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.

Filing of GST returns

Once registered for GST, the SME has the option to file its GST returns monthly or quarterly. If the SME expects to receive refunds on a regular basis, it may decide to opt for a monthly filing cycle to reduce its cashflow costs. While this will improve cashflow, the SME must also consider the additional work that is required to file the monthly returns compared with filing the returns quarterly. The higher frequency of filing the GST returns can also result in a higher possibility of making mistakes in the accounting of the tax.

How errors can cost the SME more money

Businesses that are registered for GST often view GST with lesser concern in light of higher corporate tax rates (currently at 18 per cent) as compared with a GST rate of 7 per cent. However, the risks associated with making GST mistakes can be detrimental to SMEs given their relative size. Ask the 3,097 businesses which paid $87 million in tax and penalties after they were audited for GST in the last financial year .

Common mistakes that occur include the claiming of GST paid on purchases that are disallowed and insufficient supporting documentation.

Disallowed input tax includes GST paid on expenses relating to motor cars, club subscription fees, medical and accident insurance premiums, medical benefits, family benefits and any transactions involving games of chance. SMEs that do not have proper accounting systems tend to incorrectly claim the GST paid on such expenses. While one may claim ignorance, the onus is always on the taxpayer to be compliant.

To be entitled to make a claim of GST paid on purchases relating to business expenses, valid tax invoices must be readily available to support the SME's claim of credit. If the IRAS requests for supporting documentation and the tax invoices are not provided within a reasonable time frame, the IRAS can start a full scale audit. This often results in more costs for the business as it needs to spend administrative time and resources to deal with the audit.

The Major Exporter Scheme

Another reason why an SME may register for GST is to be eligible for the favourable import relief schemes. In essence, these schemes offer GST relief at the point of importing goods, hence alleviating cash flow issues for traders who primarily export goods that are imported.

The Major Exporter Scheme (MES), for example, allows traders to suspend GST at the point of importation of the goods. GST will only be charged if the goods are subsequently supplied locally. To be eligible for the MES, traders must satisfy certain conditions, including exporting more than 50 per cent of their total supplies made.

Previously, approved MES traders were required to renew their MES status every three years and to submit an auditor's positive assurance report that the numbers reported for GST are fair and correct. These renewal procedures were seen to add to the compliance costs of MES traders.

However, the IRAS has announced on 30 May 2008, that this requirement will be replaced by a simpler procedure from Jan 1 next year. The new procedure requires MES traders whose status expires post this date to complete a declaration form. The IRAS has therefore effectively shifted the onus to the MES trader to be MES compliant without the need for an auditor's positive assurance report.

While one may view this change to the MES renewal procedure to be a relief, MES traders still need to remain compliant and vigilant of their processes, as they are required to make a formal declaration of their compliance without any third party assurance. Any non-compliance can therefore potentially result in revocation of the MES status and penalties.

As can be seen, there are a number of issues for an SME to consider before registering for GST. SMEs therefore have to make the right choice from the word go. If they opt to register, there are ways in which they can manage the cashflow costs, a number of which is outlined in this article. However, there are also administrative costs that need to be consistently evaluated. The message here is that GST is no longer a small administrative issue and SMEs need to be vigilant at all times to avoid the negative consequences of any failure to properly account for the tax.

Koh Soo How is a tax partner with PricewaterhouseCoopers (PwC) Singapore, where he specialises in GST and leads the PwC VAT/GST network in Asia-Pacific. He advises clients on VAT/GST matters, including advising clients on dispute analysis and resolution matters arising from audits conducted by the Inland Revenue Authority of Singapore (IRAS) and helping clients improve their GST compliance and staff training.

Before joining PwC, he was with the IRAS where he was a member of the team that was responsible for the implementation of the GST system in 1994. He was an Assistant Comptroller of GST with the primary responsibility of setting up the GST audit function. He was also involved in developing policy and operational rules for specialised issues and transactions such as the export of goods, tourist refunds and record-keeping.

Eudora Lee is a senior tax consultant with PwC Singapore.

This article was first published in The Business Times on December 16, 2008.