By KOH SOO HOW and EUDORA LEE

FINANCE Minister Tharman Shanmugaratnam has announced that companies can expect to get help with their costs and cashflow in next year's Budget to help them cope with the current economic downturn.

While no details have been announced on the types of measures to help businesses pull through these tough times, there is no reason why businesses cannot start to look at how they can cope with current cashflow costs. One area where cashflow planning and savings can be achieved and often overlooked is that relating to the Goods and Services Tax (GST).

The purpose of this article is to highlight some of the opportunities for small and medium enterprises (SMEs) seeking to reduce cashflow costs of the GST.

Registering for GST

An SME that is not registered for GST can do so voluntarily even though its annual taxable turnover may not exceed the registration threshold of $1 million. This registration requirement was intentionally set high to exclude small traders (including SMEs) from the GST net. However, SMEs often opt to register in favour of claiming GST paid on purchases. While the rationale is sound, the decision to register for GST is, however, often not considered fully.

For a start, registering for GST would require adequate systems to monitor GST collected and paid. This is important as the Inland Revenue Authority of Singapore (IRAS) has noted that an SME, especially one that is family-owned and managed, may not necessarily have the resources to maintain proper accounting records to meet their tax obligations. Such proper record-keeping is a critical aspect for GST-registered businesses as documentation is the cornerstone of the GST system. Failure to meet the record-keeping requirements can result in penalties for any incorrect accounting of the tax.

While the government introduced a two-year assistance scheme from March 1, 2007 to assist voluntary SME registrants cope with the associated GST compliance costs, the assistance scheme is capped at $5,000 for each company. While this may cover the initial start-up costs (such as training of staff and accounting software costs) to some extent, the SME needs to consider the long-term costs of complying with the tax obligations, including the submission of periodic GST returns, and the keeping of records to support the zero-rated tax treatment of export transactions, and GST input tax claims.

Other factors to consider include the SME's competitiveness and the nature of supplies made. If an SME's client base predominantly consists of non-registered customers, the GST component of the registered SME's sale to the customers will become a real cost (that is, the customer is not able to claim a credit for the GST paid). The SME will therefore be in a less competitive position compared with a competitor that is not registered for GST. However, one must note that the GST could be a hidden cost in the competitor's pricing.

The practical issues of registering for GST are often overlooked by the SME due to its eagerness to receive a potential refund of GST paid, especially when large capital purchases are made. If that is the sole objective of registering for GST, the SME must also be aware that the IRAS is able to recover GST claimed previously, on goods on hand with a value of $10,000 or more, from taxable persons that subsequently decide to deregister for GST.