Every business in Singapore should be familiar with the Goods and Services Tax (GST). While GST is applicable to the import and provision of most goods and services, there are also some goods and services that are exempt from GST, or zero-rated goods and services where GST is charged at 0%.
Continue reading on to find out what GST is, the way it’s calculated, and the common GST errors you should do your best to avoid.
How is GST calculated?
In Singapore, businesses have to register for GST with the IRAS. Registration for GST is compulsory if a business’s annual taxable supplies surpass $1 million in total. There are two types of GST; output tax and input tax. Output tax is the GST charged to customers who purchase a business’s goods and services, while input tax is incurred when a business purchases a good or incurs an expense.
Net GST is only refundable if input tax exceeds output tax. If output tax exceeds input tax, the business is required to pay the net GST to IRAS. Businesses cannot charge or claim GST if they are not GST-registered.
What are some common mistakes made when calculating GST?
The GST Assisted Self help Kit (ASK) is a package that many businesses can use to ensure correctness while calculating GST. It is also a requirement to complete this package if businesses wish to apply or renew the Major Exporter Scheme (MES) or any of the available tax schemes offered by IRAS. However, there are still some specific errors that are especially prevalent, so read on to learn how to prevent such common mistakes in the auditing process.
1. Inaccurately zero-rating goods
Some businesses have a false impression that their goods can be zero-rated as long as they are exported overseas. Goods cannot be zero-rated if they are delivered to a local Singaporean address, and if the services directly benefit a Singaporean, they cannot be zero-rated either. To avoid this problem, you have to first determine the belonging status of your customer. You can figure out the belonging status of your customer in the following ways:
- Individual: If your customer is an individual, check their usual place of residence. Each customer only has one usual place of residence, which would usually be their residential address. Otherwise, the usual place of residence can be any area they routinely live in with a settled purpose, and it has to be a constant period of time.
- Business: If your customer is a registered business, consider where the main legal establishment is located. If the business is legally established in Singapore without any business or fixed establishment overseas, their usual place of residence would be Singapore.
2. Not accounting for output tax for gifts
Gifts can be free goods given away as supplies. Output tax will be charged based on the open market value (OMV) of the gift for (a) gifts that exceed $200 and (b) input tax that was claimed during import or purchase of the gift. Output tax can be accounted for in two ways: the business either pays for the output tax themselves, or the recipient pays for the output tax. The recipient can claim the input tax credit if they satisfy the requirements for claiming input tax.
3. Claiming GST for disallowed expenses
Some companies make the mistake of claiming GST for goods and services that are not used for the furtherance of their business. Some examples of such goods and services include gifts and free services that are not provided for commercial purposes.
Other disallowed expenses include purchasing optional insurance premiums that are not covered under the Work Injury Compensation Act. Medical and accident premiums under this category for staff welfare and safety cannot be used to claim input GST if they are not obligatory. Club subscription fees are also not covered.
4. Not accounting for business assets
Any usable assets must be accounted for when calculating GST. As long as the asset possesses market value, output tax must be accounted for based on the asset’s Open Market Value (OMV). Businesses can analyse the price of the asset to calculate the OMV of the asset by considering a hypothetical scenario of selling it to a third party during the same period of disposal or transfer.
The OMV of the asset must be accounted for unless the asset costs less than $200. If the asset has no market value, businesses do not have to account for output tax either.
While GST errors are common, they are also avoidable if due care is exercised; otherwise, it may threaten the GST compliance record of your company or even invite a GST audit by IRAS. It is best to engage the services of a qualified tax consultant who will be able to help you avoid such errors and maximise the efficiency of your company’s taxation procedures.
If you are looking for a reputable professional firm to assist you in GST compliance service, Max Lewis Consultants will be able to provide the necessary services you need. Aside from GST compliance services, we are one of the leading service providers for transfer pricing advisory, business and asset valuation in Singapore. Consult us today to help your business move forward.