SECTION III - REVENUE AND TAX CHANGES

In the last Budget, I said that we would monitor how Government charges would impact on our international competitiveness. I also assured Members that we would not burden the private sector with unnecessary statutory costs. To this end, we have cut taxes on public utilities and personal income taxes. The property tax rebate was deepened in July last year and various new tax concessions were introduced. These tax cuts have helped our companies regain their international competitiveness and have stimulated the economy. They are also consistent with our long term objective to move towards a lower corporate and income tax regime, in which enterprise and the factors of production are taxed as lightly as possible. But they have also reduced the Government revenue base, which will be further eroded when the corporate tax cuts come into effect this year.

I shall now touch on the Government revenue position. With existing tax rates, the FY 87 tax revenue is estimated at $4.56 billion, $293 million less than in FY 86 and much lower than the $7.56 billion collected in FY 84. Consolidated Revenue for FY 87, however, is estimated at $9.06 billion, an increase of $1.27 billion over FY 86 and slightly lower than the figure of $9.81 billion for FY 84. However, the increase is almost entirely due to a transfer of $1.50 billion from the statutory boards to the Consolidated Fund. I will elaborate on this later. Excluding this amount, there will be a drop in the Consolidated Revenue receipts.

Taking into account both expenditure and revenue estimates for FY 87, Government's overall financial position is expected to be in deficit by $3.75 billion. This deficit will be financed through domestic borrowings or a drawdown on reserves.

The revenue estimates show that tax revenue has declined sharply since 1985, and there is no room for further direct tax cuts without it being made up from other sources. The policy of this Government has always been to ensure that revenue is adequate to finance expenditure. This is important as structural deficits cannot be sustained in the long term. Greater prudency is therefore necessary in all areas of Government expenditure. The decision to trim manpower in the public sector by 10% by 1990 is one move in this direction. Equally important, we must ensure that all Government programmes be self-financing as far as possible, with minimal subsidies. This will not only keep Government expenditure low but it will also encourage more efficient use of resources and reduce waste. Furthermore, we will then avoid the problem faced in many countries, of insatiable demand for state produced goods and services that are heavily subsidized. Of course, Government will make sure that while those who can afford will pay for the services, the less fortunate and the destitute will be looked after.

Selective Goods and Services Tax

Members of the House will recall that last year, I said that the Government was seriously considering the introduction of a broad based consumption tax. I also indicated then that the machinery needed for the collection of consumption taxes would have to be put in place. An early start is necessary to evaluate alternatives and to install the administrative machinery.

A broad based consumption tax is a good compensatory source of revenue. However, I would like to reiterate that a broad based consumption tax will only be introduced if the revenue shortfall is substantial and a permanent deficit inevitable. The corporate tax rate at 33 per cent which comes into effect this year, is very competitive vis-a-vis the majority of the NICs and the OECD countries, and I do not envisage that we would need to reduce it further at the present time. This is because competitive tax cutting beyond a certain level, if practised by all countries, would ultimately be ineffective in achieving its aim. Also, whilst tax rates undoubtedly matter, competitiveness should, in general, be achieved by improving the pre-tax rate of return. That is to say, by reducing operating costs. The Government will take the necessary measures to ensure that such costs are kept low.

Consumption taxes are not something new. A number of such taxes already exist. They include entertainment duties, duties on liquor and tobacco, tax on public utilities and telephone bills, etc. As a start, Government will consider extending the list of such consumption taxes on a selective basis to meet any future shortfall in revenue. A Consumption Tax Division will be set up under the Inland Revenue Department to look into the collection of such taxes. The Division will assist my Ministry in deciding on the items to be included in future under this selective basis.

Whilst the Government has decided to adopt this item by item approach in preference to a comprehensive consumption tax at this point in time, the public must be prepared for such an eventuality when we are faced with a permanent budget deficit. In such a case a comprehensive consumption tax would be inevitable. In the final analysis, the need for a comprehensive consumption tax must be seen in the overall context of Singapore's economic imperatives. TAXATION

I now turn to tax matters.

TAX ON COMPANIES

Corporate Income Tax

As I have mentioned earlier on in my speech, during the last year or so, Government has given a number of new concessions to ensure that we remain competitive. Time is needed for these measures to work. Therefore, I do not propose to introduce major changes to the corporate income tax, except to improve on the incentive package aimed at promoting Singapore as a financial and services centre.

Withholding Tax on Margin Deposits in Financial Futures and Loco-London Gold Trading

Members will recall that in the 1984 Budget, tax concessions were granted to the Singapore International Monetary Exchange (SIMEX) and its members. SIMEX has grown and earned itself a rightful place in Singapore's financial scene. Within two and a half years of its formation, SIMEX has established itself as a formidable financial futures exchange in the Asia-Pacific time zone. The daily average volume recorded in the first two months of this year was well over 5,000 lots, an increase of at least 200% over the daily average volume of about 1,600 lots in 1984.

As at end February, SIMEX has a total of 30 Clearing members, 40 Non-Clearing members and 228 Individual members. Currently, SIMEX list 7 futures contracts. Plans are underway to list additional contracts including options based on the existing contracts.

To further encourage the growth of gold and financial futures trading in Singapore and increase SIMEX members' international competitiveness, I am pleased to announce that with effect from Year of Assessment 1988, interest paid by SIMEX members on margin deposits for transactions in gold and financial futures shall be exempt from withholding tax.

Also, since Singapore is an important physical gold trading centre and has an active gold and deferred gold market, the latter being commonly known as Loco-London gold, I have decided to exempt interest paid by SIMEX members to non-residents in respect of transactions in Loco-London gold from withholding tax. This will make Singapore a more attractive place to carry out such transactions.

Extension of 10% ACU Tax to Securities Trading

The global trend in the financial market-place towards securitisation is likely to continue unabated. International securities trading, which has gained importance in major financial centres, will expand geographically and 24-hour trading in such international securities will soon be a reality. If Singapore is to continue to be a financial centre of consequence, we will have to tap into this activity and establish ourselves as a centre for the trading of international securities in the Asian time zone.

In order to further accelerate the development of our capital market and fund management activities, I have decided that with effect from Year of Assessment 1988, the following income earned by the Asian Currency Units (ACUs) and securities companies approved by the MAS would be taxed at a concessionary rate of 10%:

(a) commission and fee income from transacting in non-Singapore dollar securities on behalf of non-residents (presently such income is already exempted for ACUs); and

(b) income derived from trading in non-Singapore dollar securities with non-residents, other ACUs and other approved securities firms.

Tax Incentives for Promotion of Offshore Services

The promotion of offshore activities has been identified as one of our key growth strategies. The slowdown in international merchandise trade as a result of protec- tionistic pressures are likely to continue. Indications are that it will be counterbalanced by increased trade in services. World service trade has, in recent years, been growing twice as fast as merchandise trade and the trend is likely to continue.

In order to encourage such offshore activities, I propose to extend the Export Incentive under the Economic Expansion Incentives Act, presently applicable only to manufacturing activities, to cover export of selected services. This will include, amongst others, consultancy, management, construction, technical and engineering services.

The incentive will be extended to qualifying services undertaken with respect to offshore projects. Under the Scheme, 90% of the qualifying export income would be exempt from tax. Provision will be made for an export base to be set where export income below the base would be subject to full corporate tax. The incentive will be for an initial period of five years but can be extended. The incentive will take effect from Year of Assessment 1988.

TAX ON INDIVIDUALS

Personal Income Tax

In line with the new corporate tax rates, a new schedule of reduced personal tax rates was announced last year, to come into effect from Year of Assessment 1987. No further adjustments are envisaged at this time.

CPF Minimum Sum Topping-Up Scheme

Members of the House will recall the debate on 27 January 1987 on the Amendment of the CPF Act moved by the Labour Minister to provide for the CPF Minimum Sum Scheme. Some Members have suggested granting tax relief to children who use cash to top up the Minimum Sum Accounts of their parents.

I am pleased to announce that Government has decided to grant tax relief for such contributions with effect from 1st April 1987.

The amount eligible for tax relief will be the difference between $30,000 and the parents' CPF balance before withdrawal at the age of 55 years. In the case of children topping up the Minimum Sum Accounts of both parents, the amount eligible for tax relief will be the difference between $45,000 and the parents' combined CPF balance before withdrawal at the age of 55 years. The relief will be subjected to a maximum of $6,000 per year.

In his Second Reading on the amendment of the CPF Act, the Labour Minister has informed the House that the Minimum Sum Scheme will not be confined to CPF members only. As the scheme is also open to those who have no CPF Accounts, the tax relief will be similarly granted for cash contributions made towards the opening and topping-up of the Minimum Sum Account. This underscores the Government's efforts to encourage the self employed to provide for their old age needs.

Tax Incentives to Encourage Procreation

Mr Speaker, Sir, the First Deputy Prime Minister has already made an announcement of the Government's population philosophy and what the supporting measures are. He has mentioned that Government will allow, amongst other things, the delivery and hospitalization expenses for the fourth order births to be offset against the parents' earned income when the new accouchement fee structure takes effect from 1 Jan 1988.

To encourage more new births and to help reduce the burden of child-bearing and upbringing of the children, the following tax incentives will be granted with effect from Year of Assessment 1988.

In the case of Normal Child Relief, the quantum of relief for the third child will be raised to $750 in line with the reliefs granted for the first and second child. This will be applicable to taxpayers who are presently claiming Normal Child Relief in respect of their third child as well as for taxpayers who would become eligible because of new births.

In addition, the eligibility for the Enhanced Child Relief will be lowered from 5 GCE '0' level passes to 3 GCE 'O' level passes or equivalent taken in one sitting. The Enhanced Child Relief will also be extended to the new born fourth child. The amount of relief for this fourth qualifying child will be $750 plus 15% of the working woman's earned income subject to a maximum of $10,000.

I have also decided to introduce a Special Tax Rebate. A tax rebate of $20,000, which can be used to offset against either or both the husband's and wife's income tax liabilities, will be granted for the new born third child. An additional rebate equivalent to 15% of the wife's earned income, where the wife is working, will also be granted. However, this additional rebate can be offset only against the wife's income tax liabilities. The excess of both rebates will be allowed to be carried forward for a maximum of four years. In other words, the total rebate granted must be absorbed within a period of five years.

OTHER TAX CHANGES

Duty on Bets

The present duty on bets is 20% on the amount of bets made on any totalisator or pari mutuel promoted by any racing club or association. It was last revised on 1st April 1984. While Government does not encourage gambling, it recognizes it as a practice which cannot be totally eradicated. What Government can do therefore is to ensure that the profits from gambling are not reaped by a few private individuals but channelled for the benefits of the society. I have therefore decided to increase the duty on bets to 25% with effect from 1st April 1987. The additional revenue yield is estimated at $43 million.

Duties on Cigarettes and Tobacco

Duties on cigarettes and tobacco were last increased in March 1984 to discourage smoking. The increase had helped to retard the growth of smoking among the population. In 1985, the consumption of cigarettes and tobacco dropped by 4.3% compared to 1984, but the rate of decline had slowed down to only 1.6% in 1986.

The National Smoking Control Programme has got off to a good start in educating the public to stop smoking. In support of the effort to turn Singapore into a nation of non-smokers, I propose to raise both the import and excise duties on cigarettes and tobacco by $10 per kilogram - from the present $60 per kilogram to $70 per kilogram. With your permission, Mr Speaker, Sir, I would like to table Appendix 1 (Cols. 115 - 116) which sets out the changes. Appendix 1 - DUTIES ON CIGARETTES AND TOBACCO (Cols. 115 - 116)

The increase in duties will take effect from today and the yield in revenue is estimated at $26.3 million.

Duties on Liquors

Duties on liquors, together with duties on cigarettes and tobacco, are traditionally a good source of revenue for Government. Revision in these duties is usually prompted as much by the need to raise revenue as by the need to achieve certain necessary and desirable social objectives. In the same manner as I have decided to increase the duties on cigarettes and tobacco, there will also be a general increase in the duties on liquors.

With effect from today, the import and excise duties on hard liquors in bottles will be increased by $60, - from $210 per decalitre to $270 per decalitre. The import and excise duties on beer and stout will be increased by $3 per decalitre. The import duty on cider and perry will be increased by $8 from $22 per decalitre to $30 per decalitre, while the import duty on sake will be increased by $25 from $130 per proof decalitre to $155 per proof decalitre, bringing it in line with the duty on samsoo. Duties on still wine will be standardized at $85 per decalitre irrespective of the proof strength, while duties on other liquors such as grape must and brandy, whisky, etc in other form will be standardized at $360 per proof decalitre. Details of the increases are set out in Appendix II (Cols. 117 - 122) which has also been tabled. Appendix II - DUTIES ON LIQUORS (Cols. 117 - 122)

Total revenue yield is estimated at $19.5 million. Surpluses of Statutory Boards

Members of the House will recall that the Public Accounts Committee had recommended in its 1985 Report that surplus funds of Statutory Boards in excess of their long-term development needs should be returned to Government.

The Ministry of Finance had since reviewed the financial position of the Statutory Boards. It has been decided that while the Statutory Boards would be allowed to retain the surplus funds to finance their future development needs, the accumulation of such funds well in excess of justifiable needs is to be discouraged.

Legislation will be introduced in Parliament to authorize the Minister for Finance to require Statutory Boards to transfer their accumulated liquid reserves to the Consolidated Revenue Account. In FY 87, as I have said earlier, I propose to transfer $1.5 billion from the accumulated reserves of the Statutory Boards to the Consolidated Fund. In addition, with effect from Year of Assessment 1988, Statutory Boards will be required to pay into the Consolidated Fund an amount equivalent to what the Statutory Boards would have paid if their annual operating surpluses had been taxed at the corporate tax rate of 33%.

Tax on Telephone Services

In April 1985, Government suspended the 20% tax on domestic telephone services and trunk call services to West Malaysia indefinitely. I have reviewed the position. The suspension will remain for the time being.

Tax on Public Utilities

The 10% tax on electricity and gas was suspended for two years beginning from 1st November 1985 and would expire on 31st October 1987. I have decided to extend the suspension until 31st March 1988, at which time the position will be reviewed again.

Foreign Workers Policy and the Levy Scheme

Government has also reviewed the foreign workers policy. As recommended by the Economic Committee, the Government has decided to allow a controlled revolving pool of foreign workers on short term work permits to remain even beyond 1992. Recruitment of foreign workers will continue to be allowed in the manufacturing, hotel, construction and domestic service sectors, and they will form the revolving pool.

Government has also decided to extend the Levy Scheme, instead of CPF, eventually to all work permit holders who are not Singapore permanent residents.

Our long term goal is still to reduce our dependence on foreign workers through economic restructuring. The foreign workforce will be controlled and the levy will be the main control mechanism for this purpose. Unskilled foreign workers from non-traditional sources will continue to be allowed only in the construction and shipyard industries and for domestic services.

With effect from 1st April 1987, all new foreign workers who are not Singapore permanent residents will be placed on the Levy Scheme. Neither they nor their employers will have to contribute to CPF. However, existing Malaysian workers who are on the CPF Scheme will remain on this Scheme so long as they continue to work for their current employers.

There will be no change in the levy for the construction workers and foreign maids. The levy for foreign workers in all other sectors will be $140 per month. It will have to be raised if the demand for foreign workers becomes excessive as a result of either strong economic recovery or due to the conversion to the Levy Scheme.

Work permit holders who acquire permanent residence will be placed on the CPF Scheme. Conclusion

In conclusion, Mr Speaker, Sir, the past few years have been particularly turbulent for us. We have not been spared from the chill of recession. However, unlike a ship floundering in the high sea without a clear direction, we have taken swift actions to steer our economy out of the rough waters.

There are signs to show that the various fiscal measures taken by Government have yielded positive results. However, as I stated earlier, the recovery is not across the board. There are still hazards along the path to full recovery and they may throw us into disarray again if we are not vigilant.

Therefore, we must not relent in our efforts to ensure a sustained recovery. The Government has made fundamental changes to its economic policies in general and fiscal policies in particular. It is necessary to give the economy time for the changes to be fully effective. I will regard this year, therefore, as a year of consolidation.

We have the necessary conditions to enable us to overcome the current recession. Our infrastructure is first rate and our financial resources more than adequate. More important, we have a pragmatic and hardworking people and a healthy industrial environment. When faced with a crisis, the Government has not flinched from taking unpopular but necessary decisions to ensure the long term survival of the nation. Our people are willing to upgrade themselves and to adapt to changes. I am, therefore, confident that for as long as we continue to work together as a cohesive people, we will surmount the recession and be in a stronger and better position to see us through the 1990s and beyond.

Mr Speaker, Sir, I beg to move. [Applause].

Mr Speaker: The Question is, "That Parliament approves the financial policy of the Government for the financial year 1st April, 1987 to 31st March, 1988." In accordance with paragraph (1) of Standing Order No. 84, the debate now stands adjourned.

Debate to be resumed, what day?

Dr Richard Hu Tsu Tau: Friday, 13th March, 1987.

Mr Speaker: So be it.