Herbalife vs Comptroller of Goods and Services Tax - Is this the beginning of a lower GST registration threshold?
This is one of the most interesting GST cases in recent years and we applaud the taxpayer and lawyers for their grit to bring the appeal all the way up to the high court. For an executive summary of the key facts, you can refer to the write up by Rajah & Tann, the law firm who represented Herbalife https://eoasis.rajahtann.com/eoasis/lu/pdf/2023-03_Landmark_Tax_Case.pdf.
If you are keen to read the full judgement, you can download it here https://www.elitigation.sg/gd/s/2023_SGHC_54.
One of the key observations that we have from reading the case is that the Comptroller is concerned about the revenue leakage under a direct-selling business arrangement. The extracts from the judgement are as follows:
“The Comptroller asserts that the appellant’s business structure results in revenue leakage. The essence of the Comptroller’s point is that if the appellant’s Members were GST registered, the final sale to end-consumers would be taxable supplies and GST would be levied on the full price, which is the contractually stated retail price of the Nutritional Products without the Tiered Discounts. However, because the Members are not GST registered, the only taxable supply is the supply between the appellant and the Members. Thus, by interposing a non-taxable intermediary between the appellant and the final consumer, the difference between the price at which Nutritional Products are sold to the intermediaries and the final retail price consumers pay is not brought to tax, hence the revenue leakage.”
The first question that comes to our mind is “Is the IRAS concerned about revenue leakage from direct-selling businesses or is the IRAS concerned about ‘revenue leakage’ in all businesses, regardless of whether they are in the direct-selling business or not?”
If the IRAS is concerned about the direct-selling businesses, for the many of us who are not in the direct-selling business, we can breathe a sigh of relief since the suggested solution to the revenue leakage by the high court is for the Parliament to introduce a special valuation provision that specifically addresses direct-selling business models.
But what if the real concern is “Revenue Leakage” regardless of industry? Is the ‘revenue leakage’ in the above case unique to the direct-selling business? If it is not unique to the direct-selling business, would the IRAS go after other businesses that have such revenue leakage? If they were to go after other businesses, what are the changes that they would make?
In a direct-selling businesses, the members are often individuals who like the products and at the same time, want to make some money from selling the products to others whom they know. These members are often small-timers except for a handful of successful ones who made it to the top and may need to register for GST as a result of their success. The revenue leakage mentioned by the IRAS is illustrated in the diagram below:
Non GST registered member vs GST registered member
If you think about it, every business that has a non-GST registered intermediary in the supply chain would create a similar ‘revenue leakage’. Think about the brick-and-mortar provision shop under our HDB blocks and many other small businesses (that are not GST registered) that sells products to the end consumers.
The small businesses would have gotten their products from the distributors/principals and incur GST based on their purchase price (aka “wholesale price”, “discounted price” etc) similar to the members of the direct selling businesses. The purchase price of the non-GST registered intermediaries would be a lower price than the retail price so the difference would be the profit of the non-GST registered intermediaries.
While the non-GST registered intermediary did not collect output GST on the sale (which is the revenue leakage mentioned by the IRAS), such intermediary is also unable to recover the GST charged as their input tax and it is all part of the business cost of being a non-GST registered company.
The Singapore GST registration threshold is amongst the highest in the region. (see table below)
The Singapore GST registration threshold has been set at a high amount of S$1m for a reason, the Singapore government did not want to add on unnecessary compliance costs to small businesses when they first introduced GST in 1994.
If the government is looking for more GST revenue across all industries, other than asking the supplier to charge GST at the open market value (which is what they are trying to do in Herbal Life’s case), the government could increase the GST rates (which they already did) or one of the easier way is to lower the GST registration threshold from the current S$1m so that a bigger group of small businesses would be caught under the scope of GST.
A bigger group of GST-registered companies will definitely bring more GST revenue to the government.
We wish that is not the case but if one day the lowering of GST registration threshold is being brought up by the government, you heard it here first.
