After my initial reaction to the announcement of the increase in GST in my previous post, I realise that the latest move by the Singaporean government to increase the GST to 7% is not going to help the lower income groups as much as they would like to have us believe.

The reason given for increasing the GST is to generate money to help the lower income group. To finance the aid packages to help the lower income group, the government chooses to tax consumption instead of income. This is hugely unfair to the lower income group because they are worse off with the increase in GST compared to an increase in income tax.

An increase in income tax will not affect the lower income groups as much because of the various tax reliefs that can be claimed.

Let’s take for example a family of four, with the husband (an active NSman) earning $1,200 per month, the wife being a homemaker and two children who are in primary school.

The total annual income, based on a 12 month period, is $14,400. Let’s take a look at the taxable income for this family.

Earned income tax relief: $1,000
Wife relief: $2,000
Qualifying Child relief: $4,000 (each child is eligible for $2,000 relief)
Relief for NSman: $3,000 (active)
Relief for Wife of NSman: $750

Total relief: $10,750

Therefore, the income that is taxable for this family is only $3,650.

Since the GST will increase by 2%, for the sake of comparison, let’s assume that annual income tax has risen by 2% instead of GST. The tax increase for this family is $73.

Suppose that this family spends $1,000 per month on goods and services in order to survive. Increasing the GST by 2% will mean an additional increase of $20 per month. That means that the annual increase brought about by GST is $240. This is more than 3 times the amount that this family would have to pay if income tax had been increased by 2 percent instead.

Well, let me provide even more astounding figures. The first $20,000 of one’s income is not taxable. This means that this family doesn’t even need to pay income tax, no matter the increase in the percentage of income tax. The only way to make this family pay tax is to increase the tax on consumption, which is the GST.

Therefore, if GST goes up to 7% next year, this family would need to pay $70 a month in tax, and that would be $840 a year. If there was no GST, and the 7% had gone over to income tax, this family would not have to pay a single cent in taxes. The GST is a really ingenious idea to make the poor pay more tax.

PM Lee said in the report from Channel Newsasia that the increase in GST “will give us precious extra resources to implement social programmes like Workfare later on. Our aim is to help the lower income groups and the elderly, not to increase their burdens.”

After doing the math, I find it contradictory that a tax that penalizes the poor is going to be implemented to help the poor. It’s not even a case of robbing Peter to pay Paul; it’s a case of robbing Peter to pay Peter.

Addendum: In response to the proponents of GST, I’ve added another entry further arguing against a GST hike. You many access it here.