INCOME TAX (AMENDMENT NO. 2) BILL

Order for Second Reading read. 3.31 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."

In the 1980 Budget Statement, a number of tax concessions were announced. This Income Tax (Amendment No. 2) Bill is necessary to give legislative authority to the concessions. The opportunity is also taken to incorporate other amendments to improve and streamline existing legislation.

One of the tax concessions made in the Budget Statement was that double tax deduction will be given for expenditure incurred on or after 1st April 1980 by a manufacturer undertaking an approved research and development project. The manufacturer can also claim double tax deduction on his expenses if he assigns the project to a research and development organisation in Singapore. To qualify for the double tax deduction, the project must also be related to the business of the manufacturer. Clause 5 of the Bill makes provision for the concession by incorporating a new section 14(E) to the Income Tax Act.

Another concession allows a building used by a research and development organisation to carry out research and development activities to be considered as an "industrial building or structure", thereby qualifying for an initial allowance of 25% and an annual allowance of 3% of the capital expenditure incurred on the construction of the building. Section 18 of the Income Tax Act is amended by clause 7 to provide for the concession which will take effect from Year of Assessment 1981.

Clause 8 amends section 19 (2) of the Income Tax Act to provide for the change in the basis of granting annual allowances for plant and machinery from the reducing balance method to the straight line method. A new schedule has also been drawn up to allow for more realistic rates of write-off. Assets which promote automation and mechanisation are given faster rates. The concession will take effect from Year of Assessment 1981. An option is also given to a person who has been granted a certificate under the Economic Expansion Incentives (Relief from Income Tax) Act before 1st January 1981, or after that date where approval for the certificate has been given before 1st January 1981, to retain the reducing balance method as the basis of calculating the annual allowances during the period of tax relief.

Clause 9 of the Bill extends the accelerated depreciation allowance of 331/2% over three years to include expenditure on computers and research and development equipment incurred on or after 1st January 1980.

Manufacturers are encouraged to improve existing, or to develop, new products and processes. In so doing, they may need to acquire know-how or patent rights from overseas. As the law stands, the manufacturer cannot claim tax deduction on his expenses incurred on acquiring the know-how or patent rights. With effect from 1st April 1980 such expenditure on approved know-how or patent rights may be capitalised and written-off over five years. A balancing adjustment will be made if the manufacturer sells off the approved know-how or patent rights. Clause 10 provides for this concession by legislating a new section 19(B) to the Income Tax Act.

Clause 13 of the Bill amends section 39 of the Income Tax Act to provide with effect from Year of Assessment 1980, a relief of $750 a year to a taxpayer who maintains a handicapped brother or sister in the same household. To be equitable, the concession will also be extended to a taxpayer who maintains a handicapped child, notwithstanding the child's eligibility for children's relief under the Income Tax Act, but with effect from Year of Assessment 1981.

Presently, income derived from offshore reinsurance and inward direct insurance covering offshore risks is taxed at a concessionary rate of 10%. Clause 14 legislates a new section 43(D) of the Income Tax Act to provide for the extension of the 10% concessionary rate to include income derived by an approved member of the Gold Exchange of Singapore from offshore gold transactions as well as transactions with other members of the Gold Exchange of Singapore and Asian Currency Units. The concession is effective from Year of Assessment 1981.

Clause 18 of the Bill provides for the reduction in the rates of tax of an individual or a Hindu Joint Family with effect from Year of Assessment 1980.

I now move on to other amendments which are intended to streamline and improve existing legislation.

Clause 2 defines the terms "research and development" and "research and development organisation" for purposes of the Income Tax Act. The term "research and development" is defined as any systematic or intensive study carried out in the field of science or technology with the object of using the results of such study for the production or improvement of materials, devices, products or processes. A "research and development organisation" is defined as a body or an organisation which provides research and development services for any manufacturing trade or business.

Clause 3 of the Bill makes consequential amendments to section 14(1) (e) of the Income Tax Act as a result of the increase in CPF contributions from 16 1/2% to 20 1/2% payable by employers with effect from 1st July 1979.

In line with the new definition of research and development, clause 4 of the Bill amends section 14(D) of the Income Tax Act by replacing the term "scientific research" with "research and development". Section 14(D) allows payments made to an approved research and development organisation to be deducted as revenue expenses.

Donations to any institution of a public character under section 37(2) of the Income Tax Act are tax deductible. Clause 12 of the Bill seeks to extend the definition of an insti- tution of a public character to include charities, and cultural organisations which are not operated primarily for profit.

Clause 15 of the Bill amends section 68 of the Income Tax Act to remove the obligation of an employer to inform the Comptroller of Income Tax of the cessation of employment of his employees who are Singapore citizens.

Sir, I beg to move.

Question proposed.

Dr Augustine Tan: Mr Speaker, Sir, I have a few questions for the Hon. Minister. First of all, in regard to the definition of "research and development" in clause 2, I am wondering whether the definition provided in the Bill is not too restrictive in view of the diversified nature of Singapore's economy. In other words, it seems to me to be exclusively geared towards the manufacturing sector which only supplies about 21% of the GDP. For example, under the exclusion of that clause, quality control is left out altogether. It would seem to me that for a fledgling manufacturing economy like Singapore quality is of the essence if we want to develop long-term markets abroad. So maybe some thought ought to be given to see whether adequate incentives exist to encourage manufacturers to look after the quality of their products.

Furthermore, Sir, research in the social sciences, the so-called routine data collection, efficiency surveys of management studies, market research or sales promotion, some of these may be very significant and very important from the productivity standpoint, from the standpoint of enlarging the markets and even of manufacturing firms and also of the other service firms in the Republic of Singapore.

The definition of "research and development organisation" is again exclusively limited to manufacturing trade or business. I can see a few problems here, Sir. First, you may have an R & D organisation that may not provide services solely to manufacturing but may also have services in the service sector of the economy. Secondly, the exclusion again of the service sector from enjoying any tax incentive in respect of R & D seems to me to be a very serious omission.

Next, I would like to refer the Minister's attention to paragraph (b) of clause 9. There are four conditions which are stated in the Bill. In reading the Bill it was not clear to me whether all or some of these conditions must be satisfied before the organisation in question can qualify for the incentives on R & D. Secondly, why is it that sub-paragraph (c) specifies the installation of a computer? I grant that a computer is a very useful kind of equipment to have because it enhances productivity but so do a lot of other machines which can be installed in any particular business enterprise. So why focus exclusively on a computer? Furthermore, Sir, in the matter of computers, I am given to understand that the hardware is becoming increasingly cheaper with new innovations and new products coming on to the market. At the same time, the software is becoming extremely expensive. I would have thought that it would be more logical to include some kind of incentives for the development of software in using computers. Fourthly, the incentives seem to be geared towards physical capital and again in the context of Singapore it would seem more logical for us to emphasize development of human capital. Maybe the Finance Minister would want to look into what incentives we need to encourage investment in human capital, i.e. encourage firms to send people abroad for training programmes which would advance their skills and so on.

Another question in regard to this clause has to do with sub-paragraphs (1) and (ii) of paragraph (b) in page 8 of the Bill. Sub-paragraphs (i) and (ii) say: '(i) on or after 1st January, 1965, on the provision of machinery or plant for the purposes of that indus-trial enterprise; (ii) on or after 1st January, 1973, on the provision of that equipment or device for the purpose of preventing, controlling or reducing air pollution or water pollution;'. My question to the Minister for Finance is this. Why is he so generous in giving the incentive on a retrospective basis? I have never known him to be so generous in respect of other kinds of tax incentives. I would have thought that if a manufacturing enterprise had started as early as 1965, by now it would have written off most of its equipment many times over.

Finally, may I refer him to clause 13 which provides a welcome relief of $750 a year to a taxpayer for maintaining any handicapped child or handicapped brother or sister living in the same household. Would the Minister consider extending the concession to the tax-payer if the child, or the brother or sister in question had to be confined to an institution but yet had to be supported by the taxpayer? It would seem to me quite logical for him to extend this concession because this will certainly encourage more people to look after their handicapped relatives rather than relying on the Social Welfare Department.

Mr Hon Sui Sen: Mr Speaker, Sir, there are a number of questions to be answered. On the definition of "research and development", the Member for Whampoa is quite correct that the intention is to give these incentives to the manufacturing industry, at least in the first instance. Whether we shall extend these incentives later on to the other sectors of the economy is a matter which can be considered in due course. His eloquence in pleading the cause of other research organisations will be taken into consideration. For the time being, since these definitions are really for the purposes of calculating double deduction, perhaps they can stand for the time being. If the economy of Singapore shifts to an emphasis on the service economy, then we can consider whether there should be more promotion of such service activities.

On research and development organization, he has said that perhaps the body may also provide services which are related to non-manufacturing industries. Again, as I have tried to explain, the incentives are for double deduction on manufacturing industries, and if services are provided for other than non-manufacturing purposes, expenses can be deducted but not at the double expense rate.

If I may now turn to clause 9. He does not understand whether or not all the conditions in paragraphs (a), (b), (c) and (d) are to be taken together and must be satisfied. The operative word is in paragraph (c) where, at the end of that paragraph, there is the word "or". So it is quite clear that not all these conditions are to be satisfied.

The Member also asked why do we concentrate on computers. This is probably more in the way of emphasis for publicity purposes, emphasis on those aspects which computers stand for, that is, the modernization of processes. I agree that perhaps the computer of today is not quite as expensive an equipment as it used to be and that perhaps the emphasis is not justified or will not be justified over the next few years. As to the inclusion of software, that is probably more difficult because a lot of software is developed by the manufacturing industry inhouse so that there is no way in which we can calculate the expenses.

He also commented on sub-paragraphs (i), (ii), (iii) and (iv) on page 8 of the Bill. Various dates have been cited. I do not suppose the date "1st January, 1965" has any real significance because if machinery has been put in since that date, a lot of it would have been depreciated. It is quite clear that we must set a date and I suppose "1965", being the year of our independence, might be a suitable date.

The last question is on handicapped children. I believe that in giving this concession, instead of charity being the concern of the State and of the institutions, the intention was to promote the care of handicapped persons within the home. That is the reason why the concession of $750 has not been given to the home or institution. I do not say, of course, that they do not deserve support. Maybe that can be considered in some other concessions at some other time.

Dr Augustine Tan: Sir, I would like to thank the Hon. Minister for clarifying the questions I have raised, although I am not entirely satisfied with some of the answers. May I just point to one of the replies which he gave in respect of clause 9, especially the four conditions which are required of an organization to qualify for the special incentives for research and development. If we look at paragraph (b) of clause 9, it says:

'he has installed [that means the manufacturer must have installed] any equipment or device for the purpose of preventing, controlling or reducing air pollution or water pollution;'.

What is the position if a manufacturing industry is a non-pollutive industry and therefore has no anti-pollution equipment? How would it fit into the scheme of things?

Mr Hon Sui Sen: Sir, in such circumstances I would congratulate the manufacturer for having set up an industry which is very desirable for Singapore. But in almost all cases there is some pollution. No doubt if a reward is intended for a non-pollutive industry, perhaps we can give some other concession at some other time.

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; reported without amendment; read a Third time and passed.