INCOME TAX (AMENDMENT) BILL

Order for Second Reading read.

4.29 p.m.

The Minister for Finance (Mr Hon Sui Sen): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

The purpose of the Income Tax (Amendment) Bill is, firstly, to seek legislative authority for a number of tax concessions, many of which have previously been announced and, secondly, to tighten up certain of the existing provisions of the Act, which, in the light of experience since the Income Tax Act was last amended in 1969, appear to need improvement.

I shall first deal with those amendments which represent tax concessions. Clauses 5 and 12 of the Bill stem directly from the Government's policy of developing Singapore into a regional financial centre. To sustain the rapid and robust growth of the Asian Dollar Market, it is considered that, in addition to liberalisation of foreign exchange regulations and exemption from income tax on interest paid to non-resident depositors of Asian Dollars, further concessions from income tax are desirable to create profitable outlets for the Asian Dollar Market.

Clause 5 of the Bill provides exemption from income tax on the interest payable to non-resident holders of Asian Dollar Bonds issued in Singapore where such bonds have the prior approval of the Government. This exemption should help in the flotation of more international bond issues in Singapore.

Clause 12 of the Bill provides a reduction from the income tax rate of 40 per cent to 10 per cent or other special rate on offshore income of banks or other institutions in Singapore making loans to overseas borrowers from their Asian Currency Units. Details of the kind of loans, and their appropriate rates of tax and other conditions will be specified in regulations made under this clause.

In line with our policy of encouraging Singapore investment in Indonesia, profits repatriated to Singapore from approved projects in Indonesia have been exempted from income tax. The tax-free profits, however, presently become taxable when received by shareholders in the form of dividends. Clause 5 (f) seeks to allow such dividends to be distributed tax-free to shareholders. This "carry-through" provision will be consistent with the treatment of Singapore pioneer companies' profits. Dividends declared from these are tax-free in the hands of shareholders.

The economic development of the Republic requires large amounts of capital to be borrowed for investment. Some of these borrowers are, for example, statutory boards and high skill and high technology industries in the private sector. At present, Singapore borrowers enjoy concessions in respect of income tax on interest payable to overseas lenders under the Economic Incentives Act and under Double Taxation Treaties which we have signed with many countries. The existing provisions may, however, be inadequate or may not be applicable in certain cases because we do not have Double Taxation Treaties with certain countries. It is intended, therefore, to make provision in the Income Tax Act to enable complete exemption to be given from tax on the interest payable to overseas lenders if the loans have the prior approval of the Government. Clause (5) (d) provides that such exemption from income tax on interest payable to overseas lenders will be considered where such a loan will promote economic or technological development of Singapore (in respect of the private sector or statutory boards) and in respect of all loans borrowed by the Government. I may add here that, generally, only for loans which are sizable, and where the interest rate and the repayments are favourable and the loans are made by bona fide financial institutions, will the full exemption be accorded under the provision of clause 5 (d).

In view of Government's efforts to modernise and encourage the intensive form of farming in "flatted" farm buildings, clause 7 will extend depreciation allowances to such buildings used for rearing livestock and poultry.

Clause 10 provides for a deduction of $1,000 or the full-earned income if this is less, in respect of earned income relief from the year of assessment 1st January, 1972; full deduction in respect of insurance premiums and provident fund contributions up to $4,000 by deleting the limitation of 1/6th of assessable income from the year of assessment 1973; and certain changes regarding allowances for maintaining children from the year of assessment 1st January, 1974, which are given in detail in the new Fifth Schedule to the Bill. I need not take the time of hon. Members by spelling out these changes as these have been announced previously in Parliament.

The next category of amendments in the Bill seeks to cut some benefits which a minority of taxpayers have in each case enjoyed. The first such amendment concerns changes in the taxation of benefits in the form of free housing accommodation provided to directors and employees by companies. The present practice is to regard the value of such benefit as equivalent to the full annual value of the housing, if this annual value does not exceed 10 per cent of the taxpayer's emoluments. This practice needs to be changed in respect of rent controlled premises. It has been found that though the annual values of such rent controlled premises are already very low, some directors and employees receive even lower emoluments than the annual values of the houses, and pay very little income tax thereon, although they may be occupying very large and prestigious rent controlled premises. Clause 3 of the Bill, therefore, seeks to deem the full annual value of rent controlled premises provided to directors or employers by companies to be gains or profits of employment, and therefore subject to tax, if their remuneration is less than the annual value of premises provided.

When the Income Tax Act was last amended in 1969, exemption from income tax was accorded for profits of Singapore registered ships. This was done to encourage more registration of ships in Singapore. The intention was to give income tax exemption to large sea-going ships only, but because the provisions are vague, passenger ferries, barges, fishing trawlers and tongkangs and miscellaneous local harbour craft have also been applying for exemption. Clause 6 will clearly restrict the exemption to Singapore sea-going ships.

The Income Tax Act was amended to disallow carry-forward of losses on takeovers where a company with accumulated losses was bought purely for tax benefits. It is also proposed to bring into line with this amendment the carry-forward of depreciation allowances, which is also another source of tax manipulation. Clause 8 accordingly seeks to disallow carry-forward of depreciation allowances where the ownership of a company is changed substantially.

Charitable organisations and charities in Singapore, unlike those in some countries, have hitherto been subject to very little scrutiny or supervision of their activities. These organisations and charities enjoy major concessions under the Income Tax Act, as they get full exemption from income tax on contributions of donors and on their own income. It would not be unreasonable, therefore, to require under the Income Tax Act that these organisations apply their tax exempt income solely for charitable purposes, that they do not engage in trade or business except in pursuance of their primary purpose, and that a reasonable part of their income is distributed every year. Clause 5 of the Bill provides that charitable organisations should distribute not less than 80 per cent of their income, unless it is otherwise agreed by the Comptroller of Income Tax which he will do if any reasonable grounds are presented why a lower proportion should be spent. To prevent one common abuse of its tax exemption status, any expenses which do not fall directly within the ambit of charity can be disallowed by the Income Tax department. As the proposed amendments will ensure that charitable organisations fulfil the objectives of their founders, I do not expect them to be other than generally welcomed.

The Stock Exchange which witnessed a lot of speculative activity last year, also saw the emergence of "share option schemes". Such share option schemes allow directors and employees to take an option to buy shares in the company at often a nominal price. Clause 3 of the Income Tax Act will make it clear beyond doubt that gains or profits from share option schemes are liable to income tax.

Clause 9 clarifies that income tax will be imposed on the profits made by a life insurance company on the sale of its investment. Such investment is an integral part of the day-to-day business of an insurance company.

Clause 10 will disallow income tax deductions by individual taxpayers on life insurance premiums, unless the insurance company concerned has a branch or office in Singapore. This amendment is logical and equitable as the Insurance Commissioner has no authority over foreign insurance companies not operating in Singapore and such companies do not pay any tax in Singapore. The proposed amendment will not, however, affect existing policy holders who pay premiums to insurance companies overseas.

The present rate of penalty for late payment of tax is 5 per cent interest on outstanding arrears of income tax payments. This rate is too low to induce some taxpayers to make early payments. Clause 14 provides that the penalty rate of interest of 5 per cent will be increased by 1 per cent for every month that the tax remains unpaid up to a maximum of 12 per cent. This amendment should prevent delinquent taxpayers from wilfully delaying their payments.

I shall now deal with the last category of amendments which are intended to remove any vagueness in the existing provisions.

Clause 4 seeks to make it clear that interest paid by a local borrower to a foreign lender and interest on a loan, the funds from which are brought into or used in Singapore, are taxable in Singapore irrespective of where the loan agreement is made.

Clauses 5 and 11 seek to remove any doubt that non-resident directors are liable to a flat rate of 40 per cent tax, irrespective of the period of their presence in Singapore.

Clause 2 seeks to define the residential status of individual taxpayers and companies because of the changeover to the preceding year basis of assessing income tax.

The remaining amendments are consequential and procedural in nature.

Mr Speaker, Sir, I beg to move.

Question proposed.

4.42 p.m.

Mr Hwang Soo Jin: Mr Speaker, Sir, speaking as one Member from a rural constituency, I am pleased to note that for once tax incentive is being introduced as a measure to encourage development in the agricultural sector. I have in mind clause 7 which provides for allowances for industrial buildings and structures to be granted in respect of multi-storey buildings used or intended to be used for the purposes of intensive pig and poultry production.

Sir, in considering the practical effect of this particular provision, it occurs to me that the incentive provided may benefit only a handful of big timers with substantial financial resources behind them. In so far as the thousands of medium and small-sized farmers are concerned, the proposed incentive is to my mind quite meaningless. In the first place, how are they able to raise sufficient funds to purchase lands for development, not to mention the cost of construction at a time when prices of materials are so high?

Sir, if the Government is genuine in its intention to encourage development of agriculture along modem lines, and I believe this to be the case, I suggest that the Government should give serious consideration to the provision of much needed organisational support and long term low interest loans to interested farmers on a group basis for the development of multi-storey farm houses. Perhaps a scheme similar to the house ownership scheme of the Housing and Development Board (we can call it "Farm Ownership Scheme") but with suitable adjustments to the repayment programme may be introduced. If the Government is prepared to undertake the task of organising and financing the scheme initially, I feel sure that the Farm Ownership Scheme is likely to succeed. For a start, the Government may wish to consider areas where farmers are scheduled for resettlement. Instead of the present system of compensation, those affected and are interested in continuing their farming business may be resettled in multi-storey farmhouses. By doing it on a collective basis, large savings can be made in infrastructure development which is becoming more costly in view of the need to adopt extensive antipollution measures, such as construction of septic tanks, drainage system and other sanitary amenities.

Sir, at a time when a number of countries in the world arc suffering from a shortage of food, it is comforting to know that our agricultural sector continues to supply us with many essential items of food at reasonable prices. But for the contribution of our farmers, I am sure that our cost of living would have risen to a much higher level, as happened in many other countries which depend heavily on imports of food. With this in mind, Sir, I would urge the Minister, in consultation with the Minister for National Development, to give serious consideration to my suggestion so as to ensure that our agricultural sector will continue to make this meaningful contribution to our national economy.

Mr Hon Sui Sen: Mr Speaker, Sir, I am indebted to the Member for Jalan Kayu for his valuable suggestions. As he has suggested, I will confer with the Minister for National Development to see whether or not any of his suggestions can be considered.

I would, however, say that this provision in the Bill was intended really to apply to industrialised farming, which the future Singapore must get into, that is, to run the flatted factory farm in the way that an industry is run. I think this requires more skilled management than the individual farmer can provide, even on a collective basis. However, I do not think we can deal with the problems of agriculture while considering this particular Income Tax (Amendment) Bill, and the Member's suggestions therefore should be referred to and considered in other more appropriate areas.

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. -[Mr Hon Sui Sen].

Bill considered in Committee.

[Mr Speaker in the Chair]

4.49 p.m.

Clauses 1 to 5 inclusive ordered to stand part of the Bill.

Clause 6 -

The Chairman: There is an amendment standing in the name of the Minister for Finance on the Order Paper Supplement, which is subject to the Speaker's consent and the general assent of hon. Members present for dispensation of notice under Standing Order 33. I give my consent, is it the pleasure of hon. Members that the amendment be moved?

Hon. Members indicated assent.

Mr Hon Sui Sen: Sir, I beg to move,

In page 6, to leave out lines 31 to 35 inclusive and insert

"income of a shipping enterprise" means the income derived by a shipping enterprise from the carriage (other than within the limits of the port of Singapore) of passengers, mails, livestock or goods by sea-going Singapore ships and includes the income from the charter of such ships;"".

Sir, it was the intention of clause 6 of the Income Tax (Amendment) Bill to remove any doubt that under the existing provision of section 13 (a) of the Income Tax Act, the exemption from income tax to Singapore registered ships does not apply to harbour craft, such as passenger ferries, fishing boats, tongkangs, etc., which operate within the Port limits of Singapore. Unfortunately, clause 6 of the Bill, as drafted, could also be construed to exclude any Singapore sea-going ship which does not call at Singapore. The purpose of the exemption from income tax is to encourage registration of all sea-going ships registered in Singapore, irrespective of whether they call at Singapore or not.

Therefore, it is proposed by the present amendment to reword the definition in clause 6 to make it clear that there would be no change in the exemption from income tax of seagoing Singapore registered ships, but not of vessels which are used only within the Port limits of Singapore.

Amendment agreed to.

Clause 6, as amended, ordered to stand part of the Bill.

Clauses 7 to 15 inclusive ordered to stand part of the Bill.

Clause 16 -

The Chairman: There is a note,

In page 12, line 8, after "Gazette", to insert close inverted commas and a fullstop.

This will be done.

Clause 16 ordered to stand part of the Bill.

Bill reported with an amendment; read a Third time and passed.