Impact of GST Changes on Small Businesses: What You Need to Know

Surviving in the business world isn’t easy; it’s one of the most challenging tasks. The consequences could be dreadful if a business owner fails to stay current with the regulatory changes. They may even lose thousands of dollars. One such significant change is the Goods and Service Tax (GST).  

What’s so impactful about GST? How does the change in GST impact small businesses in Singapore? Tax reform was implemented to simplify the indirect tax structure, but the change has caused various impacts on small businesses. While there are pros and cons, you must understand the overall picture of GST change and how GST rate change affects small businesses in Singapore. Let’s dive right into the blog to learn more.

What is Goods and Services Tax (GST)?

Goods and Services Tax (GST), known as Value Added Tax (VAT) in some countries, is a consumption tax. It’s charged on the goods and services, meaning a percentage is added to the product or service you buy.  

Every business will collect the tax amount from the sales they make, and then they’ll pay it to the Inland Revenue Authority of Singapore (IRAS) every month or quarter. However, the GST rate change was announced and released in Singapore’s budget for 2022. The change was implemented in 2023, and the rate changed from 7% to 8%.

As mentioned in the Inland Revenue Authority of Singapore, in Budget 2022, the Minister of Finance announced that the GST rate will increase from:

(i) 7% to 8% with effect from 1 Jan 2023 (first rate change); and

(ii) 8% to 9% with effect from 1 Jan 2024 (second rate change). 

It’s also mentioned that the revenue from the increment will be used to take care of senior citizens and healthcare expenditures.

How Does GST Work?

So now, you might be wondering whether GTS impacts all types of companies in Singapore. Should every company charge their customers GST? Or should every company register for GST? Well, it doesn’t apply to every goods and service sold, meaning there are specific rules and regulations. Let’s read on to understand more.

There are two ways for GST-registered businesses to deal with GST:

●      Output tax, which you charge, and

●      Input tax, which you pay

Yes, that’s right. As a business owner, you should also pay GST. This amount is charged on the raw materials, services, and other items you purchase for your company. However, you wouldn’t have noticed it. These charges are obtained from you just like you charge from your customers.

The good news is that you can claim the GST by mentioning it’s a business expense. But for that, your business should be GST-registered in Singapore.

Once you’re registered, you will be paying the net GST (Input tax minus output tax) to the IRAS. While doing it, if you pay more than the amount you collected from your customers, the IRAS will pay back the difference. Similarly, if the input tax exceeds the output tax, you must pay it to the IRAS.

Should Every Business In Singapore Register For GST?

GST is a self-assessed tax, so businesses must assess themselves to decide whether to get registered. If you want to assess your business, you can get in touch with GST audit services in Singapore. But before you check them out, you should know the complete picture of GST.

First, if your business’s taxable turnover is above S$1 million, it’s compulsory to register. Second, even if your taxable turnover has not yet been achieved, you can do it voluntarily if you prefer registering. Let’s get into detail about compulsory and voluntary registration. 

Compulsory Registration

As per IRAS, there are two methods to calculate taxable turnover:

Retrospective Basis – every business should register once the taxable turnover goes above S$1 million at the end of any year from 2019 onwards or for a certain quarter along with the earlier 3 quarters, which means before January 2019.  

Prospective Basis – a company is assessed to have above S$1 million in taxable turnover in 12 months. Businesses that focus on hitting over S$1 million in the next 12 months should submit a few copies, such as:

●      Three recent invoices with shipping documents were issued to your customers. If you have issued fewer than three invoices, you should provide all of them.

●      A list of your revenue in the last two months should have the invoice number, date of invoice, customer’s name, sale description, and the amount.

●      You got three recent copies of suppliers’ invoices with shipping documents. Or if your suppliers’ invoices are less than 3, you have to provide all of them.

●      A list of business purchases in the last two months should have the invoice number, date of invoice, supplier’s name and GST number, purchase description, and the amount without the GST.

●      A copy of your latest profit and loss account. It should have all the reports and notes related to your account.

●      A copy of your office’s rental agreement.

You should do the GST registration within 30 days from the date of duty if it’s a retrospective basis, and if it’s a prospective basis, your date of forecast is the date of registration. 

Voluntary GST Registration

Some business owners prefer voluntary registration even if their turnover doesn’t exceed S$1 million, but is it possible? Of course, it is. You can register your business voluntarily, but IRAS requires you to follow specific guidelines, which you can check out here.

Should Your Small Business Register for GST Voluntarily?

You may be wondering if GST is necessary for small businesses. Should you also consider it? Well, we’ll help you get a better understanding of it. You can check out the following factors and cross-check them with your business to decide whether or not to GST-register your small business in Singapore.

Net GST – As we already discussed, this is the balance between input and output taxes, so if you think your business will have more input taxes over output taxes, it’s wise for you to register. Why? IRAS will refund the additional amount.  

Recording and filing obligations – Once your small business is GST registered, you must adhere to the business rules and regulations, such as filling protocols, bookkeeping, and accounting. You must hire a third-party GST audit service or an in-house accountant in such instances.

Make sure to draw a pros and cons list to decide what’s best. But here’s the drawback: you would have to spend some money to keep things on track, and that will increase your overhead costs.

Customer’s mindset – Every GST-registered business will have to charge their customers for the goods and services purchased. So when you charge your customers for their consumption of goods and services, there’ll be an extra GST charge as well. The problem here is that if your competitors are not GST-registered, your customers might find your goods and services unreasonably expensive.

Reliability – The way customers' mindsets work is quite astonishing because if you don’t register your business, they might assume you’re unreliable. Say that yours is a small business and doesn’t meet the minimum turnover, yet customers might expect you to register because, from their point of view, it proves that your business is trustworthy.

This is why you need to seek expert advice regarding small business taxation. With years of experience and a team of experts, we can guide you on this. Please feel free to get in touch with us if you need help.

GST Rate Increase Affected Small Businesses: 7 Key Impacts

The GST rate change has caused various impacts on both large and small-scale businesses in Singapore. The impacts will differ as per the business type, registration status, type of business activities, and demand and supply of their goods and services. However, here are 7 impacts that small businesses should know and stay prepared for: 

Increase In Business Costs

If your small business isn’t registered for GST, it’ll incur more costs when purchasing goods and services from suppliers registered for GST. But that’s not all; you will also bear a cost for imported items. When this happens, your business expenses will increase while the profit margin reduces.

You can mitigate this issue by registering your small business for GST even if it has not met the S$1 million yearly turnover threshold. By doing so, you can claim input tax from the IRAS for your business purchases.

Increase In Prices

When your small business is GST registered, you will have to add the GST to your goods and services, which means your customers will have to deal with higher prices. This can become challenging if your customers don’t know the reason behind the price hike. This is why focusing on market competitiveness and price sensitivity on equal grounds is essential.

Changes In Consumer Behavior

The GST rate change will reduce the demand for non-essential goods because consumers might need to find it reasonable to purchase such goods at an increased rate. They might reduce their consumption or might even opt for alternatives. This is why small businesses need to monitor consumer behaviour and preferences.

If you decide to register your small business for GST, study consumer behaviour and take action accordingly, such as improved marketing strategies and customer services. You can also work on offering other benefits, such as loyalty programs, discounts, and promotions to retain customers.

Compliance Requirements

Small businesses registered for GST should adhere to the GST rules, including GST filling, keeping records, and issuing tax invoices. It’s important to keep your small business’s financial systems updated so that the assessments reflect the new GST rate.

Make sure that the GST rate change is applied accurately since the time of change. On top of all, you should know the special provisions and transitional rules that apply to certain supplies. If you’re not sure about the transitional rules, you can learn about them here.

Modification In Cash Flow Management

Small business owners should be careful with cash flow management, especially once they register for GST. They have to pay GST tax to the authority within the given timeline, so it’s important to have sufficient funds. You should ensure that your business’s cash flow is modified to cover GST obligations and business expenses.

If you need help managing tax obligations, you can seek financial support and government schemes or talk to suppliers and customers to smoothen the process.

Increase In Market Potential

Once you register your small business for GST, you may have to consider expanding. When the GST rate change impacts your business, it’ll correlate with your business’s potential and profitability. You have to evaluate potential and future market demands and supplies.

Find opportunities and threats to see how you can grow your business further. You have to assess your resources and capabilities to find your scope of operation. It would be best if you made an effort to increase your revenue while keeping the risks at bay.

Social Responsibility

When a small business gets registered for GST, the impact of social responsibility tags along; therefore, when you register yours, be aware that the GST rate change will affect stakeholders and society as a whole. You should find the optimal balance between your business’s interests and objectives while focusing on environmental commitments.

As mentioned earlier, the revenue collected from the GST increase will be used for Singapore's healthcare sector and ageing population. As a GST-registered business owner, you should make sure to initiate corporate social responsibility-related events and programs to align with this vision.

Find The Right Help For GST-Related Services in Singapore

In summary, GST for small businesses is quite significant and will impact both consumers and companies in Singapore. This is why preparing and adapting to the change is important, as taking necessary measures to find opportunities and overcome challenges. By doing so, you can achieve business goals while becoming a competitive market player focusing on social responsibility.

But the overall concept of GST change can be overwhelming if you’re new or too busy to spend time learning; that is why we are here to make it easy for you. Our Tax Advisory Services will take you through every step with clarity and due diligence. Feel free to contact us if you need our help.

FAQs

Before you leave, here are some GST rate change FAQs for small businesses:

Why is there a rise in GST in Singapore?

Singapore charges Goods and Services Tax (GST) to fund public services, including healthcare, security, and education. It also supports the expanding needs of Singapore's population. Moreover, GST is a broad-based consumption tax, making taxation equitable. It helps Singapore's economic well-being.

What are the two types of GST rates?

Standard Rated Supplies: This is charged at 9% on sales of most goods and services.

Zero-Rated Supplies: These are goods as services that cannot be charged GST

Which businesses are exempted from GST in Singapore?

Businesses offering financial services, such as digital payment tokens, and those involved in property sales and leases are exempted. Additionally, local service providers and importers dealing with precious metals used for investment are exempted. Since these businesses can only exempt supplies, they are not eligible to claim GST on their purchases.