HEAD M - MINISTRY OF FINANCE

Head M - Ministry of Finance

The Chairman: Head M - Ministry of Finance. Mr Inderjit Singh.

Taxation

Mr Inderjit Singh: Sir, I beg to move,

That the total sum to be allocated for Head M of the Estimates be reduced by $100.

Sir, I have a number of tax suggestions to make. First of all, paying tax on the current year's income. Some years ago, there was a discussion in Parliament about the current year's assessment or Pay-As-You-Earn system for income tax.

The gist of this is that it sees people pay tax for the income that they are earning during the current year. This can be deducted at source for those who are employed and the expected benefits of such a system are: first, it would enable the Government to use tax policy as a stabiliser for the economy and as a counter-cyclical tool to mitigate slowdowns and dampen overheating of the economy. Under the current model, the tax is levied on the income earned in the previous year of assessment, and the impact of any tax initiative will have some lag before it is felt effectively on the economy as people's present consumption and investment decisions take into account the amount that they have to pay for the previous year's assessment. It would also lessen the burden on people who lose employment but still have to pay tax on the previous year's income.

Sir, now, I will move to a few suggestions of promoting entrepreneurship and overseas expansion of enterprises. First, to provide tax incentives for individuals and companies to invest in private equity and start-ups. These could also be refined to encourage investment in the areas that Singapore sees itself developing a strategic strength in. The mechanics of the proposal could include income tax deductibility in whole or in part of investments made into private equity funds or in start-up companies. And the losses incurred, as a result of the investment not being successful, could also be allowed to be carried forward, in terms of income tax computation.

Sir, the expected benefits include encouraging angel investors which we are greatly lacking here in Singapore.

Sir, the second suggestion is on deferral of taxation or payment of assessed tax for companies that are investing in overseas expansion. The proposal could include removing funds marked for overseas expansion from assessable income to allow companies to accumulate the capital base to make strategic investments overseas. Alternatively, such companies could also have their taxation deferred to facilitate their move overseas.

Third, tax incentives for investment funds to be housed here. Presently, we have incentives which are geared to encourage investment activities out of Singapore. Funds themselves, however, are likely to continue to be parked overseas in the tax havens. This proposal would target having these funds move here from these tax haven countries. This could also be coupled with other incentives to encourage investment in private equity in startups that I talked about earlier. Expected benefits are that it would bring greater liquidity to the local investment scene and it will also encourage companies overseas to raise funds in Singapore.

Sir, fourth, is on the slight change that we have on the deductibility on borrowing cost. As I understand, the cost of borrowing is not eligible for tax deduction during the start-up or construction period of an asset, even if during this development phase,

the assets are being built to generate funds for future revenues, the cost of borrowing is not deductible and I do not understand why.

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Sir, the amount can be quite significant and the burden on the companies could be quite huge, especially for very capital-intensive companies. For example, I remember when I started UTAC in 1998, it took us almost a year to get the facilities ready for production, and we spent a lot of money and also borrowed some. It was quite a huge burden on us when we tried to operate a company with that kind of taxation and we could not deduct the borrowing costs from the amount that we have to pay for tax.

Finally, on GST. It is a welcome move that the Government will be helping smaller companies offset the cost of becoming GST-registered. Some Members have brought this up. The issue really is the cost of operating a GST-registered company. This cost will be much more than the cost of starting up as a GST company. The companies will have to employ additional resources to manage their GST-registered status.

Further, we have heard many times that, sometimes, it takes a long time for IRAS to credit companies making GST claims, especially when there are a certain number of queries that may have arisen. It could take a couple of months before the companies get their returns back from IRAS. This, therefore, will result in a huge cashflow burden for smaller companies. Could the Minister look into simplifying the procedures so that we can encourage many more companies to become GST-registered and, therefore, benefit from what the Government is trying to achieve by sponsoring their start-up to become GST-registered companies?

Ms Jessica Tan Soon Neo: Sir, with the GST increased to 7%, to be implemented from 1st July 2007, more SMEs will be considering registering their companies, as the GST increase will increase the cost of business and they may no longer be able to continue absorbing GST. It is good that there is a GST assistance package capped at $5,000 per SME to help defray cost for the SMEs voluntarily registering for GST for the first time.

However, operationally, the impact of GST to SMEs will be more than the set-up cost. The current GST filing requirements and payment terms are not aligned to support SMEs. Most SMEs operate with 90 days and, in some cases, six months' payment terms with their clients. The current GST filing is on issue of invoice for these SMEs.

Hence, Mr Chairman, I ask the Minister that there be consideration given to the refinement of the filing and payment schedules for GST to allow SMEs to make payment when paid. This will help minimise the cashflow impact for SMEs and prove a good win-win situation. This will help achieve the objective, as Minister Tharman Shanmugaratnam said earlier, to make Singapore the best place to start, grow and globalise businesses for our SMEs.

The Parliamentary Secretary to the Minister for Community Development, Youth and Sports (Mr Teo Ser Luck): Mr Chairman, Sir, my question on corporate taxation and Singapore's competitiveness was addressed by the Second Minister for Finance in his speech yesterday. I have nothing further to add.

The Chairman: Dr Ahmad Magad, you have two cuts. Take them one after the other. Total 5.5 minutes.

Tax Exemption for Not-for-Profit Organisations

Dr Ahmad Mohd Magad: Mr Chairman, Sir, the Government's announcement of incentives to attract philanthropic and not-for-profit organisations (NPOs) to Singapore is laudable. The move will not only create the opportunity for Singapore to be positioned as a philanthropic hub in the region, but would also enhance greater philanthropic awareness among Singaporeans in our endeavour to be a more caring and giving society.

The announcement, however, did not clarify as to whether such organisations would incur GST on their operating costs when they locate their operations here. The addition of a 7% GST to the operations of an NPO, when it comes into effect in July this year, would certainly make it less attractive in their overall relocation considerations. I would like to ask the Minister for Finance to clarify whether the cost of operations of NPOs will be GST-exempt.

Retirement Planning

Sir, with the concerns expressed by several Members of this House during the Budget Statement debate that the middle class has been squeezed over the last few years and considering that many of them are also middle-aged, I believe there should also be a corresponding sense of urgency to assist the middle income segment to increase their savings for retirement. This will help to alleviate the middle income squeeze issue from becoming a perpetual problem for the Government. The Government has also clearly stated in 2003 that the CPF would be more of a "safety net" for the middle and upper-wage earners, and that these people would have to take on more of their own planning for retirement.

As companies look to ways to drive more loyalty from Singaporean workers and to attract more foreign talent for critical assignments, a private company-run plan can be a strong draw, while also functioning as a retention component for employees. At the same time, it has the potential to significantly enhance long-term retirement savings for the middle class.

One time-tested model that we could consider to base on is the US 401K plan which has contribution limits that do not make them a major part of the high-income segment's retirement savings. However, middle-class participants in the US who start early and regularly contribute to these plans are pleasantly surprised to discover that, over the years, their savings grow to hundreds of thousands of dollars. It is my understanding that the 401K plan in the US is the largest single asset in many people's retirement portfolios.

I would like to repeat my proposal made last year that consideration be made to amend section 5 of the Income Tax Act, so as to allow companies to create tax deferred savings plans into which both the company and its employees can make contributions. This would not affect CPF in any way. People and companies would continue to contribute to CPF accounts, just as they do today. However, the level of contributions to the private pension scheme could be linked to CPF contribution limits in some way, and that the maximum contribution level could be capped at an amount that would not make the programme a windfall for the wealthy. The 401K plans, for example, are set up such that the company matches some of the employees' contributions into their savings. For these matches, employees typically earn anywhere from 30%-60% on their investments right away. Subsequently, this money grows with tax being deferred until it is withdrawn many years later.

The scheme I would like to suggest could take the following or some modified form:

(1) Limits for defined contribution plans could be capped at, say, 20% of salary, less employer contribution to CPF, instead of being capped at the level of benefits payout;

(2) Employers should have the discretion to determine eligibility to the retirement benefit plan;

(3) Employers should have flexibility in determining contribution level or benefit level;

(4) Pooling of the retirement funds under one master trust could also be considered so as to attract low unit costs from fund managers;

(5) Portability of the retirement savings should preferably be permitted;

(6) The benefit withdrawn at retirement should be tax-exempt, provided they are used to purchase an annuity; and

(7) Double tax deduction to employees and employers for contributions made towards retirement savings should be considered to encourage contribution to the fund.

Sir, I believe these recommendations can provide relative tax efficiency, impose the discipline that the Supplementary Retirement Scheme (SRS) lacks, and could be used to assist the Government's aim of devolving retirement responsibilities to the private sector. They also provide tax efficient benefits to foreign nationals who are always on the lookout for safe and tax-incentivised environments to park their funds.

Miss Penny Low: Sir, given 30 seconds, this cut is meant to be read with my many previous speeches on the same subject.

The fundamental question is whether the Government senses any urgency to address the retirement funding of an ageing population. If CPF is meant for subsistence living, then we need more than one scheme. Could the Government review and improve:

(1) The Supplementary Retirement Scheme?

(2) The section 5 plan?

(3) Taking care of the retirement needs of the middle-income and the homemakers via the above schemes? Would this not be a prudent way to include them in the Budget?

Role of Temasek Holdings

Ms Eunice Elizabeth Olsen (Nominated Member): Sir, it has been about one year since the Temasek Holdings-Shin Corp deal was struck and, since then, the unfolding events have soured the deal somewhat. Perhaps, after one year, it is a good time to take stock of the lessons learnt and to consider Temasek's role in the management of our reserves and how it is carried out.

The public refrain from the Government, whenever this topic comes up, is that Temasek is a commercial entity, which enters into transactions on a commercial basis, and that the Government neither approves individual investments by Temasek nor second guesses its risk assessment.

The question is whether the perception of those whom Temasek would like to do business with, especially in the region, matches the situation as described by the Government. Perception is important in business decisions, especially in this region. It is important to Singapore that Temasek is not blocked from investments that have potential to bring us good returns. The Financial Times has reported that Temasek has encountered barriers in increasing banking investments in India and South Korea while its investments in three Chinese banks appear to have raised concerns among the authorities. The concern, it seems, is that Temasek is an arm of the Government. At the very least, it is possible to accept the Government's refrain on Temasek and yet wonder, not illogically, if Temasek, on its own accord, takes some cues from the Government's thinking on our national interests and strategies.

For example, Temasek's 60% owned wafer business, Chartered Semiconductors, has had losses of more than $1 billion since 2001. Its fortunes have turned recently, but should an investor like Temasek and its shareholder, the Ministry of Finance, be all right with such losses? A point to consider is the importance of cheap manufacturing to Singapore. These are the considerations that colour people's perceptions of Temasek and its role.

So what can we do to help Temasek and its investment to give us good returns? Some economists have suggested it before. Would Singapore be better served with companies in the hands of an array of private-sector shareholders rather than Temasek? Given how important the external economy is to a small and open country like Singapore, would it be better if Temasek were freed up to focus fully on external investments and growing Singapore's external economy?

I know that Temasek is moving towards a portfolio mix of one-third domestic, one-third regional and one-third OECD. Perhaps, it should plan to eventually reduce its share of domestic investments even further.

How could it help? For example, Temasek has identified banks as core to its investment strategies and has been fairly aggressive recently in pursuing this strategy. Last year, it acquired about $4 billion of Standard Chartered Bank, and there is speculation that Temasek could merge StanChart with DBS Bank. If it becomes harder for Temasek to add further bank holdings in the region, because governments are wary of its intentions, would it not help to alleviate the nationalistic factor by unpacking national companies like DBS from Temasek's baggage?

While some might think that one approach is to invest less in the region to avoid being dragged into the pitfalls of domestic politics in the region, I think it is better to deepen our links with our neighbours. It is better for our interests to be tied strongly with the interests of our neighbours, and for our neighbours to believe that we are genuine. It is simply a question of how do we manage this best.

The second point I would like to ask the Ministry of Finance is whether it believes Temasek can do better in its accountability to Singaporeans. Sir, since the Shin Corp deal, Temasek has been even more tight-lipped than usual. A lapse last year revealed Temasek's template on how to "spin" replies to media queries on a wide range of issues, not just on Shin Corp.

I think it is not unreasonable for a company which manages our reserves and our hard-earned taxes to be more forthcoming in explaining its decisions and sharing its assessments. I note worryingly that our 2007 estimates for capital receipts are 54% less or $3.8 billion less than last year's revised estimates. How much of Shin Corp has a bearing on this?

Vehicle Taxes

Mr Ong Kian Min (Tampines): Sir, from 28th February 2003, the rates of excise duty for various grades of petrol are fixed as follows:

(1) Premium petrol at 44 cents per litre;

(2) Intermediate petrol at 41 cents per litre; and

(3) Regular petrol at 37 cents per litre.

This petrol duty is imposed on the petrol price before GST. What this means is that, for every litre of petrol we pump, we have to pay the petrol duty and then the GST on top of that. I went to the petrol station recently. For 51.1 litres of petrol, the total, including GST, was $63.57, of which $22.48 was the petrol duty. I calculated. The total GST amount was $3.03, out of which, the GST on the petrol duty was $1.12.

Sir, 5% on 24 cents of duty works out to 2.2 cents. With 7% GST, this goes up to about 3 cents. It may seem to be a very small amount, but this is for every litre we consume, and it all adds up. More importantly, I would like to ask the Minister for Finance whether, in principle, it is right and fair to charge GST on top of excise duty. Is this not a tax on another tax? Should the GST not be imposed only on the non-duty portion of the petrol price?

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Sir, on road tax.

The amount of road tax payable in respect of private cars is calculated based on the engine capacity of the car - the higher the engine capacity, the higher the road tax payable. So if the car engine's capacity is 1,600 cc, your annual road tax is $950. If it is 3,000 cc, your road tax goes up to $3,050. But this road tax formula is based on the assumption that expensive cars have larger engine capacities and that there is a correlation between the size of the engine and the price of the car. In this day and age, I would like to ask whether this assumption is still valid.

Accounting Standards and Corporate Governance

Mr Inderjit Singh: Sir, I understand that many non-corporate entities like societies and charities have had to follow a financial reporting standard for companies. The Minister for Community Development, Youth and Sports mentioned in Parliament earlier this year that the Government is considering setting up an Accounting Standard Board to issue accounting standards for charities. Could MOF outline what the Government is doing to change the accounting standard regime for these non-corporate entities or what they will have to comply with under the proposed new system?

In fact, for corporate entities, both listed and unlisted, we do not really have an authority to regulate accounting standards. Such a system is a practice in many countries and it helps maintain certain standards of governance and disclosure for companies. How can this strengthen the corporate governance and disclosure regime in Singapore for the various entities?

Sir, at the same time, while we desire for better standards, we should also avoid going overboard, like in the USA, where rules like the Sarbanes-Oxley Act have made it onerous for listed entities in the US to the point that it is deterring many companies from either listing in the US or pushing them to plan and exit from the US markets.

Perhaps the Minister can share with the House what we could do to implement an effective corporate governance standard and monitor and even enforce compliance, including for private companies, while not deterring investments here. What needs to be done is to strike the right balance between corporate governance and flexibility to make Singapore an attractive and yet transparent place for business.

Budget Policy

Sir, over the years, the budgeting process seems to have shifted from project funding where MOF approves specific projects for each Ministry and the Ministries have to justify the economic value of the projects they plan to undertake. The system, however, has evolved into a block budgeting system where Ministries are given block budgets and then they have greater flexibility in spending the budget that Parliament approves.

While this does look like an efficient system and delegates more responsibility to the respective Ministries, the risk is that the Ministries might spend funds that they receive from the Government on projects which might not necessarily align with the Government's objective or national interest, nor would it be the type of projects that they were originally intended for. How can MOF ensure that the budget allocated is spent consistently with this approach? And how does the Auditor-General then audit whether the Ministries are indeed spending the money as intended?

With the block budgeting approach, it will surely make it difficult for the Auditor-General to audit this aspect. Could the Minister share with us how Ministry of Finance is controlling the other Ministries through this approach?

Key Performance Indicators for Ministries

Mr Siew Kum Hong: Mr Chairman, I noted that the expenditure estimates contain various key performance indicators (KPIs) for each Ministry. This, being the first time that I actually read the expenditure estimates, was completely new to me. These KPIs appear to be derived from the Mission Statement of each Ministry, in an attempt to quantify the essentially qualitative nature of Government.

Sir, in the private sector, KPIs are used for performance evaluation purposes. This is self-evident from the term itself. A target is set for the individual or organisation and then that individual or organisation's achievement against the target is assessed. Properly done, this is a fair and transparent method of performance evaluation.

It does seem that the KPIs for the Ministries are intended to serve such a purpose. If so, I think it will be helpful if the Minister could explain the consequences of a Ministry's failure to achieve its KPIs.

Of course, we must remember that Singapore, as a small country, is subject to external pressures. So, sometimes, a failure to achieve a KPI may not be attributable to poor performance. That will be so, especially for KPIs related to the economy, such as KPIs tied to economic growth. But, surely, external circumstances cannot possibly explain all failures to achieve KPIs.

I would also like to ask the Minister to clarify how these KPIs are set. I ask this because some KPIs set for financial year 2007 are actually lower than the achievements from preceding years which does seem odd to me. I would give three examples to the House.

Firstly, MCYS has a KPI based on the recidivism rate of Mandatory Counselling Programme clients. In FY 2004 and 2005, the rates were 2.7% and 1% respectively. In FY 2006, it rose to 5%. For FY 2007, the target remains at 5%. That seems strange when we have previously achieved much lower targets.

Secondly, the Ministry of Home Affairs has a KPI for the number of fatal and serious injury road accidents per 10,000 motor vehicles. For FY 2004, 2005 and 2006, the actual percentage ranged from 3.4% to 3.9%. Yet, the FY 2007 target is 6.5%.

Finally, the Ministry of Manpower has a KPI based on the total upgrading supported by headcount. In FY 2006, this was 73,000, but the FY 2007 target is 64,000.

Of course, if the KPIs are not used for performance evaluation purposes, then I hope that the Minister would clarify the purpose of these KPIs.

The Minister of State for Finance (Mrs Lim Hwee Hua): Mr Chairman, Sir, first, let me thank Members for their comments and suggestions. The issues that they have raised fall under the following three categories:

(i) Making the tax system more effective;

(ii) Enhancing financial stewardship of our investments; and

(iii) Strengthening the framework for governance and accountability.

Our tax system seeks to promote enterprise and entrepreneurship while raising sufficient revenues to meet our expenditure needs. The key tax changes this year will help Singapore attract more investments and create more good jobs over time, and opportunities for our people.

Sir, our income tax system is characterised by low headline rates coupled with targeted incentives and reliefs to promote enterprise and effort.

In this year's Budget, we have enhanced a number of our tax incentives to boost our capital markets. These changes will further strengthen Singapore as a financial centre. Mr Inderjit Singh has suggested that, beyond these measures, the Government should encourage investments in private equity by allowing upfront income tax relief on such investments.

Our tax regime is already highly favourable for all investments by individuals, including in private equity. We do not tax capital gains. For approved start-ups, we have the Enterprise Investment Incentive (EII) which shares the risk faced by investors by granting them tax relief for investment losses made on disposal. Sharing the downside risks on these investments and allowing investors to keep their upside gains by not having a capital gain tax is better than an upfront deduction of investment which could distort investment choices.

Mr Singh also has proposed to grant either tax deduction for funds for investment or tax deferral for companies that invest in overseas expansion. Sir, as we do not tax capital gains in the first place, we cannot allow deductions for capital funds marked for overseas expansion.

We agree, however, there is a stronger case for deferring tax for overseas operations that have yet to turn profitable, as this will ease the cashflow of companies. This is why we introduced the Overseas Investment Incentive (OII) scheme in 1987, and further enhanced it in 2004, to allow an approved company to defer for two years its income taxes from its profitable operations in Singapore, if its approved overseas investments incur operating losses in the first three years of investment. However, this scheme had no takers after the 2004 enhancement. The feedback we got from companies was that they did not see the tax deferment as an "incentive" since they still had to pay the taxes later. The scheme has since lapsed. However, if there is strong interest by companies in the scheme, we will be happy to re-introduce it with modifications, if need be.

Mr Inderjit Singh has also asked about incentives to encourage investment activities from Singapore.

Sir, we have several tax incentives to promote the fund management and venture capital industries in Singapore, including the foreign investor tax exemption incentive schemes and the venture capital fund incentive. Together with the economic agencies, MOF monitors and regularly reviews the effectiveness of these incentive schemes. My Ministry welcomes suggestions on new incentives or modification of existing ones.

Mr Singh has also asked about allowing a tax deduction on borrowing cost during the start-up or construction period of an asset.

Sir, our current practice is to allow deductions only for expenses associated with assets that generate an income. In the case of assets that are still in the process of being constructed, all expenses, including interest and other borrowing costs, are classified as capital in nature because they are not incurred in the production of income. And since we do not tax capital gains, these expenses are not tax-deductible. Having said that, I should add that we will continue to review our position, taking into account business practices.

Sir, our tax system also promotes savings, especially savings for retirement. With an ageing population, enhancing the retirement adequacy of Singaporeans is a major priority for Government.

Dr Ahmad Magad and Miss Penny Low have asked what the Government is doing to help the middle income group save for their retirement. In particular, they have asked if it is time to review and revamp the SRS and Section 5 Pension Funds, so as to enhance the retirement savings of the middle-income segment.

The tax treatment of contributions to the SRS and Section 5 Pension Funds has to be considered within the larger framework of retirement savings in Singapore.

The CPF, as all Members would know, is the central component of this larger framework. The CPF helps Singaporeans save for basic retirement, homeownership and healthcare. CPF savings are given comprehensive preferential tax treatment - contributions, investment returns and withdrawals are all tax-exempt. This is more generous than most pension systems in the world.

The SRS is a voluntary savings scheme on top of tax-advantaged, mandatory CPF savings. Contributions to SRS are eligible for tax relief, and investment returns are not taxed at the time of accrual. The SRS is more generous than the US' 401(k) plans which require the employee to pay income tax on the full 100% of the monies withdrawn during retirement. In the case of the SRS, only 50% of the withdrawals are taxable at retirement and, with proper streaming of the withdrawals after retirement, many people will pay little or no income tax.

The SRS allows individuals to accumulate significant levels of retirement savings with tax benefits. A Singaporean or PR who contributes at the current full contribution rate of $11,475 per year, say, from age 30 to his retirement at 62, will accumulate over $620,000 of SRS savings, assuming a conservative 3% rate of return on his investments. This will be over and above his CPF savings.

Sir, the SRS appeals to a narrow range of tax-paying employees. It does not appear to be running out of steam; in fact, it has grown steadily by an average of 25% per year, from 11,890 since its introduction in 2001 to 35,724 in 2006. Nonetheless, my Ministry will continue to explore other ways of enhancing and promoting the SRS to increase participation in the scheme.

I thank Members for their proposals to enhance the pension funds approved under section 5 of the Income Tax Act, or Section 5 funds for short. We will examine the proposals carefully.

But let me just add that, again, we must view the Section 5 funds not in isolation but within the larger context of the CPF and the SRS. In fact, with the SRS, there is less justification to provide tax advantages for the section 5 funds as well. Tax advantages are already given to the SRS which is an employee-based scheme. It provides portability - SRS savings will remain in the SRS accounts even with a change of employers. Furthermore, the SRS does not preclude employers from making private arrangements with their employees for them to make contributions to their SRS accounts. The Section 5 funds, however, remain useful as employer-based schemes, for employers to supplement the retirement savings of the employees as well as the talent retention tool.

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Sir, let me now move on to vehicle taxes.

Mr Ong Kian Min has asked for the rationale of pegging road tax to engine capacity. Road tax is a part of the vehicle ownership tax structure. We have based the road tax formula on engine capacity because we want to have a progressive tax structure. It is not unreasonable that car-owners who wish to drive higher-end performance and luxury cars, which typically have higher engine capacities, pay more road taxes. Using engine capacity is a relatively straightforward and transparent way to ensure progressivity in the road tax structure, as it is part of a vehicle's technical specification and it is also a measure which car owners are familiar with.

But I agree that engine capacity is not a perfect proxy for the value of a car. But there are other vehicle ownership taxes, namely, the Additional Registration Fee (ARF) and excise duty of a vehicle, which are pegged to the Open Market Value (OMV) of a vehicle, and these take into account the differences in the market value of vehicles.

The Government will continue to review the basis of road tax periodically to ensure that it remains relevant.

Mr Ong has asked whether there is double taxation by imposing GST on the total cost of petrol, since there is already a duty paid on petrol. He has proposed that GST should only be imposed on the non-duty portion of the petrol price.

Sir, GST is a tax on the final value of a good or service consumed in Singapore. This includes any duties imposed in the course of supplying these goods and services. The duty levied on petrol is a part of the final price payable for the consumption of petrol. In the same way, GST is payable on duties levied on tobacco and liquor. This is also the practice in other countries with GST or value added tax systems.

Some have also asked if we should review our diesel taxes. Significant advances have been made in diesel engine technology in recent years that have made diesel cleaner. Indeed, this is why the Ministry for the Environment and Water Resources introduced the Euro IV emission standards for all types of new diesel vehicles from 1st October 2006. Euro IV diesel vehicles are less pollutive than Euro II diesel vehicles, emitting 70% less particulate matter (PM).

But Euro IV diesel vehicles are still not as clean as petrol vehicles. In fact, compared to petrol vehicles, they still emit about five times more particulate matter of less than 2.5 microns in size (PM2.5) and oxides of nitrogen. This is of particular concern to us as studies have shown that PM2.5 is linked to respiratory diseases such as bronchitis and asthma. Hence, we will continue to discourage diesel passenger cars on our roads through the imposition of a diesel tax.

We will continue to track the development of diesel technologies as they develop, and review our policies.

Sir, let me now move on to compliance costs. A key element of a competitive and pro-enterprise tax system is to keep the cost of compliance to businesses and organisations low.

This is why we have kept the GST as a broad based tax that applies to almost all goods and services consumed locally. Our GST rules are simple and exemptions sparse. This also allows GST rates to be kept low for everyone.

Dr Ahmad Magad has asked whether Non-Profit Organisations (NPOs) will incur GST on their operations. Yes, they will. NPOs are treated like any business as far as GST is concerned. NPOs that make taxable supplies can register for GST and claim input tax on purchases. And as with any other business, NPOs that do not make GST-taxable supplies cannot register for GST and claim input tax. For registered NPOs that receive subsidies, some of their expenses would be defrayed by the subsidies. Hence, the input tax on these expenses will not be claimable because no GST was charged on the subsidies.

Ms Jessica Tan has expressed concern over SMEs managing their cashflow with respect to the current GST filing and payment schemes. Mr Inderjit Singh has also asked about the cost of operating as a GST-registered company, as well as ways to simplify the refund process so as to reduce the cash flow burden for companies.

As I have explained to the Members in this House before, let me reiterate that most GST-registered persons, some 94%, do not have difficulties in making their output GST payments to IRAS. Our GST filing and payment schedules impose a minimal cash flow burden on companies.

To facilitate their own cashflow management, businesses can choose a monthly, quarterly or half-yearly accounting period. They have one month from the end of the chosen accounting period to pay the net output tax to IRAS. Businesses that pay via GIRO have an additional 15 days to do so.

For businesses that buy on credit, they can claim the input tax at the time of invoicing and need not wait till they have actually made payments on their purchases. These businesses are thus able to claim their input tax against the output tax charged to customers resulting in a cash flow advantage.

SMEs that face cash flow issues and have less than $1 million in annual turnover can also apply to be placed on the cash accounting scheme or, alternatively, the half-yearly accounting period. This helps alleviate the cash flow impact of extending long credit terms to their customers.

Under the cash accounting scheme, businesses need only to account to IRAS for output tax on their supply when they receive payments from customers. For these businesses, they are however only entitled to claim input tax on their purchases when they have made payment to their suppliers.

The one-off start-up cost of GST registration is about $3,000, which, as Mr Inderjit Singh has pointed out, is subsidised. According to IRAS' survey, the running cost per year of administering the GST system is about $1,800 for a typical SME. Only companies with revenues of more than $1 million are required to register for GST, and I think for such companies, this cost is manageable.

As for GST refunds, currently, IRAS' service standard is to process GST refunds within 30 days from the receipt of the return. In practice, over 90% of the refunds are processed within eight days. IRAS will continue to shave down the processing time to make GST refunds. Going forward, IRAS will target to process and send 85% of the e-filed refunds onward to the banks by the next working day, and 90% within two working days.

Sir, moving on to the current year basis of assessment, Mr Inderjit Singh has suggested that we consider switching from a present year basis to a current year basis for assessing income tax.

We have indeed considered this. In 2005, the Ministry of Finance studied whether to switch to a current year basis of assessment, ie, having the employer deduct the tax payments from the employees' salaries and remitting it to the tax authorities directly. We too felt that there could be some advantages to bring about a better matching of the taxpayers' incomes and their expenditures and to enhance the effectiveness of the tax system as a fiscal stabiliser.

However, the feedback from the public consultation exercise that was conducted then was not in favour of switching to a current year basis of assessment. Firstly, taxpayers had concerns over the practical difficulties in estimating their own current year's income, so as to pay their taxes upfront. There was also concern over the high compliance costs to be incurred by businesses and individuals as a result of the periodic filing and the withholding of tax required under the current year basis. The concerns are still valid. We are nonetheless prepared to reconsider this proposal should the reasons for adopting current year basis become more compelling in future.

Sir, I will now move on to issues related to financial stewardship of Government's assets.

Miss Olsen has asked about the role of Temasek Holdings with regard to its investments and the monitoring of performance. Temasek is Government's investment holding company. It is a long-term investor, with stakes in a broad range of companies principally in Singapore and in the region. Let me just recap to the House that its mission is to create and maximise long-term shareholder value as an active investor and shareholder of a portfolio of assets and investments.

She asked if the role is still relevant today. Temasek's role is still very much relevant today, in terms of delivering good long-term risk-adjusted investment returns. Temasek’s investment decisions will continue to be based on commercial considerations and guided by its four investment themes of getting exposure to:

i) rising Asian economies;

ii) growing middle class;

iii) deepening comparative advantages; and

iv) emerging champions.

The issues raised by Ms Olsen have been extensively discussed in this House, specifically on the Shin Corp investment, back in November last year. If I may just recap some of the specific issues.

She asked if Temasek would be selling all its shares in Shin Corp at a huge loss and what the impact would be. The Government will leave it to Temasek to make all its investment decisions based on commercial considerations.

She alluded to how Temasek is going to recover some of these huge losses and what the penalties would be. Temasek manages a diversified portfolio and takes concentrated risks. Its overall investment portfolio has continued to do well, achieving commendable returns with total shareholder return of 17% by shareholder funds and 18% by shareholder value since inception. Temasek is expected to do well for Financial Year 2006 and to pay dividends to the Government as a shareholder.

2.45 pm

How will Temasek be held accountable for the losses, if realised? The Government looks at Temasek's overall performance. In this respect, as I have said, Temasek is expected to do well for this year and will continue to pay dividends to Government as a shareholder. Like all professional investment companies, Temasek continues to learn from its experiences with all investment deals, whether positive or negative. And this is how Temasek can develop and transform itself into a leading investment house.

Sir, let me just reiterate once again that Temasek is accountable to Government as shareholder for delivering a good rate of return on its overall investment portfolio and not on each and every single investment in isolation. The Government does not influence, nor interfere with, nor micro-manage, nor second-guess any of Temasek's individual investments. And the Government's role is really to ensure that a competent board of directors is in place to guide Temasek's investments, and that the investment process is robust and rigorous.

Sir, let me now move on to the issues of governance and accountability, corporate governance for commercial and non-commercial entities and the framework for driving public sector performance. Singapore's reputation on trust and governance as well as effective and efficient public service is well recognised and a key competitive advantage for us. We must continue to build on this reputation and strengthen it.

First, strengthening corporate governance and disclosure standards. I agree with Mr Inderjit Singh that we must strike the right balance between having sufficient rules to protect investors' interest and keeping the compliance burden on companies reasonable. We must never make it onerous or costly for companies to operate in Singapore.

In recent years, we have taken several steps to strengthen Singapore's reputation, such as launching the Council on Corporate Disclosure and Governance in 2002 which has the authority to regulate accounting standards for both listed and unlisted companies, introducing the Code of Corporate Governance and mandating all companies to comply with the prescribed accounting standards. However, we are very conscious that we should not go overboard. Elaborating on the example by Mr Inderjit Singh, we have seen how an over-zealous approach to corporate governance in the US has unwittingly imposed heavy compliance costs, reduced business flexibility, and hampered capital-raising. It is estimated that, since the introduction of the Sarbanes-Oxley Act in 2002, the cost of being a public-listed company in the US has escalated by some 100 to 200 percent and, instead of focusing on growing their companies, senior executives are increasingly distracted by legal compliance and burdened with hefty costs. The US has seen an exodus of IPOs, with smaller US companies choosing to list overseas, such as on the London Stock Exchange.

Sir, we must also customise our rules to fit the context. Hence, our corporate regulatory system differentiates between listed and unlisted corporate entities. Unlisted companies typically do not raise funds from the public and, hence, some of the safeguards to protect shareholders' interests, such as the public disclosure of directors' remuneration in bands, are less relevant. And one area for further customisation and improvement is accounting standards for entities such as societies and charities. Whilst we have a proper authority to regulate accounting standards for companies, there is no similar authority when it comes to non-corporate entities such as societies and charities. Many of these entities have simply followed the Financial Reporting Standards which were drawn up primarily for commercial entities and not always suitable for their needs.

We, therefore, need a more comprehensive approach to setting accounting standards for the various kinds of entities in the different sectors. The Government has, therefore, decided to set up an Accounting Standards Board (ASB) that will issue accounting standards for entities not in the public sector, including companies and other entities such as charities, societies and co-operatives. The ASB will replace the current Council on Corporate Disclosure and Governance (CCDG) and will come into effect on 1st September 2007. Like the CCDG, the ASB will continue to issue accounting standards for companies, taking reference from those issued by the International Accounting Standards Board but evaluating carefully their relevance to the local context. In addition, the ASB will prescribe modifications to accounting standards to make them relevant for other non-public sector entities such as charities, co-operatives and societies.

The ASB will comprise key regulators, senior accounting professionals, and leading users of financial information. This new consolidated framework for accounting standards under the ASB will enhance the credibility of financial reporting and achieve consistency in standards across the sectors. But the ASB will not replace the regulators for the various sectors, who will continue to oversee the corporate governance requirements for the entities under their purview. For instance, the Commissioner of Charities will continue to oversee corporate governance requirements for charities, while the MAS and SGX will oversee corporate governance for listed companies.

For public-sector entities, like Statutory Boards, the Government will assign the Accountant-General's Department as the legal authority to set accounting standards. Statutory boards do not have public shareholders - they are instead accountable to Parliament. The reporting requirements for purposes of accountability will, therefore, have to be different. Having a separate arrangement for setting accounting standards for private sector entities is consistent with the approach taken by other countries such as Canada, the UK and the US.

Finally, Sir, let me now speak about how my Ministry will continue to pursue and enhance public sector accountability and performance. Mr Singh has asked how the Government ensures that under the block budget system, the use of public funds is aligned with the Government's objectives and national interests. Theblock budgeting system sets a ceiling for Ministries' expenditure by capping their spending as a percentage of GDP and gives Ministries the flexibility in how they can achieve their desired outcomes without having to seek approval from the MOF for every item of expenditure. Notwithstanding the discretion accorded by the block budgeting system, there are sufficient checks in place to ensure proper accountability for public funds. After the block budgets are set, MOF continues to ensure that Ministries are doing the right things and doing them right.

First, the MOF meets each Ministry at least twice a year to discuss the strategic directions and the longer-term spending needs, achievements and financial management. These discussions seek to ensure that each Ministry's plans and programmes are aligned with the overall national goals and priorities.

Second, not all spending is at the discretion of the individual Ministries. Significant development expenditures require approval by the Development Planning Committee (DPC) which rigorously evaluates the worthiness of each project and assesses whether its objectives are aligned with the national interest as well.

Third, regular evaluations are conducted by the Accountant-General's Department (AGD) on how funds have been used, whether the expenditure has produced value-for-money and whether their targeted outcomes have been achieved.

Mr Singh has asked whether the Auditor-General would be able to audit Ministries effectively, given the block budgeting system. Sir, the role of the Auditor-General, as defined in the Constitution, is to audit and report on the accounts of the Government. In this role, the AGO's jurisdiction is wide-ranging and has been focusing on reviewing key financial systems and controls which are applicable, regardless of block budgeting or line budgeting.

Going forward, MOF will strengthen the framework by achieving better value and performance by putting in place regular, structured reviews on how agencies are allocating public funds. And to do this, MOF will set up a Value-for-Money Review Office in the Accountant-General's Department (AGD) to expand the performance-based reviews. And as an independent party which is not involved in the budget allocation process, the AGD will provide objective observations on whether Government goals have been achieved with value for money. MOF will work with the Ministries to address any observations that may arise from these reviews.

Finally, all Ministries have to submit a yearly Report Card to the Cabinet for their performance on the desired outcomes for the past year and their directions for the years ahead.

I wish to thank Mr Siew Kum Hong for his interest in the KPIs or the Key Performance Indicators. I wish to add that some of the key indicators found in the Report Card to the Cabinet are actually reported in the Budget Book. Mr Siew has asked about the relevance of these KPIs. These KPIs are set with reference to our national strategic outcomes and formulated based on best practices from other countries and international organisations. Ministries continually review these KPIs in consultation with their Government Parliamentary Committees to ensure that they remain meaningful.

We employ KPIs in the same manner as many other countries do - to monitor performance and the achievement of stated outcomes. Salient KPIs are scrutinised by Cabinet, and Members of Parliament may comment on them. The Ministry of Finance also uses KPIs to engage Ministries on whether they are measuring the right things, and whether their strategic outcomes are aligned with national priorities. It serves more as a dashboard.

Hence, we do not tie budgets to the meeting of KPIs. Budget should be seen as a means to good performance rather than a reward for performances. Indeed, if a KPI is not met, it could mean that the Ministry needs more resources than less. A more indepth understanding on why KPIs are not being met could then lead to more resource adjustments or programme. If there are questions on specific KPIs, Members of Parliament can raise these queries at the COS debate for the respective Ministries.

The Chairman: We have a few minutes left. We can take clarifications.

Ms Eunice Elizabeth Olsen: Sir, I would like to ask the MOF, despite the fact that Temasek is a private company, whether its decisions and investments should be debated in this House for accountability because it is wholly government-owned and is investing public funds. While the Government may not interfere in maybe individual investment decisions, does the MOF not agree that it cannot be out of the loop, like in the big picture, as in the overall strategic thinking of how our reserves are managed?

Mrs Lim Hwee Hua: Mr Chairman, Sir. It is not clear why if Temasek is to compete for investments, as all other investment houses, that it should be subject to different processes than the other investment houses when it comes to making decisions on investments. It is important to note that Temasek has been set up as a very separate and independent investment vehicle so as not to confuse the issues of what is strategic, what is national with what is commercial, and I think that separation is important to preserve.

Ms Denise Phua Lay Peng: Sir, I would like to ask the MOF if the PMO, instead of the MOF, should be involved actually in managing the process of setting KPIs. Do the individual Ministries actually follow some kind of consistent process by which they follow some balanced score card or dashboard method to make sure that the KPIs are indeed balanced and also involve probably the inputs of key user groups who are using the Ministries' various services?

Mrs Lim Hwee Hua: Sir, for each Ministry, the dashboard is indeed set up actually with many parties involved in it. The Ministry of Finance is the prime mover because it is the allocator of public funds. But that is not to say that the PMO and other Ministries responsible for handing out services to the public are not involved. They are all involved in different ways and there are also a lot of inter-ministerial collaborations for which the respective KPIs would have to incorporate the different inputs as well.

Ms Denise Phua Lay Peng: Sir, I suggest that because what gets measured gets done, what gets measured and paid actually gets done even more, that there will be a consistent process by which KPIs are set throughout the different Ministries. If the PMO take heed of that entire process, it could be facilitated by MOF.

The Chairman: The question has to be directed to PMO, not to the Ministry of Finance.

Ms Denise Phua Lay Peng: So would the Ministry of Finance consider raising that process with the PMO?

Mrs Lim Hwee Hua: Sir, I believe Minister Teo has just earlier on explained the difficulty with tying the KPIs to individual performance evaluation. But, certainly, these are all worked out on an inter-ministerial basis.

Miss Penny Low: Sir, MOF mentioned that the SRS scheme appealed to a very narrow group. Can she clarify which group this may be and whether we could enlarge the appeal of this scheme to a much larger group? Using the back-of-the-envelope calculation, if the middle class is about 50% to 60% of the entire working population of two million, we have about one million and only 35,000 has entered the SRS scheme. Why is that so? Could the Minister enlighten us on the reason for the slow take-up rate?

Mrs Lim Hwee Hua: Sir, the SRS scheme was introduced only in April 2001. Hence, it would take some time for it to gain momentum. The SRS is not so appealing to the younger people because they would actually need a lot of their resources for other needs, such as housing and other investments. Hence, it tends to favour more the higher income and those in the higher tax bracket with a lot more disposable cash. When we conceived the SRS, it was indeed to supplement retirement savings but it was not meant to be a tax advantage for the higher income groups.

Mr Inderjit Singh: Sir, I would like to thank the Minister of State for her comprehensive answers to all our questions. As you notice, this year, under MOF, there were very few cuts and that is because this year's Budget was a good budget. There was a comment in the Straits Times that too many of the PAP MPs were praising this Budget. But I think we make no apologies for praising the Budget because it was indeed a good one and the result was very few cuts for this Ministry.

Sir, I beg leave to withdraw my amendment.

Amendment, by leave, withdrawn.

The sum of $437,696,370 for Head M ordered to stand part of the Main Estimates.

The sum of $147,503,000 for Head M ordered to stand part of the Development Estimates.

The Chairman: Order. I propose we take the break now.

Thereupon Mr Speaker left the Chair of the Committee and took the Chair of the House.

Mr Speaker: Order. I suspend the Sitting and will take the Chair again at 3.20 pm.

Sitting accordingly suspended

at 3.05 pm until 3.20 pm.