INCOME TAX (AMENDMENT NO. 2) BILL

Order for Second Reading read.

4.11 p.m.

The Financial Secretary (Mr T. M. Hart): Sir, I have His Excellency's authority to move the Second Reading of the Bill.

The Bill is a very simple one. Its object is to increase the rate of tax on the chargeable incomes of companies from 30 per cent to 40 per cent, to enable companies to deduct tax at the new rate from dividends paid to shareholders, and to enable the new rate to be levied on the chargeable income of non-resident individuals, trustees (other than the trustees of incapacitated persons) and executors, and on the interest on debentures, mortgages and loans paid to non-residents. To this end, sections 43, 44 and 45 of the Income Tax Ordinance are amended in the manner indicated in the Bill.

The decision to increase the rate of tax on the chargeable incomes of companies has not been taken lightly or without careful consideration of all the implications.

The Government has been of the opinion for some time that the rate of tax could be increased substantially. It has been supported in this opinion by its Economic Advisers who have both held the view that the rate could be substantially increased without doing harm either to the general economy of Singapore or to the companies affected. It has been supported by an examination of the results achieved by companies operating locally over a period of years, which, by and large, have been extremely good. It has been supported by a comparison of the company rate in Malaya with the rates applied to companies operating in other countries. It has been supported by the fact that leaders of the business community have from time to time privately expressed the view that company tax could stand some increase without causing very much harm.

But the Government has so far been unwilling to take action to raise the rate of tax because other sources of revenue still remain to be tapped; because the pressing need for more revenue which would justify the imposition could not be clearly demonstrated; because, in this more than in any other sphere of direct taxation, common action with the Federation was essential; because we wished to do everything possible to attract investment capital and because we feared that an increase in the rate of company tax, in the absence of any counterbalancing legislation such as Pioneer Industry legislation, might inhibit investment.

Now, Sir, the matter has been precipitated by the need for more revenue to meet the cost of essential services like police, defence, education, medical, health, and communications, without which companies could not exist, far less make profits.

The need for increased revenue has been clearly demonstrated and the point need not be elaborated. Similarly, I think it has also been clearly demonstrated that Government expenditure has been cut to the bone and that provision has only been made for what is generally agreed to be essential. I mention this because, in the past, any increase in direct, or indeed in any, taxation has met with a storm of protest against the waste and extravagance of Government expenditure, the argument being that no increased taxation would be necessary if Government would only limit its expenditure to what was essential. The argument is no longer valid - if indeed it ever were valid. All other sources of revenue within the customary pattern of taxation have been exhausted. Direct taxation under the Income Tax Ordinance is the main source remaining. Of the sources in the field of direct taxation, company tax is the most productive and likely to give the greatest yields over the longest period. The Government has therefore no option but to avail itself of it.

At the same time, Sir, the Government regrets that it has to introduce this measure at a time when the economy is in process of throwing off the effects of a recession. It would naturally have preferred to delay introduction until the economy was back in full stride as it were. This, however, has not proved possible. The need for revenue outweighs other considerations.

At the same time, it must be pointed out that the effects of the increase will certainly not be as disastrous to the economy as some of the critics who have ventilated their views would have us believe.

The increase is from 30 per cent to 40 per cent and it is generally accepted that 30 per cent is a very low figure. Neither the increase itself nor the new rate can be called crippling, as some critics have termed it, and I confidently believe that companies operating in Singapore will be able to absorb the increase without undue difficulty.

The new rate of 40 per cent still maintains a fairly substantial favourable margin compared with the rates in other countries from which one might expect to attract investment capital. For example, in the United States, companies are charged at a graduated rate which varies from 42 per cent to 52 per cent. In Canada, 18 per cent is charged on the first $25,000 of profit and 45 per cent on anything in excess of $25,000. In the United Kingdom, the standard rate is 42� per cent plus a profits tax of 10 per cent.

Similarly, the new rate compares very favourably with that in most of the countries in Asia which can be regarded as competing with us for investment capital. For example, the standard rate in India is 30 per cent with a surcharge of 30 per cent. In Ceylon the standard rate is 45 per cent.

Apart from these considerations, I doubt very much whether the increase in rate will act as a special disincentive to investment capital. In the first place, capital looks mainly to questions of "yield". It asks itself whether the prospects are sufficiently good to justify investment. Will the investment be safe enough? Will it yield enough to meet all expenses, including tax, and yet make a larger profit than it would make elsewhere? If these criteria are applied to the past, the answer must be a spontaneous, unanimous and overwhelming affirmative. There is perhaps more uncertainty about the future. That is inevitable in the circumstances, as I have said in other connections. But I am sufficiently confident in the common and commercial sense of the people of Singapore and their elected representatives to believe that they will do nothing to destroy but everything to improve the climate for investment. In short, once the political picture clarifies itself, I think that the prospects for investment in the future will be such that it will take more than an increase of 30 per cent to 40 per cent in the rate of company tax to deter investment capital.

Apart from these considerations, however, the Government is in process of introducing legislation which will give tax concessions to new industries and to existing industries which inject new capital. As far as such undertakings are concerned, these measures should counter-balance any detrimental effects which might conceivably arise as a result of the increase in the rate of company tax.

The increase in the rate of tax applicable to executors and trustees will not involve the degree of hardship which appears at first sight. Executors are entitled to claim relief at the increased rate of 40 per cent in respect of all distributions to beneficiaries which are made within a prescribed period, with the result that beneficiaries resident in Malaya are likely to receive the same amount of income as they could have received if the rate had not been increased. So far as trustees are concerned, they distribute the income of the trust under deduction of tax and beneficiaries are able to claim repayment or a set-off, as in the case of company dividends, in respect of the 40 per cent tax deducted from what they receive.

With regard to non-residents, it is administratively desirable that the rate should be the same as that at which companies deduct tax from dividends. The great majority of non-residents who derive income from Singapore do so in the form of company dividends: if the non-resident rate were greater than the rate at which tax is deducted from dividends it would be impossible to collect the difference from non-residents: if the rate were lower, every non-resident would automatically be entitled to claim relief in respect of the difference between the non-resident rate and the rate at which tax has been deducted from his dividends, and a substantial amount of additional work would be thrown on the Income Tax Department. Bearing in mind that most non-residents either have a title to claim a proportion of the personal reliefs and the graduated rates of tax under the provisions of section 40 of the income Tax Ordinance, or are resident in territories which give to their residents double taxation relief in respect of income which is taxed both in Singapore and in the territory of residence, the increase in the rate to 40 per cent will add little, if anything, to their existing tax bill.

Sir, I beg to move, "That the Bill be now read a Second time."

Question proposed.

4.22 p.m.

Mr R. Jumabhoy: Mr Speaker, Sir, much has been said about the increase of income tax in the Budget speeches, and I will therefore be very brief. As you will see, Government expenditure has increased by leaps and bounds. That is why taxation has to be increased to meet the increase in expenditure. I quote, Sir, from page 13 of the Draft Estimates. In 1954, the expenditure was about $249 million; in 1955, when there was a trade recession, the expenditure was about $198 million; but in 1956, it was $222 million; in 1957, it was $238 million; and, for the present, the expenditure is $265 million. The Financial Secretary might say that this is inevitable. At this stage, I am not going to oppose such an increase, since the doers of this wrong act will be staying in office for only three more months. The new Government will, I am sure, reduce not only income tax, but also the tax on petrol, tobacco and some other items.

Sir, the Financial Secretary has said that nobody has given any concrete suggestions as to how to reduce the deficit in the Budget. I think the Government has been told every year to cut down the administrative costs. I have said it every year. You might ask how? Sir, I have said that non-Singaporean officers - may I use the words expatriate officers', who are not Singaporeans, Sir? Will you allow that, Sir?

Mr Speaker: Yes.

Mr R. Jumabhoy: In the past, expatriate officers had been drawing high salaries, and rightly so, because they had to run one house in Singapore or in Malaya, and one house in England or India or Ceylon, or wherever it may be, and the cost was therefore very high. But this should not be the case as and when these officers are replaced by local men, including the Ministers. I will say this: that, as far as the lower-grade officers are concerned, they should be properly paid. They should not be made to suffer. But do the local officers in the higher grades really require the same level of salary scale as the expatriate officers? They were able to live on a salary of $200 or $500 or $600 before. Why should they want to live now on a salary of $1,500 or $2,500? The Government should therefore cut down the salary of these officers, and not make the taxpayers bear the increased cost of Government expenditure by imposing higher taxation.

Sir, I have got very little to add, for this Government, or these people who form the present Government, will not see this House again. They will not be elected and put to office in the next elections. Therefore, they will not be in a position to increase taxation.

4.25 p.m.

Mr Lim Cher Kheng: Mr Speaker, Sir, I rise to oppose this motion. As I have mentioned this morning, the present Government is in a very peculiar position in that it has a nominated Minister for Finance to present the Budget, which is an anti-climax. Also, it has been admitted by the mover of this motion, that it is not opportune at this juncture to increase the rate of income tax. What I would like to emphasize, Sir, is that our economic stability is not only affected by the present world trade recession, but it is also affected by our economic policy. We do not know what the Government's economic policy is at the present time. Is it Pan-Malayan? Has Singapore's economic policy of increased taxation followed the Federation?

The Financial Secretary has said that he is confident that, with this increase in taxation, he can expect an increase in revenue. Sir, you may be right if you say that to, say, a primary school student. One plus one is two. When you increase the rate of taxation, you can expect a bigger revenue. But there is also another method of computation. Two plus zero is also equal to two. Therefore, Sir, if you now increase the rate of company tax, do you expect to attract investors to this country? Of course not! If you cannot attract investors to this country, how do you ever expect to have any company making a profit to pay tax and thus increase the Government's revenue?

I think I can quote an editorial comment in the Nanyang Siang Pau on this Budget. The Editor viewed with mixed feelings the Government's proposal to increase the rate of taxation. This Government - by which I mean the Financial Secretary - is not facing realities. It is not adopting a practical approach in the preparation of this Budget. You know very well that business is very bad and yet you expect to be able to tax the profits of a company. It is just like borrowing money from a beggar. You know he is a beggar, and yet you expect to borrow money from him.

Mr Speaker: Order. I think the hon. Member should remember that he is addressing the Chair. I am not the Financial Secretary or the Government.

Mr Lim Cher Kheng: Yes, Sir. I think there are many ways of increasing our revenue to meet our financial commitments, other than the simple process of passing a Bill to increase the rate of taxation. Maybe I am not qualified to predict that in 1959 the Government will not be able to collect the $55 million in tax, as was envisaged by the Financial Secretary.

At present, Sir, from the businessmen to the men-in-the-street - taxi drivers, trishaw riders, workers in the factories - when you ask them about the future of this country, you will be surprised with the answers. They all give the same answer, "No good. The future is no good. Business is no good." The people generally have lost confidence in the future. Why? Why does the Financial Secretary not find out the fundamental cause of the trouble which has brought about the economic instability in this country, and then find a solution to the problem?

Sir, it has been said that the Opposition Members only know how to criticize the Government but are never able to put forward any constructive suggestions. I would like to put forward two suggestions as solutions to our economic ills. Either one of them will help to solve our problems. One is the well-known formula - let Singapore merge with the Federation of Malaya immediately. The other formula may be new, Sir, but it is already so commonly discussed in the coffee-shops and market places. It is that it is time for Singapore to have its own independent economic policy to safeguard its rice bowl. All say that it is time for Singapore to think of a way to make its own living. Political leaders may continue dreaming of a political merger or marriage with the Federation, and believe in the sincerity of a Pan-Malayan economic unit, Sir, but I do not think that the man-in-the-street believe in it. The picture is clear. I am sorry to have to quote one Legislative Councillor in the Federation Government who asked, "Why should we lose $20 million a year by selling Federation fish to let Singapore fishmongers make a profit?" And this Legislative Councillor shouted loudly, "Why should we let Singapore pineapple canners benefit to the tune of millions of dollars by canning our pineapple?" Sir, all these things should be sufficient for us to take deep thoughts. What made such a responsible Legislative Council Member on the opposite side of the Causeway regard Singapore as neither a prodigal child nor a deserted brother?

Sir, I strongly oppose the Bill, not because in principle we should not tax the rich. I for one think that if we can pass a sort of super-tax - a person whose income is more than $20,000 a year can be taxed 90 per cent, because the average living standard of Singapore is $10,000 a year - I do not think everybody will grumble, but not a tax on a common clerk who is earning about $400 or $500 a month. He has got to pay more tax in order to contribute to what, Sir?

Mr Speaker: I think the hon. Member is forgetting that we are on the Income Tax (Amendment No. 2) Bill. We have not come to the motion about personal tax yet. We are on the companies still.

Mr Lim Cher Kheng: Sir, in conclusion, I wish to make my point clear. I oppose this increase of tax but not on principle. At this juncture for the Hon. the Financial Secretary, knowing full well that times are hard, a recession is on, the political situation is unstable and the situation is not under control, to introduce this Bill with the co-operation of the present Government Benchers seems somewhat fishy, and it all the snore convinces me that it will pave the way for the Member for Tanjong Pagar to become the next Prime Minister.

Mr Speaker: Mr Hart, in reply?

Mr Hart: No, Sir.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole Assembly.

Assembly immediately resolved itself into a Committee on the Bill. [Mr Hart].

Bill considered in Committee; reported without Amendment; read the Third time and passed.