INCOME TAX (AMENDMENT) BILL

Order for Second Reading read. 3.25 p.m.

The Minister for Home Affairs and Education (Mr Chua Sian Chin) (for the Minister for Finance): Mr Speaker, Sir, I am moving the Second Reading of the Bill on behalf on my colleague, the Minister for Finance.

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

Sir, the object of this Bill is to incorporate into the Income Tax Act the tax concessions which the Minister for Finance granted in last year's Budget Statement The opportunity is also taken to include, in the Bill, amendments which redefine tax terminology in order to remove ambiguity. The Bill also seeks to give the Comptroller additional powers to ensure prompt collection of taxes.

In his Budget Statement in March 1976 my colleague, the Minister for Finance, announced that to continue to develop Singapore's financial centre and to promote the Asian Dollar Market, income received by Asian Currency Units for advising, confirming or re-financing off-shore letters of credit will be taxed at the reduced rate of 10% instead of the normal 40%. That tax concession is now given effect under clause 7.

The Minister also announced in his Budget Statement in February of this year that the basis of the tax on pensions would be revised. Members may be aware that a pension payment, like the annuity paid by insurance companies, can be treated as consisting of two elements, one element being part repayment of the capital, and the other interest on the capital. At present, both elements are subject to income tax. Clause 3 provides that only the interest portion will be treated as income and taxed accordingly; for purpose of assessment the interest element is calculated at one-half of the pension. This concession applies to all pensions set up by law in Singapore as well as to approved pensions.

I now deal with the other amendments.

The present definition of source of income does not cover interest accruing from suppliers' credit or deferred payments for the sale of goods, royalties and other payments for the use of movable property, management fees, payments for the use of scientific, technical, industrial or commercial knowledge or information, and rents or payments under agreement for the use of movable property. Clause 4 provides that where these are paid directly or indirectly by a Singapore resident or a permanent resident in Singapore, or are deductible against income accruing in Singapore, the source is deemed to be in Singapore and therefore liable to income tax.

Clause 5 of the Bill lifts the restriction on the exemption from income tax, in respect of interest received from Asian Dollar bonds, to issues emanating in Singapore. Henceforth, all approved Asian Dollar Bond issues are tax exempt, whether issued within or outside Singapore.

The present law allows a taxpayer to claim relief for maintenance of his dependants who reside with him outside Singapore. Clause 6 now restricts the tax relief to the taxpayer whose dependants are living with him in Singapore.

Clause 8 provides for the deduction of withholding tax on royalties and management fees paid to non-residents similar to that provided in the Act regarding payment of interest to non-residents. The rate of withholding tax is 40% although the Comptroller has the discretion to give notice to make deductions at a higher or lower rate, where appropriate.

Clause 10 of the amendment provides for full or partial exemption of income under double taxation agreements. Any income so exempted under a double taxation agreement will be taken into account in determining the effective tax rate to be applied to other income in respect of which tax is payable.

The present system of granting double taxation relief can in certain cases result in less tax being collected, because of a large foreign income, than would have been the case had there been no foreign income. Clause 11 now rectifies this anomalous situation. It provides for any tax credit allowed under the double taxation agreement not to have the effect of reducing the tax payable on any source of income derived from Singapore.

Income tax for the year of assessment is based on the income of the preceding year. There is therefore a time lag. In the case of a business or trade whose accounting period ends in the early part of the year, the deferment of tax payment is even longer. Indeed some businesses choose the early part of the year as the end of the accounting period to take advantage of this provision. To prevent such abuse, clause 12 imposes an obligation that where the accounting period of a business or trade ends on or before 30th September, an estimate of the tax should be given to the Comptroller within three months after the end of the accounting period to assist the Comptroller in raising an advance assessment without undue delay.

Another amendment, clause 15, vests the Comptroller with reciprocal right to apply to the Board of Review or High Court for appeal cases to be heard in public instead of in camera. Hitherto, only taxpayers can make such an application.

The final amendment as contained in clause 16 makes it the employer's responsibility to ensure that the amount deducted from the emoluments of the employee for purpose of payment of income tax is forwarded to the Comptroller not later than ten days after the date of such deduction. There have been occasions when employers deliberately delayed the remittance of tax so deducted.

Sir, I beg to move.

Question proposed. 3.35 p.m.

Mr Cheong Yuen Chee (Toa Payoh): Mr Speaker, Sir, I rise in support of the Bill which is to provide for, among other things, the clarification of income from off-shore financing and the clarification of the effect of a double tax arrangement. It is to be expected that, in the course of Singapore's development as a financial centre for the region, there must arise the need to amend the Income Tax Act to cater for new sources and new categories of income from new financial activities. In that sense, the various provisions in the Bill relating to off-shore financing and such matters as Asian Dollar Bonds and Asian Currency Units may be classified as consequential legislation, that is, consequential to the Government's programme or blue-print of development for Singapore. I do not think any Singaporean, who is truly appreciative of Singapore's ever constant need to ensure the viability of its economy in a competitive world, will question the necessity and desirability of the various provisions in this Bill.

One particular provision in the Bill I particularly endorse is clause 3 which provides for all pensions, granted under any written law in Singapore, to be taxed on a 50% basis. Such a provision means, in other words, that a pensioner will receive half his pension free of tax. That should be a considerable relief to all pensioners in Singapore, particularly when the pension is determined at the time of retirement of the pensioner and is normally not adjusted against subsequent inflation which can effectively reduce the real monetary value of the pension.

While I am grateful, as a trade unionist, to the concession accorded under the Bill to pensions, I wish to enquire whether the Government would extend its concessionary treatment to retrenchment gratuity. As it is, the position regarding retrenchment gratuity is most confusing and perplexing to workers.

As Members of this House may know, a retrenchment gratuity is payable when the service of a worker is terminated on the ground of redundancy or of reorganisation of the employer's business, trade or profession. Under the Employment Act, the liability of an employer to pay a retrenchment gratuity is stated to be conditional upon the retrenched worker having a minimum of three years' service at the time of retrenchment.

The Income Tax Department had on several occasions decided that if a retrenchment gratuity is payable by virtue of a contract of service or a collective agreement, it is deemed to be a gratuity paid or granted in respect of the employment of the retrenched worker. Therefore, it is taxable. On the other hand, if a retrenchment gratuity is not paid or granted by virtue of any previous contractual agreement, but decided upon by an employer at the time of termination of service, it is deemed to be a gratuity paid or granted in respect, not of employment, but of the termination of employment. Therefore, it is not taxable.

To workers who are faced with the traumatic experience of being retrenched, the confusion over the question of income tax liability for the retrenchment gratuity simply adds to their woes.

In drawing the attention of this House to the unsatisfactory and invidious distinction between retrenchment benefit as a contractual payment and retrenchment benefit as a non-contractual compensation, it is my intention to draw the attention of the Government to the purpose of retrenchment gratuities and that is, a payment to compensate for the abrupt loss of career prospects to a retrenched worker through no fault of his own, and to enable the retrenched worker to tide over the period when he seeks alternative employment. Whether a retrenchment gratuity is a contractual or non-contractual payment, it does not make any difference to the purpose for which it is granted or paid.

I understand that the Income Tax Department has made certain decisions on this matter but these have not been made known to the public. Could the Hon. Minister kindly throw some light on the subject?

Mr Chua Sian Chin: Mr Speaker, Sir, I am glad to say that I am in a position to throw some light on the point raised by the Member for Toa Payoh. He did make a representation to the Income Tax Department on the point about retrenchment gratuity given as a result of a negotiated agreement with a trade union or as a result of a contract signed between the parties. Hitherto this retrenchment gratuity is subject to tax. But following the representation by the Member for Toa Payoh, the Income Tax Department has agreed to make it non-taxable.

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 Chua Sian Chin]

Bill considered in Committee.

[Mr Speaker in the Chair]

3.41 p.m.

Clauses 1 to 8 inclusive ordered to stand part of the Bill.

Clause 9 -

Amendment made:

In page 5, line 34, after "such". to insert "dividend," [Mr Chua Sian Chin].

Clause 9, as amended, ordered to stand part of the Bill.

Clauses 10 to 16 inclusive ordered to stand part of the Bill.

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