Zero GST for basic goods?

food n price to be paid

On Jul 8, 2011, Dr Mukul Asher, my ex-lecturer of welfare economics in NUS back in 1980s, was asked to answer the questions as follows.

1. What would be the effect of implementing a zero percent Goods and Services tax for basic commodities?
2. Would it help to lower the cost of living for lower income families in Singapore?

Firstly, he uniquely used the term "basic commodities" while the article is entitled "... basic goods". I generally interpreted "basic commodities" as totally unprocessed or barely prossessed raw materials. Consequently, he said GST's orientation would change to tax on value added at manufacturing, wholesale and retail levels. Example - No GST is to be applied on $5 of carrot and $4 of flour imported. When the carrot and flour became a $25 carrot cake, GST is to be applied on $16 value added. He opined that this system would increase cost of administering the tax by authority and compliance costs by businesses. He didn't elaborate as to how it could be so. Alternatively we could consider the Australian's where its GST free supplies include health, education, childcare, religious services, certain foods etc.

Secondly, he concluded that GST revenue would drop due to exemption of basic commodities and prompting higher GST rate. Currently we apply GST on almost on goods and services with government sending cheques with GST rebates to selected individuals to offset regressive tax burdens (a system I am in favour with). So when we compare the two methods in totality, will there be a significant change in collection? Which is more efficient and effective?

Thirdly, Dr Asher applied the basic economic concepts of substitution effect on demand and price when he said households would switch demand from "GSTed" items to "non-GSTed" basic commodities leading to an increase in prices of the latter. This also assume supply of basic commodities would generally be unresponsive. Too simplistic an assumption?

As Dr Asher is a professor of public policy at Lee Kuan Yew School of Public Policy, I am sure he has done much more in depth studies and thinking on the issues but the article is too simplistic with conclusions only given cursory elaboration.

Reference - ASHER, Mukul, "Zero GST for basic goods? Bad idea.", The Straits Times, July 8, 2011.