Insights

IRAS GST audits and penalties - A concerning trend?

September 10, 2021

In the financial year ended 31 March 2021, the IRAS has conducted 2,858 GST audits cases, and the additional taxes and penalties collected from the IRAS GST audits is $207,896,000. This works out to an average of $73,000 of tax and penalties per  IRAS GST audit case.

The average tax and penalties recovered per audit case for corporate income tax and individual tax is $19,000 and $22,000 respectively for the year ended 31 March 2021.

Have you ever wondered why IRAS GST audit results in more tax and penalties as compared to corporate income tax and individual tax?  

  • Is it because IRAS auditors are more trained in GST to identify non-compliance issues?  
  • Is it because GST is a tax on gross revenue and gross purchases while corporate income tax is a tax on net profit, hence when it is a tax on a bigger base, the amount of tax and penalties will be bigger as well? 
  • Is it because GST is more complicated as it is a tax on transactions and GST is also applicable on transactions that are not captured by the accounting system? 
  • Or is it because corporate income tax returns are mostly prepared and filed by the tax professional and GST is usually prepared in-house by the finance team and usually the finance team is a generalist instead of a specialist?

While we cannot pinpoint any specific reason why IRAS GST audits resulted in more tax and penalties per case as compared to corporate income tax and individual tax, the real reason why GST audit case resulted in more tax and penalties consistently over the past 20 years is probably a mixture of the above factors.

While businesses have recognised long ago that corporate income tax is complicated and corporate income tax returns should be handled by tax professionals, we have not seen it happening with GST, yet.   

Current situation

Let us first look at how the tax teams are set up in companies.

Most ideal set-up

The biggest companies usually have a global tax team and the global head of tax is supported by directors heading different taxes (i.e. director of transfer pricing, director of indirect tax, director of mobility tax, etc.) and such companies would also have an indirect tax person in the local tax team.  

Such in-house tax teams also have the annual budget to seek support on tax matters from the professional services firm. The local indirect tax person would have oversight over the filing of the GST returns. 

This is the ideal tax team set up which recognises the importance of indirect tax.

Realistic set-up

The second group of companies may still have a global tax team but it may not have a separate director of indirect tax sitting in the global tax team. The indirect tax matters are the responsibilities of the global head of tax (although this person is likely a corporate tax person). 

From a local country perspective, there is one tax person and this tax person is in charge of all the different taxes. This person is usually a corporate tax person who is very good with corporate income tax, somehow knows a bit about transfer pricing, goods and services tax, customs duties and personal income tax, etc. In other words, he may be the specialist in corporate income tax but he is at most a generalist when it comes to indirect taxes.  

Depending on the complexity of the issues, the local tax person may sometimes get support and budget to outsource the matters to a professional services firm but the local tax person would have to DIY most of the time. The local tax person would have oversight over the filing of the GST returns. The local tax person does not really know the specifics to look out for from an indirect tax perspective. He knows that GST is not that simple but he doesn’t know what he doesn’t know.  

This is a realistic set-up considering the costs of getting a full-time in-house indirect tax person.

Most common set-up

The third group of companies (and if I were to guess, a majority of the companies in Singapore) would not have a tax team and the tax matters are the responsibilities of the head of finance (they are often known as the CFO, Financial Controllers, Finance Director, Finance Manager, etc.)  

The head of finance are generalists when it comes to tax matters. Corporate income tax returns are outsourced to tax professionals but GST returns are mostly done in-house. The head of finance has oversight over the filing of the GST returns. Similarly, the head of finance does not really know the specifics to look out for from an indirect tax perspective. He doesn’t know what he doesn’t know and most of the time, he doesn’t think that GST errors, if any, are material.

This is the most common set-up and it is not enough.  

We suspect that the second and third groups of companies contributed a significant amount of tax and penalties recovered by the IRAS in the GST audit.  

If you belong to the second and third group of the companies, the question that you need to ask yourself is what can you do to move up to the first group of companies from an indirect tax perspective and stop being part of the tax audit and penalties statistics published by the IRAS?

If you have the resources, all you need to do is to call the recruitment firm to fill up that headcount on indirect tax. Otherwise, you should consider getting yourself a retainer for GST matters.

 

*Marketing and advertisement*

A retainer at Jed Tax Consulting provides your finance manager, tax manager or anyone else within your company with unlimited access to an Accredited Tax Advisor (aka myself) who has over 20 years of practical GST experience at IRAS and professional service firm.

You do not need a permanent headcount in your company and we will be there for you (on GST matters), anytime you need us. Having a retainer with us would not move you straight up to the first group of companies but it definitely brings you closer.

Our experience has shown that the GST savings resulting from this retainer service more than pays for the retainer fee itself.

Speak to us to see how our retainer services work.

*Continue reading if you are skipping the marketing and advertisement*

If your company do not have the budget for retainer services, you need to send your finance/tax team to attend regular GST training, make sure they read up on every GST update from the IRAS, buy coffee for their new friend who is a GST advisor (aka me) and start praying that the IRAS does not select the Company for GST audit.

The amount of tax and penalties recovered from GST audits can only go up once the GST rate is increased to 9% between 2022 to 2025.

Regards
Eddie Soh

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