By: Ying Hu
Master of Taxation, Fellow Chartered Accountant Singapore, FCCA and Accredited Tax Advisor, ASEAN CPA

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Abstract

This paper examines the effects of inflation and Goods and Services Tax (GST) adjustments on business profitability in Singapore over the past decade. Utilizing a hypothetical business scenario, we analyze how stagnant pricing amidst rising costs erodes profit margins. We also explore the rationale behind GST rate increases as a means to maintain the real value of tax revenue in the face of inflation. The study introduces a GST-based Consumer Price Index (CPI) to compare with the official CPI, providing insights into alternative perspectives on inflation measurement. Our findings underscore the necessity for businesses to adjust pricing strategies to sustain profitability in an inflationary environment.

这篇文章由我撰写，旨在分析通货膨胀和商品服务税（GST）调整对新加坡企业盈利的影响。我通过一个假设的商业案例展示了若价格不变，企业在成本上升的情况下会遭遇利润率下降甚至亏损的情况。我还解释了GST上调的逻辑，即政府通过此举来维持税收的实际购买力以应对通胀。

文章中提出了一个基于GST的CPI作为替代通胀衡量指标，与官方CPI相比，它显示出更高的累计通胀率，反映了不同的生活成本压力。最终，我强调，企业需定期调整价格，深入理解经济指标，以在通胀环境中维持盈利和稳定性。

Disclaimer

This analysis is theoretical and intended for illustrative purposes and discussion purposes. The content is NOT for research purposes. The assumptions made do not reflect official government policies or predictions. Businesses should conduct individual assessments or consult professionals when making financial decisions. No rigorous research or auditing of the statistics were done.

Introduction

Inflation is an omnipresent economic force that subtly erodes purchasing power over time. For businesses, understanding and adapting to inflation is crucial for maintaining profitability and ensuring long-term sustainability. In Singapore, the past decade has witnessed modest but impactful inflation rates, coupled with adjustments to the GST. These changes have significant implications for both businesses and the government’s revenue.

This paper aims to provide a comprehensive analysis of how inflation and GST adjustments affect business profitability. Through a hypothetical business case, we illustrate the financial challenges posed by stagnant pricing in the face of rising operational costs. Additionally, we delve into the government’s rationale for GST rate increases as a mechanism to preserve the real value of tax revenue.

Background

Inflation and the Consumer Price Index (CPI) in Singapore

The Consumer Price Index (CPI) measures the average change over time in the prices of a basket of goods and services commonly purchased by households. From 2014 to 2023, Singapore experienced a cumulative inflation rate of approximately 7.3%, as reflected by the CPI increase from 100.0 to 107.3.

Wage Inflation

Wage inflation during the same period saw average salaries rise by about 15.4%. This increase is significant for businesses as staff salaries constitute a substantial portion of operating expenses.

*Hypothetical Business Loss shows the loss incurred in maintaining the 2014 revenue level, based on CPI changes. By 2023, a company would incur an estimated loss of S$6.80 for every S$100 of revenue if it maintained break-even revenue from 2014.

GST Adjustments

The GST rate in Singapore increased from 7% to 8% in January 2023, with a further rise to 9% planned for 2024. These adjustments are intended to maintain the purchasing power of tax revenue, which diminishes over time due to inflation.

Hypothetical Business Scenario

Business Profile in 2014

  • Revenue: $1,000,000
  • Cost of Goods Sold (COGS): $600,000
  • Gross Profit: $400,000 (40% Gross Profit Margin)
  • Operating Expenses: Staff Salaries: $180,000 (5 employees at $3,000/month) Other Operating Expenses: $220,000
  • Net Profit: $0 (Break-even)

Financial Outlook in 2023 Without Price Adjustments

Adjusted Costs Due to Inflation

  • COGS: Increased by 7.3% CPI inflation Adjusted COGS: $600,000 × 1.073 = $643,800
  • Gross Profit: $1,000,000 − $643,800 = $356,200 (35.6% Gross Profit Margin)
  • Staff Salaries: Increased by 15.4% wage inflation Adjusted Salaries: $180,000 × 1.154 = $207,720
  • Other Operating Expenses: Increased by 7.3% CPI inflation Adjusted Expenses: $220,000 × 1.073 = $236,060
  • Total Operating Expenses: $207,720 + $236,060 = $443,780
  • Net Profit (Loss): $356,200 − $443,780 = ($87,580)

Analysis

By 2023, the business incurs a net loss of $87,580 due to increased costs without a corresponding increase in revenue. The gross profit margin declines from 40% to 35.6%, and operating expenses rise significantly.

The Role of GST Adjustments

Maintaining Real Value of Tax Revenue

Inflation diminishes the purchasing power of money over time. The GST rate increases help the government maintain the real value of tax revenue to fund public services effectively.

GST Collection Over Time

Calculations adjusted for cumulative CPI inflation.

Required GST Rate to Maintain Real Revenue

To keep the real value of GST revenue at $70,000 in 2014 dollars, the GST rate would need to increase gradually:

Developing a GST-Based CPI

Methodology

We propose a GST-based CPI by using GST rate adjustments as a proxy for measuring inflation’s impact on government revenue.

GST-Based CPI Index

Starting from an index of 100 in 2014, the GST-based CPI increases reflect the necessary GST rate adjustments:

Observations

The GST-based CPI suggests a higher cumulative inflation rate compared to the official CPI, indicating alternative inflationary pressures or differing cost-of-living impacts.

Implications for Businesses

Re-evaluating Pricing Strategies

  • Necessity of Price Adjustments: To maintain profitability, businesses need to adjust prices in line with inflation.
  • Avoiding Margin Erosion: Regular price reviews can prevent the decline of gross profit margins.

Understanding Government Policy

  • GST Rate Increases: Recognizing that GST adjustments aim to preserve the real value of public funds can help businesses anticipate and plan for tax-related cost changes.

Conclusion

Inflation and GST adjustments have significant effects on business profitability. The hypothetical scenario illustrates how stagnant pricing amidst rising costs leads to losses. By comprehending the rationale behind GST rate increases and considering alternative measures of inflation, businesses can make informed decisions.

Proactive pricing strategies and a deep understanding of economic indicators are essential for businesses to navigate an inflationary landscape successfully.

References

Note: All financial figures are hypothetical and for illustrative purposes only.

Author: Ying Hu assisted by Chatgpt4o