, has an article making a strong case for a low broad-based GST. The article points out the bizarre anomalies that can arise from exemptions. It quotes an example. `Side by side on supermarket shelves are chocolate, digestive biscuits (which attract a GST or VAT of 17 1/2%) and Jaffa Cakes (where the VAT is 0%);' Why? Because Jaffa Cake is classed as food and therefore zero-rated; and chocolate and digestive biscuits are classed as snacks which I assume you eat while you are watching TV, therefore, you pay 17 1/2%. It is completely arbitrary. These exemptions have inevitably led to higher costs for everybody, and quarrels over precisely which items should be exempt and how much and when. It ends up with a lot of cheating and without much benefit for whom it was intended. The third fear or criticism of the GST is one that centres around inflation and profiteering. Sir, with your permission, may I ask the Clerk to distribute the Table (Cols. 1645 - 1646) that I have given to him? [Copies of Table distributed to hon. Members.] Table - COMPUTATION OF PRICE INCREASES USING 1990 PRIVATE CONSUMPTION EXPENDITURE (PCE) DATA (Cols. 1645 - 1646) Sir, we can make a broad estimate of the impact of GST on the total economy. My view is that there is little to fear from profiteering and inflation for many reasons. One reason is that the actual impact of GST on the total economy is, in fact, less than the 3% GST. The Department of Statistics has estimated that even if companies pass on the full 3% GST to consumers, the total impact on the economy should not be more than 2% I have given a handout. Let me just run through the handout very quickly to explain what it is all about. This, as I said, shows the impact on the total economy. First of all, the gross private consumption expenditure. This excludes the expenditure by tourists on various items on which they do not pay cess. This is just the local private consumption expenditure. This is $32,948 million. Not all of this expenditure is subject to GST. We must deduct those types of expenditures which the Finance Minister has already exempted from GST and these will be the financial services, rental on housing and so on. When we exclude all these, there is a net private consumption expenditure of $28,168 million. This private consumption expenditure is on all establishments, big and small. And we know that establishments with a turnover of less than $1 million per year will be exempted from GST. If we estimate that these small establishments account for 10% of the total value added in Singapore, then the effective rate is, in fact, on only 90% of the value added. That means GST on 90% of the net private consumption expenditure. So we apply the 3% on 90% of net private expenditure and get the GST of $760 million. That is the GST collected. But in the process of imposing this 3% GST, we are giving away, by way of indirect tax reductions, a total sum of $162 million, because adjustments have been made for indirect taxes, PUB tax, telephone tax, entertainment duties, petrol duties and so on, and those have been offset by the GST. So we have to take that out because that is not an additional expenditure. It is already there in the system and that is $162 million, giving a net revenue of $598 million. If you apply that on the gross private consumption expenditure, we get 1.8% effective GST. This, as I have said and I must emphasise, is the total picture. But it is an important element in trying to assess what is the impact of GST on the total economy. Of course, in some cases, prices may increase more because of rounding off. In other cases, prices may not increase at all because companies may decide to absorb a part of it because of reduced income taxes or because of competitive position in the market. We are not the first country in the world to impose GST. Every country where GST has been imposed has gone through this process of price adjustments. Studies have been made on the impact of GST on overall inflation. In most of the cases, the impact of GST is much less than the GST rate. In other words, if the GST is 3%, the GST contribution to the inflation rate is less than 3%. And there is no reason to believe that we will be different. We have strong institutional measures to check profiteering and the impact should be less. As I have pointed out before, there is no reason to assume there will be profiteering. Profiteering is a term that is used when people hoard and extract obscene profits because of a shortage. There is no shortage. In fact, we now live in a world which has an over-supply of the essential commodities that we consume. We do not also have a situation where suppliers can get together to form a monopoly or a cartel. We have a situation where there are many independent suppliers and the chances of them ganging up are very small. Far from it, I think they will compete furiously one against another. If necessary, as we did during the Gulf War, we can increase the supply of essential items and flood the market with essential goods through NTUC Fairprice and other such organisations. This will undermine any cartel and prevent it from making unfair profits at the expense of the public. MTI will monitor the prices, as Dr Soin has suggested. We should, of course, monitor it right from now and will ensure that steps are taken and measures are put in place for adequate supplies to be in Singapore when the GST is introduced. We can also, of course, organise consumer groups and clubs which will help advise the public on the cheapest outlets. We can enlist the assistance of CASE and help CASE to monitor prices and publicise those retailers who profiteer. I think consumers must learn to support CASE, must learn to organise themselves. I know that many of our Backbenchers here will be organising groups within their constituencies to monitor and to keep consumers informed and to put pressure on those who increase prices unfairly. Lastly, and I would say that this is the the very last type of measure the Government should consider, as Dr Ow has already pointed out, price control is not a good way to proceed, the Government does have powers to be tough on those who blatantly profiteer. And in extreme cases, we can revoke their Government licences or permits to operate. For example, we can revoke a hawker's licence if a hawker is found to be increasing his prices unfairly. And as Dr Ow pointed out, perhaps we should be ruthless in picking a few who profiteer and making them an example to frighten the rest. We can, of course, use the Price Control Act, but I will be very loath to resort to this. Because this is not the best way to ensure that prices do not go up in a situation where basically there are many suppliers who compete with each other. The best solution is still the free market. It will be far easier for the consumers to boycott any company which charges more and by such boycott bring prices down rather than use the Price Control Act. Sir, to summarise, now is the right time for GST. Government finances are healthy. We can afford to offset and help the lower-income group. There is a need now to put in place a system of taxes which affect all but very lightly, so that if Government revenues have to be increased as a result of pressures to increase subsidies and services, everybody will know that they have to pay a part of it. It is important for Singaporeans to realise that. Secondly, Sir, tax reductions, offsets and rebates are focused on those who really need help and are more than sufficient to compensate for the GST. Lastly, Sir, in our system, there is little danger of inflation or profiteering.