Unless you have been living under a rock, you would notice that GST had gone up from 7% to 8% with effect from 1 Jan 2023. The impact of GST hike is significant because it affects almost every facet of our everyday life. Unsurprisingly, many merchants and retailers pushed out “Beat the GST Hike” promotion during the year-end period to drive up sales. Were these genuine promotions or mere marketing gimmicks? Now that it has been a month into the new year and Singaporeans generally getting accustomed to the increase in consumption tax, I like to highlight some of the poor/irrational financial decisions that I have observed.
What Are “Beat the GST Hike” Promotions?
“BEAT the GST” promotion refers to sales campaigns that are designed to encourage consumers to make their purchases before the increase in GST comes into effect. They are usually run by merchandisers selling big-ticket items such as furniture and electrical appliances.
Diagram 1 is an example of the “Beat the GST” promotion carried out by Takashimaya, a departmental store. These promotions are also common in transactions that usually require some form of pre-payment such as holiday packages, wedding banquet and renovation bills. For example, vendors may roll out promotions where payment is made in full or with faster milestones so that the buyer avoids paying the 1% additional GST. However, participating in these campaigns may not be financially sound these circumstances:
1. Creditworthiness of counter parties (vendors)
It is important to consider the creditworthiness of the counter parties that you are dealing with when you are making a prepayment. In this case, I am referring to the vendors such as interior design companies, travel agencies, bridal shops, beauty salon etc. Before making a larger than required pre-payment, ask yourself this question “Would the company still be operating and delivering the promised product/service many months later?” Afterall, company closures are most common in the aforementioned industries as cited by CASE in this article on Channel News Asia.
Consumers can protect themselves by checking against this “Consumer Alert List” on CASE. Another way is simply to avoid making large amount of prepayments as shown in Diagram 2!
Choosing accelerated milestone payments could well turn out to be a case of being penny wise pound foolish if you are unfortunate to get the short end of the stick.
2. Time Value of Money
In finance, we are always taught to consider the time value of money. With this consideration in mind, it may not be wise to make advance payments just to save 1% on GST output, especially if the good/service will be delivered more than 4 months later. That is because the opportunity cost of parting away with your money so early is much higher than the 1% that you are trying to save.
During the year end period of 2022, risk-free rate of Singapore government T-bills were hovering around 4%. SGS T-bills are fully backed by the Singapore Government. Hypothetically, if one simply purchases a T-bill, the return would be 1% with just a holding period of 3 months. Likewise, a holding period of 4 to 5 months on the Singapore Savings Bonds will yield a similar return. Other financial instruments such as fixed deposits from Singapore banks which the less financially savvy group are more enamored towards bear equally attractive returns. I am providing a wide gamut of money instruments here to illustrate that it is not difficult to make 1% on your savings with a holding period of 3 to 4 months at the current high interest rate environment. Therefore, do take time value of money into account to understand if you are truly better off by making an advance purchase.
3. Storage cost of bulky items
I know of some who purchase big bulky furniture during the “Beat The GST” sales campaign far in advance for their new homes that will only be ready very much later. For those who take immediate delivery, it will take up storage space in your existing home. It is even worse for those who end up having to transport the bulky furniture to alternative locations for storage. The storage and transportation costs incurred may offset the 1% saving on GST easily.
Even if the merchandisers offer to store it in their warehouses, do factor in the additional effort or stress (for some) to coordinate and revise delivery timings later. Furthermore, ff the big bulky items being stored are electrical appliances, they generally do not hold value even within a year as they depreciate fast in value from technological obsolescence.
Why Are “Beat The GST” Campaigns Popular?
While I highlight that participating in “Beat The GST” campaigns may not be the most financially sound decision to undertake, they are nevertheless very popular with the general public. While I am not a student of behavioural finance, I briefly read a couple of modules related to cognitive biases during my undergraduate days. This is my hypothesis which may not be entirely correct:
1. Herd Behaviour
Herd Behaviour can drive our decision making. If we see others participating in the sales campaign, we simply follow the herd even though it may not be the most rational. In modern parlance, we call this “The Fear of Missing Out” or FOMO for short.
2. Mental Accounting
We tend to sort our funds mentally into separate accounts such as monies from our bonuses or money to be set aside for holiday travel, emergency funds etc. This causes us to make financial decisions based on mental accounting, although money is actually fungible!
I foresee these events playing out again at the end of 2023. This is because GST will increase from 8% to 9% on 1 Jan 2024. Don’t get me wrong, some of these “Beat the GST” campaigns can really benefit consumers operating under the right set of circumstances. Just don’t blindly follow the herd and make sure to take into consideration the factors I have mentioned earlier to make a sound financial decision.
This article was published on 29 Jan 2023
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