ECONOMIC EXPANSION INCENTIVES (RELIEF FROM INCOME TAX) BILL

[Mr Speaker in the Chair]

Order for Second Reading read.

The Minister for Finance (Dr Goh Keng Swee): Sir, I beg to move, "That the Bill be now read a Second time."

The active promotion of manufacturing industries has been a cardinal feature of this Government's economic policy since 1959. At that time the Pioneer Industries Act had just been brought into effect. It had served its purpose over the years in introducing a wide variety of manufacturing activities into the island. Today the number of pioneer certificates issued stands at 243 and the number of pioneer firms at 224. 155 of these firms have commenced production.

Since our separation from Malaysia, which has put a seal on the still-born Malaysian common market, it has become abundantly clear that only through a rapid increase in domestic exports of traditional products in traditional markets as well as of new products in new markets that Singapore can attain salvation. The first tentative steps were made by the Government in late 1965 through a special tax deduction for export promotion activities. Then in his Budget speech last year, my predecessor outlined a range of fiscal concessions on profits derived from the export of domestic products. It has taken us a full year, however, to grapple with the legal and administrative complexities of these proposals. I am, nevertheless, satisfied that the time has been well spent.

The Bill before the House seeks, inter alia, to provide the maximum incentives to exporters without, at the same time, allowing them too much fat. In respect of old companies with established export markets, it is only those who improve on their export record who will benefit. Exporters who prefer to rest on their oars will get nothing, as befits members of a thrusting and dynamic society.

Besides export incentives, the Bill seeks to offer tax concessions on payments for foreign royalties, technical assistance and research and development, as well as on interest liabilities arising from foreign loans utilised for the purchase of productive equipment.

The Bill also provides for a tax holiday in respect of profits from sales of approved manufactured products resulting from an expansion of approved enterprises.

Finally, the Bill provides for the repeal and re-enactment with minor amendments of the well-known Pioneer Industries Ordinance.

I set out below details of each significant part of the Bill.

Part II is essentially the same as the Pioneer industries Ordinance of 1959. Its incorporation into the present Bill is to place all incentives together in one piece of legislation so as to assist investors.

Part III gives incentives to manufacturing enterprises which expand their productive capacity. Any manufacturing company which incurs new capital expenditure for the purpose of manufacture or increased manufacture of an approved product may be entitled to such benefit provided such expenditure exceeds $1 million, or exceeds $100,000 as well as results in an increase of not less than 30 per cent of the value of existing productive capacity.

The tax concession which is computed on the basis of a formula set out in clause 19 is available for a period of three or five years, depending on the amount of capital expenditure. The purpose of this provision is to encourage enterprises to expand their capacity in order to improve their economies of scale. This is an important supplement to the tax relief for pioneer industries.

Part IV provides tax relief for the export of domestically manufactured products and deep-sea fish. The domestic market in Singapore is too small for many manufacturing industries to achieve the optimum scale of production, and therefore production for export is necessary. In most developing countries and in many of the developed countries, the domestic market is protected by high tariff barriers so that domestic consumers may absorb completely overhead costs while exports are priced at variable cost only. With a small or in some cases non-existent domestic market, this is not possible in Singapore. It follows that industrialisation depends very largely on the incentives given to the export of manufactured goods.

The Bill provides that profits of approved manufacturing companies from the export of their manufactured goods will be subject to a rate of company tax of four per cent instead of the regular tax of 40 per cent. The same tax relief is given to companies engaged in deep-sea fishing.

It is understood that separate cost accounting for exports and local sales is not practicable for many manufacturing concerns. Moreover, it is difficult for the Inland Revenue Department to assess the exact export profits. The Bill, therefore, adopts a simplified formula which assumes that the rate of profit from export sales and domestic sales is the same. To the extent that actual profit is usually smaller than profits from domestic sales, the simplified formula gives some additional advantage to exporters, but it also saves a lot of administrative work in the Inland Revenue Department.

Since the present exports of manufactured goods other than those produced by pioneer industries are subject to the full 40 per cent tax, the tax incentive given to exports will somewhat lower the total revenue from company tax for the first few years after the adoption of the Act. But as the incentive will encourage many more manufacturing industries to be established in Singapore, there will soon be an increase in employment and income and eventually an increase in tax revenue from all sources. Also, as exports increase, the loss of tax revenue from export profits will decrease.

To aim at maximum market diversification and to reduce partly the loss of existing revenue, the Bill provides that in the case of established markets for certain products, the tax relief will apply only to the increase of exports of these products to such markets. In order not to offset too greatly the export incentive, and to reduce the work of tax administration, the condition of established markets will be applied only to cases where a given product has been exported continuously for a minimum period of five years.

With tax relief on export profits, a company qualifying for such relief shall no more be entitled to the double reduction of overseas marketing expenditure for tax purposes.

Part V aims at reducing the cost of manufacturing companies which borrow from abroad for the purchase of machinery and equipment. Provided that the amount of the loan is not less than $200,000, the interest on such approved foreign loans shall be exempt from tax, subject to the condition that such exemption does not result in an increase in liability to tax by the foreign lender in his country of residence. Since tax liability has hitherto been borne almost entirely by the local borrower, this concession will reduce the borrowing costs and facilitate foreign loan investment in Singapore.

Manufacturing industries depend not only on capital but also on techniques. Part VI of the Bill provides that approved royalties, technical assistance fees and contributions to research and development costs payable to non-residents shall be taxed at 20 per cent instead of the regular non-resident tax of 40 per cent. Such royalties, fees or contributions, if used to acquire ordinary share capital in the company from which such payments are received, shall be exempt from tax. In special cases, the Minister may also exempt such royalties, fees or contributions from tax even if they are not used to acquire share capital in the company. Tax concessions on royalties, fees and contributions are given subject to the condition that they do not result in an increase in liability to tax in the non-resident's country.

Part VIII of the Bill relates to consequential matters such as repeal of earlier legislation, transitional provisions, penalties and so on. The Minister is empowered to make regulations for carrying out the provisions of the Bill.

I venture to suggest that this Bill, which consolidates and expands our industrial incentives, heralds a new and bright phase in our industrial progress, one which holds out hopes that our efforts to overcome the serious, unemployment problem of our time will eventually succeed.

May I close with a word of assurance to our manufacturers? I would have liked to send this Bill to Select Committee if this course of action were at all feasible. But it is necessary that export incentives promised a year' ago become law now and this rules out consideration by Select Committee. At the same time, I am conscious that further consideration may bring about improvements and I am open to suggestions and proposals from manufacturers and other interested parties, which, if they are of sufficient merit, can be incorporated in a future amending Act.

Sir, I beg to move.

Question proposed.

5.28 p.m.

Mr Bernard Rodrigues (Telok Blangah): Mr Speaker, Sir, I speak in support of the Bill which, in effect, re-enacts the principal provisions in the previous legislation governing the industrial development of Singapore. As such, the Bill not only provides for the establishment of new pioneer industries and for expansion of established enterprises, but also places emphasis on the production for export. This is a Bill which everyone in this House I am sure supports. Nevertheless, I have some criticism to make against it. It is my regret that I do have some criticism to make, especially since this Bill is a comprehensive Bill governing the industrial promotion of Singapore. I appreciate that no Bill can be perfect in the sense that it provides for all possible eventualities or contingencies within the scope of the Bill. I feel, however, that it is my duty to bring to the attention of this House the main defect which I consider to be present in the Bill.

The purpose of this Bill, as stated in the Bill itself, is to amend and consolidate the laws relating to incentives for the establishment of pioneer industries and for economic expansion generally, by way of providing relief from income tax and so on. It is about seven years since Singapore embarked on its industrialisation programme. I am surprised that during this period of seven years the various authorities, such as the Economic Development Board which is responsible for the implementation and the supervision of Singapore's industrialisation programme, have not found it necessary to incorporate into the relevant legislation covering the industrialisation programme of Singapore a distinction between genuine Singapore-based pioneer industries and non-genuine Singapore-based pioneer industries. From my experience as the Secretary of the Pioneer Industries Employers' Union, I regret to note that there are two such categories of pioneer industries in Singapore today. In the case of the genuine Singapore-based pioneer industries which are set up by foreign investors with or without local capital, the pioneer industrial concerns are fully controlled by local boards of directors and establish for themselves their own network of export markets. In the case of the non-genuine Singapore-based pioneer industries which may be similarly set up by foreign investors with or without local capital, the pioneer industrial concerns mainly serve as adjuncts to the overseas industrial concerns belonging to the foreign investors. The policy of such local industrial concerns is dictated through local boards of directors with no effective power, but by the foreign investors from their overseas headquarters. To give an example by way of illustration, a Hongkong industrialist may set up a local textile firm which avails itself of income tax relief under the relevant legislation. In spite of the stringent provisions in the relevant legislation in respect of the valuation of second-hand machinery, this Hongkong industrialist will benefit immensely from the disposal of obsolete machinery from his Hongkong factory to the pioneer factory in Singapore. Secondly, the textile firm in Singapore, besides meeting the negligible demand of the local Singapore market, does not establish for itself any contact with any foreign market. Any export to overseas markets is directed through the Hongkong firm. In other words, the Singapore factory serves as a "relief" factory for the Hongkong textile concern in the sense that it is only when the Hongkong firm is not able to cope with orders from its overseas customers that such surplus orders are passed over to the Singapore factory. Such a textile factory, in my opinion, is not a genuine Singapore-based pioneer factory. As I see it, the Singapore factory is fully dependent on its Hongkong principal and its interest is subordinated to the interest of the Hongkong textile concern. It is not in the general interest of Singapore to have such factories which do not actually contribute to the industrial development of Singapore, because the principal objective of the establishment of any industrial concern in Singapore is to establish for itself an export market and enhance the reputation of Singapore-made goods. This is not being achieved by firms such as the one which I have just described, because whatever it is doing only serves to strengthen the export market for the Hongkong firm.

My first concern is that such a firm is able to get the same relief from income tax and the same benefit as a genuine Singapore-based industry gets under the relevant legislation governing the industrial development of Singapore.

My other concern, which is very important to me, is that the workers of Singapore receive a raw deal under the management of such a Singapore factory. First, the workers must comply with the constant reiteration by the Singapore Government of the need not to press for higher wage claims and other fringe benefits in order to allow the pioneer industries to compete effectively in overseas markets. Secondly, the workers are not assured of regular employment because such a non-genuine Singapore-based factory has no market of its own and exists only as a factory to meet the fluctuating marginal demands or contingencies of the Hongkong industrial concern. It is a regrettable state of affairs and I think it is of utmost importance for Singapore's industrial development to make a distinction between the two types of pioneer industries in order to encourage the genuine and not the apparent industrial development of Singapore.

This is my only comment on this Bill, but it does not in any way detract from my support for it. I only wish that the House will take notice of my comments and pay some attention to the resolution of the problem of encouraging the genuine industrial development of Singapore.

5.37 p.m.

Mr Lim Soo Peng (Havelock): Mr Speaker, Sir, the Economic Expansion Incentives (Relief from Income Tax) Bill seeks to provide additional relief from taxation for enterprises whose creation or expansion of exports are in the economic interests of the State. This Bill consolidates, re-enacts and repeals the Pioneer Industries (Relief from Income Tax) Ordinance of 1959 and the Industrial Expansion (Relief from Income Tax) Ordinance, also of 1959. As such, any criticism of this Bill will, I think, be found in what it does not contain than what it does. It merely consolidates two previous Ordinances and grants additional tax relief, but it does not nor is it designed to change the basic character of tax legislation. I believe that what is urgently required is a comprehensive re-examination of the fundamentals of our taxation structure and system. After all, this Bill seeks only to supplement the income Tax Ordinance, and if what it seeks to supplement is not the best, then the best it can do cannot be the best. In other words, it is circumscribed from the start.

It is, of course, a highly controversial matter as to whether or not our present taxation system and structure retards economic growth. There does not seem to be any controversy. Indeed, it seems to be taken for granted by almost everybody that our tax system is not conducive to economic growth. If this is the situation, that is, where everyone agrees that it is not good and disagrees only whether it is bad, then I say that the time has come when serious thinking should be done on its change. There will be the traditionalists who regard any change with horror and who rest their case on custom and usage -the solid base of inertia. On the other hand, there will be those who believe that a revision of our present tax system solves all problems associated with industrial expansion. The truth probably lies, as truth usually does, somewhere in between. It is here that I think the Government can profitably explore. The process will probably take at least a year or two before the truth is found and implemented. I suggest that a Commission with as wide representation as possible be appointed forthwith to review the principles and administration of our present tax system and to make recommendations for changes. This Commission should set out to discover ways and means of simplifying and modernising our income tax structure. Indeed, if the necessary men can be found - I have no reason to believe that in our island of talents we have this shortage - I will even go further to suggest that another Commission be appointed to review our laws on property tax. In our need for rapid economic development, we should not ignore an aspect which plays a very important part in either stimulating or retarding economic growth. I think everyone in this House will agree with those outside that our property tax laws are rather archaic and require modernisation. Property owners have been heard to complain rather bitterly -

Mr Speaker: Order. Mr Lim, I am afraid your comments on the Property Tax Ordinance are rather outside the scope of the Bill under discussion. You will be in order if you can relate your remarks to income tax problems connected with property tax paid by industries or companies to which this Bill will, when enacted, apply.

Mr Lim Soo Peng: Sir, that is what I have in mind. Property owners have been heard to complain rather bitterly and vociferously about discrepancies and differences in rates and valuations that cannot be justified.

The present Bill before the House can at least supplement if not correct our present income tax system by offering incentives to investments through reliefs from income tax. Such incentives can at best be stop-gap temporary measures and should be examined in the light of possibly better things to come. All the reliefs proposed for pioneer industries, expanding established industries and export industries relate directly back to the rather old and cumbersome method of income taxation which asks incorporated companies to act as tax collecting agents for the Government in the case of distributed profits, and as taxpayers in the case of retained profits. Such a system has little philosophy, less rationale and no equity. It operates this way. A company does business for a year and makes a profit. It pays 40 per cent of that profit as tax, if it distributes that profit as dividends in that year, then its shareholders get the tax credit and adjust it against their personal rates in the third year. On the other hand, the company may not distribute the profit until ten years later. In this case, the shareholders will adjust their tax credits in the twelfth year against their personal rates. During this time, many shareholders may have disposed of their shares to new shareholders who have taken them over. The old shareholder would have sold his shares at an enhanced price incorporating the profit of the company and the tax credit. What is more is that the profit from the sale of the shares will be regarded as non-taxable capital gain and the new shareholder in reality gets back part of his capital by way of the dividends subsequently declared on which he has to pay tax.

It follows from this that our present tax withholding system upon which is based the further reliefs proposed by this Bill before the House does not lend itself to accurate or even close estimation of the effects of the reliefs either in quantum or on the persons considered desirable to enjoy them. It is widely held that one of the most important factors conducive to economic growth is the presence of large joint-stock companies with capital spread over a large number of shareholders. Such being the case, it is important that shareholders should shoulder their true tax liabilities or enjoy their true tax reliefs. Our present tax structure does not provide this, and it follows that the present Bill does not so provide.

Mr Speaker, Sir, I am not saying that we should not have the present Bill before us made into law. What I do say is that we should not stop with it. We should only regard it as a stop-gap measure while we revise our present tax structure. I say, let us try to make this Bill work in order to give us time to work out a better one, which, apart from ease, certainty and fairness to the taxpayers, will at least enable the Government to estimate its revenue from. profits made by the companies rather than on the probable time and quantity of dividends distributed.

I can go on, Sir, for quite some time on the merits of a corporation tax instead of our present withholding tax. But as we are not debating a Bill to establish corporation tax, I should now like to deal with the provisions of the present Bill, after having established the point that we should not expect too much from it.

Sub-clause (9) of clause 14 is held by many as unduly restrictive. This sub-clause restricts the carry-through tax exemption benefits to shareholders of a holding company to one which holds throughout the tax relief period of a pioneer company either all the issued shares or such portion of the shares as the Finance Minister may require at the time when the pioneer certificate is issued to the pioneer company. I do not think the Minister will be an unreasonable man when he determines the portion of pioneer shares the holding company should have. But the Bill does not allow him to change his mind should the holding company, for one reason or another, all good and valid reasons, wishes to change its shareholdings. Unless the Minister can give cogent reasons why a holding company should not vary its shareholdings at all, I am of the view that he should at least arm himself with the powers to agree to a variation.

Sub-clause (5) of clause 19 does not appear to be a favourable incentive to expanding enterprises in that its terms are rather restrictive. It must be borne in mind that we are a young industrialised country and cannot compare with those highly industrialised countries in other parts of the world. Practically every country in this part of the world is competing against one another for investment. In the face of such competition. I feel we should give serious consideration to affording relief by way of investment allowances which have been found to be a more practical form of inducement to investment. If it is found advisable to adopt the investment allowance method as an incentive, clause 17, especially sub-clause (1) (a) and (b) , will need revision either in principle or in quantum, or in both.

Many manufacturers are apprehensive of the possible administrative difficulties in the use of the words "established export market" contained in Part IV of the Bill. Such a fear may or may not be justified depending not on the legislation but on the attitude of the tax authorities implementing the legislation. Not being a legal man, I am not in a position to propose the necessary amendments to the Bill, but I should like the Minister to narrow down the possibilities of lengthy and fruitless arguments between taxpayer and tax collector.

Another dissatisfaction from manufacturers, especially from the established ones, is that the incentives proposed give more to the new exporter and discriminate against the old exporters. Here, we are dealing with a Bill which seeks to induce new exporters, and there is much to justify the philosophy of not running after the bus when it is already caught. But the sour note introduced by differential treatment may either cause friction amongst manufacturers or induce old manufacturers to create subsidiary companies ostensibly to manufacture those products that are exported or export to new markets for the purpose of re-export to the established markets. If the Minister does not wish to change his mind on not running after a caught bus, I feel he should examine the many possible ways of tax avoidance.

Parts V and VI of the Bill operate largely around the key words "bona fides". Everyone knows that it is extremely difficult to determine bona fides in the business world. There are so many forms and so many disguises. I know that it is even more difficult to legislate on what constitutes bona fides, but I should like the Minister to assist manufacturing exporters with some general guide-lines, so that those wanting foreign loans or foreign technical assistance are better able to proceed.

Mr Speaker, Sir, with these reservations, I support the Bill.

Dr Goh Keng Swee: Sir, I wonder if the Member for Telok Blangah has really thought out to its logical conclusion the statement he has made about Hongkong industrialists who establish ---

Mr Bernard Rodrigues: Point of clarification, Sir.

Mr Speaker: If the Minister is prepared to give way.

Dr Goh Keng Swee resumed his seat.

Mr Bernard Rodrigues: I never said Hongkong industrialists. I only said, as an illustration, Hongkong industrialists.

Dr Goh Keng Swee: Nevertheless, he has given us to understand that these are the people. The point is this: is he suggesting that if Hongkong or other industrialists want to establish a subsidiary in Singapore which can provide useful employment for our unemployed, we should turn down their applications? Is that his proposition? I doubt if he means that. I think his main objection is the manner in which some of these enterprises are carried on, namely, that work is irregular, that workers are laid off from time to time. May I suggest to him that this does not really depend on whether the local plant is a subsidiary of a foreign firm, or whether it is run by a local board of directors, irregular demand is the result of irregular market conditions, and whether you have one form of enterprise as against the other, so long as market conditions are erratic, it is unavoidable that you get irregular periods of employment. This is true not only in the textile industry but also generally in other industries subject to very wide fluctuations in the export market.

I would have thought that one of the great merits of Hongkong industrialists is that they not only bring their capital and their know-how to Singapore, but they also bring their export market. It is all very well to say that the Singapore management can develop export markets which are more steady and more reliable. There are very few Singapore manufacturers with much experience in overseas export markets. And the great contribution that Hongkong industrialists have made to Singapore is that this problem of marketing is virtually solved by them. Of course, I would agree that it would be a good thing if there could be a greater continuity of employment. No one would dispute that. But, unfortunately, continuity of employment sometimes depends on factors outside the control of the enterprise in Singapore.

I think the Member for Telok Blangah is confusing the early days of the textile business when it is true that Singapore firms were using quotas or unused quotas of their Hongkong main companies. But this was very soon settled when countries like Britain and America gave separate quotas for Singapore manufacturers. As soon as this arrangement came into effect, the production in Singapore plants was related to the quota allowed for the plants, and not related to the quota given to the Hongkong principals.

I now come to the comments of the Member for Havelock. I think he has made a study of this Bill. He says that it does not introduce any fundamental change in the tax system of the Government. Of course, this is true - this Bill is not intended to introduce any basic changes. It only makes certain concessions in order to promote industrial growth. Whether the present time is appropriate for commission of the tax system is a matter on which I think people can have different opinions. It has been urged upon me that our tax system needs an overhaul. If so, this is a subject which must be considered on its own merits and not in relation to whether a better tax system would promote economic expansion. I would have thought that one of the main objectives of having a better tax structure would be the more efficient collection of revenue.

On the subject of export incentives, the Member for Havelock makes the point, which has already been put to me by other people, that this Bill would unduly favour the new industrialists as compared to established firms with a long record of export performance. He suggests that this might tempt the older industries to create subsidiaries or to disguise themselves as separate legal entities in order to obtain the benefits of tax exemption. I do not think this is possible because what determines whether a particular product will enjoy tax exemption is not whether the firm producing it is new or old. It is whether in the past such goods have been exported in continuing amounts to a certain established market, and if that is the case, then neither the old firm nor, if it is disguised as a new firm, it will get this benefit. The only people who will get this benefit are the old firms who have improved on their previous performances, and if it is a new firm, then they will have to improve on the old firm's performances.

As regards the provision of bona fides in Part V of this Bill, I would have thought that this is a very simple matter. This is to ensure that no fictitious loans or transactions are created to enjoy exemption from tax and bona fides really means that the transactions or the loans on which tax exemption is being asked for represent genuine business transactions, subject, of course, to the minimum limits laid down in the law. I do not expect that there would be much trouble about this. But if this is a matter which still disturbs the Member, I would be very glad if he could let me know exactly what is causing him anxiety. There may be a real point which is causing anxiety among businessmen, in which case I would be very glad to give any further clarification on this, but it should be on rather concrete proposals. I think these remarks would cover most of the points he has raised.

Mr Lim Soo Peng: Clause 14, Dr Goh.

Mr Speaker: I think the Member was speaking on sub-clause (9) of clause14.

Dr Goh Keng Swee: I would have thought that sub-clause (9) prevents a pioneer certificate from being bought and sold between companies. I think that is the intention. It is certainly not the intention of this clause to place unnecessary limitations on legitimate business transactions.

Question put, and agreed to.

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

The House immediately resolved itself into a Committee on the Bill. - [Dr Goh Keng Swee].

Bill considered in Committee; reported without amendment; read a Third time and passed.