ANNUAL BUDGET STATEMENT

[Mr Speaker in the Chair]

Resumption of Motion.

Dr Tony Tan Keng Yam: Mr Speaker, Sir, I now turn to the FY 1982 Budget.

The objectives of the Budget are to -

(a) increase the supply of skilled, technical and professional manpower needed to facilitate the restructuring and upgrading of the economy;

(b) step up infrastructural, industrial and commercial development so as to sustain economic growth and promote economic restructuring, and

(c) accelerate the public housing construction programme to meet the rising demand for housing units.

The total estimated expenditure (excluding the transfer from the Consolidated Fund to the Development Fund) for FY 1982 is $12,440 million. Of this, $7,156 million or nearly 60% is for education and manpower training; infrastructure, industrial and commercial development as well as public housing.

The recurrent expenditure of Government programmes totals $5,591 million. This is 22% higher than that for FY 1981 and should be adequate to cover rising costs as well as expansion of essential functions, such as education and manpower training.

Expenditure on manpower is expected to rise by $188 million or 16%. The rate of increase is moderate because of a net total reduction of 168 posts on the permanent establishment. The total number of posts on the FY 82 permanent establishment will be 68,677 as against 68,845 on the FY 81 permanent establishment. Substantial reductions in manpower have been effected by the Ministries of Environment (115 permanent and 1,817 daily-rated posts), Finance (187 permanent and 13 daily-rated posts) and Health (216 permanent posts). Less manpower is required because of increased staff productivity, reorganization of work procedures as well as mechanization and computerization of routine operations. The reductions in manpower of these Ministries have been partly offset by staff increases in other Ministries. The increases have been supported selectively and only in cases where the needs have been clearly demonstrated. These have been confined to Ministries with new or expanded areas of work, such as the new Overseas Missions, Bukit Merah Branch Library, Ponggol Fishing Port, Family Day-Care Scheme, Aerodrome Fire Fighting Service and Work Permit Division.

Excluding Armed Forces expenditure, Other Operating Expenditure will go up by $185 million or 42%. The increase is due mainly to the purchase of capital items, including office equipment, vehicles and vessels, interest equalization payments under the Fixed Rate Export Financing Scheme, and expenses connected with the management of Government assets. The increase in allocation for capital items is in accordance with the policy of promoting mechanization and computerization in Ministries and Departments. The balance is largely to meet higher costs of maintenance, rental, public utilities, supplies and materials.

Grants, Subsidies and Other Transfers will increase by $139 million or 24%. This is due largely to:

(i) annual salary increments, increase in CPF/MPF contribution and a contingency sum for the NWC wage supplement in FY 82 for the staff of statutory boards, tertiary education institutions and aided schools;

(ii) a bigger provision for tuition grants to the students of the tertiary education institutions whose enrolment is expected to go up significantly in FY 82; and

(iii) an allocation of $20 million for the sening up of a revolving fund for loans to purchase personal microcomputers.

The recurrent expenditure will be fully met by the expected revenue of $7,639 million, leaving a surplus of $2,048 million for transfer to the Development Fund to help finance development expenditure.

A sum of $6,849 million or about 55% of the total budget will be spent on development projects. Outlays on infrastructural, industrial and commercial development, public housing as well as education and manpower training together account for 85% of the development budget.

Expenditure on infrastructural, industrial and commercial development will take up $3,001 million or 44% of the development outlay. This includes $1,720 million for the Petrochemical Corporation of Singapore, lines of credit to the Development Bank of Singapore, Ship Financing Scheme and Capital Assistance Scheme for the Construction Industry; $354 million for the development of Changi Airport and roads in the Republic; $294 million for the development of industrial estates by the Jurong Town Corporation as well as $151 million for the Economic Development Board's Capital Assistance Scheme and Product Development Assistance Scheme.

In line with the objective of accelerating the public housing construction programme, a total of $2,253 million or 33% of the development budget has been budgetted for this purpose. The number of HDB units to be completed annually will be increased substantially over the next few years.

The provision for education and manpower training is $548 million. This is to cater mainly for the School and Junior College Building Programme, Third Phase Development of the Kent Ridge Campus of the National University of Singapore, construction of a new complex for the Nanyang Technological Institute and expansion of the Ngee Ann Technical College.

An amount of $52 million is set aside for the computerization programme of the Civil Service. The allocation is for the purchase of hardware as well as the development of software. Computerization will improve efficiency of Government operations and, in the long run, curb manpower increases in the Civil Service.

To utilize these budgetary allocations effectively, we need a competent and efficient Civil Service. As at the end of December 1981, a total of 10,613 posts or 15% of the permanent establishment was vacant. Although there are shortages of officers in a number of Ministries, recruitment is progressing and hop&ully the vacancy position will improve in the course of FY 82.

REVENUE

The total estimated revenue for FY 1982 is $7,639 million, which is an increase of $106 million or 1.4% compared with the revised estimates of $7,533 million for FY 1981.

Income tax, as always, is the largest single source of revenue. Income tax collections in FY 1982 are expected to be high because of the economic growth in 1981. The total collection is estimated at $2,930 million, representing an increase of $330 million or 12.7% over the revised estimates for FY 1981. Corporate income taxes account for 72% of the total collection.

The total budgetted expenditure for FY 1982 is $12,440 million, comprising a recurrent expenditure of $5,591 million and a development expenditure of $6,849 million. The revenue of $7,639 million estimated for FY 1982 is, therefore, insufficient to finance total recurrent and development expenditures. Taking into account Development Fund income of $1,741 million, there remains a deficit of $3,060 million to be financed by borrowings and a drawing down from the Development Fund. TAX CHANGES

The most exciting part of any Budget Statement, although in my view not necessarily the most important part, is the tax changes. For FY 1982, 1 do not intend to levy any new taxes or raise the rates of existing taxes.

Since 1978, we have progressively reduced personal income tax rates in order to afford relief from inflation and to ensure that our income tax will never be so high as to deter Singaporeans from wanting to work hard and earn more. Cumulatively, the tax concessions which we have given add up to a considerable amount. Even after taking into account the rise in nominal incomes due to inflation, the effective tax rates which Singaporeans pay today are lower than five years ago. In percentage terms, this reduction in effective tax rates has been most substantial at the lower income brackets. Let me take a simple example. Consider a person who had a net chargeable income of $5000 in the Year of Assessment 1977. His effective rate of tax in that year would be 7.5%. Even if his chargeable income has increased at the same rate as inflation, his effective tax rate in the Year of Assessment 1982 would have been reduced to 4.8%. This means that his effective tax rate has declined by more than one-third over the last five years. Taxpayers in the higher income brackets have also enjoyed similar, although smaller, reductions in effective tax rates. We must continue to make sure that our rates of income tax will never reach a level where they discourage hard work and stifle talent. However, for FY 1982, 1 have decided that it is not necessary to add to the concessions in personal Income Tax rates announced in the 1981 Budget and taking effect from the Year of Assessment 1982.

Tax Changes for Individuals

These concessions in income tax rates will be at a cost estimated at $114 million to Revenue. Nevertheless the healthy state of our finances has made it possible for me to extend an additional four concessions for individual taxpayers. TAX ON PUB BILLS

I have examined the basis of the tax on PUB bills and have decided that it should be changed. The prime objective of this tax is to ensure conservation in the use of electricity, gas and water. This being so, the tax should be levied on only those items in the PUB bill that vary according to consumption.

With effect from 1st April,1982, the fixed charges in the PUB bill will not be included for the purpose of computing the 10% tax. These charges are sanitary appliance fee, domestic refuse charge, rental for appliances and night soil removal fee. The tax, therefore, will be imposed on only the total of electricity, gas and water charges, and water-borne fee where these charges exceed $80. The tax will remain at 10% of the amount in excess of $80.

This change will effectively mean on average a rise in the exemption ceiling of between $4 and $9.

Contributions to CPF and Approved Pension and Provident Funds

High CPF contributions have, over the years, come to exceed the maximum amount allowable for tax deduction under the Income Tax Act. In 1979, the ceiling was raised from $4,000 to $5,000 for statutory CPF contributions and contributions to designated approved funds which are funds in lieu of the CPF. I am extending this concession to give greater relief to taxpayers.

With effect from Year of Assessment 1983, all statutory CPF contributions and contributions to designated approved pension and provident funds will be fully tax deductible. Where such contributions exceed $5,000, no deductions will be allowed for life insurance premiums and other voluntary contributions to super-annuation schemes. Where the statutory contributions do not exceed $5,000, the maximum amount deductible for all contributions to CPF and approved pension and provident funds and life insurance premiums will be $5,000.

This tax concession will result in a loss to Revenue of about $10 million.

Aged Dependant Relief

Members will know that Government is very concerned that the young should look after their aged dependants. The growing number of one-family nuclear households is not a healthy development. The elderly and dependent should not be left on their own. Family members should look after one another. The care of the aged is a complex matter and it will take time to work out appropriate government policies to encourage children to look after their aged parents. In the meantime, where there are obstacles which can be cleared or incentives, however modest, which can be given, we should do so forthwith.

I intend to make two revisions to the aged dependant relief. A taxpayer can currently claim a relief of $750 for each aged parent or grandparent living with him, subject to a maximum of two. For the relief to be allowed, one of the conditions is that the aged dependant must not have an income of more than $750 in the year.

With effect from Year of Assessment 1983, the relief will be raised to $1,000 per aged dependant. As a further relaxation of the conditions for eligibility of the relief, the relief will be allowed so long as the dependant has an income no greater than $1,500 in the year.

ESTATE DUTY

On 1st January, 1981 the specific exemption for residential propedies was raised from $200,000 to $600,000. The exemption limit for assets other than residential properties remained at $100,000.

As a further concession to promote home ownership, the exemption limit for residential properties will be extended to include the full value of anyone residential property. In other words, the exemption limit will be $600,000 or the full value of any one residential property, whichever is the higher.

In line with income tax deductibility of CPF contributions, exemption will be given on all CPF balances of the estate with the Fund. It will not include amounts withdrawn by the deceased during his lifetime under the approved schemes and not refunded to the CPF. Where the CPF balance exceeds $100,000, no further exeption will be given for other assets, except for those qualifying for the exemption on residential properties. Where the CPF balance does not exceed $100,000, the exemption limit of $100,000 for assets other than residential properties will apply to all such assets, including the CPF balance.

This concession will also apply to all approved provident funds which are in lieu of CPF.

To encourage offshore gold transactions as well as to further develop the gold market, gold deposits with bullion companies held by foreigners, who are neither resident nor domiciled in Singapore, will not be liable to estate duty.

The above concessions will take effect from 1st April, 1982.

TAX CHANGES FOR COMPANIES

I now come to the tax changes for corporate taxpayers.

Stamp Duty on ACU Offshore Loan Agreements

Stamp duty on ACU offshore loan agreements was abolished on 1st April, 1980. However, loan agreements which were signed outside Singapore would still be subject to ad valorem stamp duty up to a maximum of $500 when repatriated to Singapore. As a modest concession towards facilitating loan syndication activities in Singapore, I have agreed to allow ACU offshore loan agreements which were signed prior to 1st April, 1980 to be repatriated to Singapore without being liable to stamp duty as from 1st April, 1982.

Road Tax on SBS and CSS Buses

There is a need to rationalize road tax for buses that provide scheduled services, that is, those of the Singapore Bus Service (SBS) and the City Shuttle Service (CSS). Road tax on SBS buses presently is a flat rate of $6,500 per bus per annum, irrespective of the size or engine capacity of the bus. This helps to encourage the deployment of bigger capacity buses. All SBS buses have a passenger capacity exceeding 46. The average passenger capacity is 65. In comparison, the road tax on CSS buses ranges between $400 and $1,600 per bus per annum, depending on the passenger capacity. CSS buses are smaller with passenger capacities of between 30 and 46.

I have decided to harmonize the road taxes to a uniform rate of $5,500 per bus per annum for all SBS and CSS buses of passenger capacity exceeding 46 with effect from 1st April, 1982. The road taxes on the smaller CSS buses will remain unchanged.

This will result in a loss to Revenue of $2.9 million per annum.

Capital Allowances for Company Registered Cars

Under the Income Tax legislation, capital allowances can be claimed on company registered cars. The ceiling of the capital allowances was last raised from $15,000 to $25,000 on 1st April,1979. With effectfrom 1st April, 1982, 1 have decided to increase this ceiling further to $35,000 to bring it more in line with present prices of cars.

Financial Leasing

The lease financing market in Singapore, although not fully developed, is growing in importance and it is appropriate to lay down the broad tax framework for its operations. Financial leasing, as another form of financing, confers upon the lessor and the lessee tax benefits. For this reason, it is not only widely practised by companies genuinely engaged in lease financing but also by others, including related parties which enter into lease agreements for tax benefits.

Various representations have been made by leasing companies and financial institutions for liberalization of the present tax laws in order to promote financial leasing in Singapore. One of the proposals is that the residual value at the end of the lease period should be nominal or of a minimum acceptable value. The basic tax principle has always been that if an asset is disposed of, it must be or so deemed to be sold at the open market price. Most major developed countries have adopted the same principle. Although it may be difficult initially leasing companies in Singapore should, in the course of time, be able to determine the open market price of the asset at the end of the lease period. Indeed, the profitability of the company will hinge largely on its ability to determine accurately the residual value of the assets. I have, therefore, agreed with the recommendation of the Tax Department to adopt the basis of open market price for determination of the residual value at the end of the lease period. A balancing charge will be imposed if the open market price is higher than the written down value at the time of disposal. If the open market price is lower than the wriften down value, then a balancing allowance will be given. The Tax Department will in practice accept an independent professional valuation for the purpose of determining the fair open market price of the asset.

It is important that a distinction should be made between a sale agreement and a lease agreement. For tax purposes, an agreement will not be considered as a genuine lease agreement if it provides for any of the following:

(i) The lessee is given an option to purchase the asset during the lease period or at its expiry;

(ii) Where there is no option to purchase, the lessee during the lease term or upon its expiry, acquires the asset at below open market price;

(iii) The rental payments during the initial lease term constitute almost all or at least 90% of the acquisition cost and incidental expenses. Additionally, either the lease term is shorter than the useful life of the leased asset, or the leased asset is not marketable and is a special purpose property, and the lessor has no intention to recover the asset;

(iv) The original lease agreement provides for extension or renewal of the agreement at less than 15% of the rental in the primary lease agreement; and

(v) The periodic lease payments are uneven and/or exceed the current fair rental value.

Transactions involving members of a group or related persons which are primarily motivated by tax manipulations will not be treated as genuine lease agreements. However, transactions which are done at arm's length are acceptable. A transaction is not considered to be at arm's length if a member of the lessee group lends to the lessor funds for the acquisition of the asset or guarantees any debt of the lessor incurred in connection with the lease. A transaction will also be disqualified if the leasing company is specially incorporated for the purpose of leasing the assets to the related companies. It is deemed to be so incorporated if, for any of its financial years, the value of its contracts entered with independent persons constitutes less than 50% of the total value of its contracts for that year.

Sale and lease-back transactions are generally not accepted as genuine lease agreements. They are treated as loans rather than lease agreements. However, the Tax Department will accept sale and lease-back transactions as genuine lease transactions if the equipment is sold to the lessor before it is put to use in the lessee's trade and the sale is made at not more than the acquisition price which the lessee pays to the supplier. The lessee must also not be given capital allowances for the equipment before its sale to the lessor.

Leveraged leases will be treated on an individual basis, upon application to the Tax Department.

The Tax Department will give accelerated depreciation to the lessor on equipment leased to a leskee who would be eligible for the accelerated depreciation had he purchased the equipment himself. In the event of termination of a lease agreement, the lessor can continue to claim the accelerated depreciation allowances if the equipment is subsequently leased to another lessee who is also eligible for such allowances. Otherwise the depreciated vaue of the equipment will be wrinen off on a straight line basis over the remaining statutory life of the equipment. However, the terminal payment paid by the lessee to the lessor as compensation for terminating the lease will be subject to tax.

Mr Speaker, Sir, before I commence my concluding remarks, I should like to digress a moment and make a statement on Pensions.

Pensions

The Ministry of Finance has reviewed the New Singapore Allowance payable to certain locally domiciled pensioners. Following this review and discussions with the Pensioners' Association, the allowance is to be revised and will be called the "Singapore Allowance". It is fortuitous that the decision to revise this allowance has been taken at a time which allows me to announce it in this Budget Statement. Let me emphasize that it is not the intention nor should Members expect that pension revisions will be a regular feature of future Budget Statements. Pensions are payable for services rendered and are based on the length of service and salaries earned during such service. They are not and should not be related to the salaries of current employees. These salaries are determined on the basis of various factors, including the market rate for the job, which are quite different from the basis on which pensions are payable.

From 1st April, 1982, the Singapore Allowance, which will replace the present New Singapore Allowance, will be paid to all locally domiciled Government pensioners whose gross pensions (i.e. pensions plus New Singapore Allowance) are less than $850 a month.

Those who are drawing pensions, excluding the current new Singapore Allowance, of $775 per month or less will be paid a Singapore Allowance at the flat rate of $75 per month. Those drawing pensions of more than $775 per month but less than $850 per month will be paid the Allowance on a reducing scale such that the pension plus the Singapore Allowance equals $850 per month.

Let me give you a few examples:

____________________________________________________________ Pension Current Current Singapore Gross Increase $pm NSA Gross Allowance Pension $pm (%) $pm Pension $pm from $pm 1.4.82 $pm 7 35 42 75 82 40 (95.2) 100 50 150 75 175 25 (16.7) 650 20 670 75 725 55 ( 8.2) 800 - 800 50 850 50 ( 6.3) ____________________________________________________________

The Singapore Allowance will benefit 97% of the 7,685 locally domiciled pensioners. Those now drawing the lowest gross pension of $42 per month will get the largest percentage gain of about 95% while those with a gross pension of $150 will gain about 17%. The Singapore Allowance will cost the Government some $2.8 million, a 10% increase in the pensions bill for the year.

Conclusion

Mr Speaker, Sir, this Budget reflects our economy which is on an even steady keel. I have deliberately not introduced any new taxes or raised the rates of existing taxes in order not to increase the tax burden. However, I hope that Singaporeans will not look upon this Budget as an occasion for rejoicing but rather as a respite to enable them to consolidate and improve their position.

To perform better we must upgrade our present skills and seek to acquire new ones. There is no other way and we must not be deflected from this task. We have to work as a team in our homes, in our work places, in our community and as a nation. Other than a favourable location, we have no natural resources. It is only by working harder than others that we can make a future for ourselves and our children.

In the process of assimilating new technology and modern management methods, we must not forget the traditional values which have served as the bedrock of our society. We must not abdicate our moral duty to look after those who are weak, old and infirm. Children must not forsake their parents and grandparents. The aged and the weak need more than material care; they have emotional and spiritual needs which only their children and their family can provide. It is the responsibility of the young to look after the aged. After all, the success of children in later life is built on the sweat and toil of their parents. Children, therefore, owe it to their parents to enable them to live out the autumn of their lives not only with pride and dignity, but also surrounded by affection and care.

1982 will be a grim year. The problems of unemployment and protectionism in the industrialized countries will not abate. Indeed, we will be lucky if these problems do not escalate. Singapore will, before very long, be buffeted by the turbulence of the international economic storm, We can go under, or we can resolve to ride out the storm. To do this, we must keep trim and be prepared to lend each other a hand when the need arises. Then, when the storm subsides we shall surge forward again.

Sir, I beg to move.

Mr Speaker: The Question is, "That Parliament approves the financial policy of the Government for the financial year 1st April, 1982 to 31 st March, 1983." In accordance with paragraph (1) of Standing Order No. 84, the debate now stands adjourned.

Debate to be resumed on what day, Dr Tan?

Dr Tony Tan Keng Yam: On 15th March, 1982, Sir.

Mr Speaker: So be it.