By William Choong, Senior Writer

IF THE economy contracts further, should the Government consider cutting the goods and services tax (GST)?

Professor Basant Kapur of the National University of Singapore says 'yes'. Rolling back the 2 percentage point GST increase instituted in 2007 would boost domestic demand more than GST credits targeted at the less well-off, he wrote in this newspaper last week.

Some economists and tax consultants note that the GST credits offered in the Budget are explicitly targeted at lower-income households. A GST roll-back, though a blunt instrument, would 'lift all boats' - be they rich or poor - said one economist. Granted, a roll-back will benefit the rich more. But this in itself might not a bad thing, if they end up spending more.

The Government, though, has justifiable reasons for not rolling back the 2007 GST increase. As ST Forum letter-writer Wang Xin Min pointed out last week, even if the multiplier effects of a GST roll-back and GST credits were the same, providing low-income earners with cash is more equitable. Also, most households will receive more benefits this year than what they would have gained if the Government had rolled back the GST hike.

A roll-back would have been contrary to the Government's policy of cutting direct taxes such as personal income tax, and using indirect taxes such as the GST to expand the tax base. Indeed, some tax consultants believe our GST should head higher towards 10 per cent. It may well be the Finance Minister delayed further GST increases this year, since in the past, cuts in the corporate tax rate were accompanied by increases in the GST. This year, corporate taxes were cut but the GST was not increased.

This article was first published in The Straits Times on February 03, 2009.