INCOME TAX (AMENDMENT NO. 2) BILL

Order for Second Reading read.

The Minister for Finance (Dr Richard Hu Tsu Tau): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

The Income Tax (Amendment No. 2) Bill, 1992, gives legislative effect to income tax changes announced in the 1992 Budget Statement and 12 other changes not announced in that Statement.

One of the tax incentives I have announced was to promote the establishment of the RAS Commodity Exchange Limited which will provide a centralised and regulated marketplace for trading of commodity futures. With effect from Year of Assessment 1993, the Exchange will be exempted from tax on its income from futures activities for a period of five years. In addition, the qualifying income derived by participants of the Exchange will be taxed at a concessionary rate of 10%. These incentives are similar to those granted to SIMEX. Clauses 2 and 15 amend section 13 and insert a new section 43K to provide for this incentive.

To foster the development of sophisticated high value-added financial activities, I have also announced that with effect from Year of Assessment 1993, financial institutions will be allowed double tax deduction for expenses relating to the establishment and development of approved financial activities in Singapore. Clause 8 inserts a new section 14J to provide for this tax concession.

Currently, life insurance companies are taxed on the excess of investment income over management expenses and agency commissions. Where a life insurance company also carries on business outside Singapore, the income on which tax is payable is its world-wide investment income apportioned in the ratio of Singapore premiums over world-wide premiums. This basis of taxation is not satisfactory. It does not fully reflect the profitability of the insurance company, nor does it make a distinction between the income of the company that accrues to its policyholders as against shareholders.

I have thus announced that with effect from Year of Assessment 1993, life insurance companies will be taxed on their total income derived out of the Singapore business. This means that the assessable income of life insurance companies will include premiums in addition to investment income arising from the Singapore business. At the same time, the expenses that can be deducted will now include benefit payments and increases in actuarial liability to policyholders. The resultant chargeable income attributable to policyholders will then be taxed at 10% whilst the portion attributable to shareholders will be taxed at the prevailing corporate rate. Clause 9 amends section 26 to provide for this change.

Members will recall that in recognition of the contributions of reservists to Total Defence, I have announced that with effect from the Year of Assessment 1993, tax reliefs for reservists will be given in two tiers: $1,000 for active reservists and $500 for those who have done national service but are not in active reserve service. Clause 11 amends section 39 to effect this.

To reward effort and enterprise, I have also granted a 5% one-off and across-the-board rebate on personal income tax payable for the Year of Assessment 1992. Clause 20 provides for this rebate.

The corporate tax rate will also be reduced from 31% to 30% with effect from the Year of Assessment 1993 to help maintain Singapore as an attractive location for investments and to offset some of the business cost increases of the past year.

Consequently, the reduced rate will apply to non-residents, trustees and executors as well as tax withheld at source on payments to non-residents. Clauses 13 and 17 amend sections 43 and 45 for this purpose. There are also two other amendments resulting from the deduction in corporate tax rate.

The first relates to an adjustment to the dividend franking credit mechanism. Although the reduction in corporate tax rate takes effect from the Year of Assessment 1993, that is, 1st January 1992, companies could only be informed of this after our Budget announcement. Adjustment is, therefore, necessary for those dividends declared in the early part of 1992 of which tax has been withheld at 31%. A transitional adjustment is also needed to avoid the mismatch whereby dividends derived before 1st January 1992 is taxed at 31% while a credit of only 30% is allowed on such dividend if the recipient company is assessed on such dividends in the Year of Assessment 1993. Clauses 10, 16 and 18 amend sections 35(2A), 44 and 46 to provide for these changes.

The second amendment relates to the tax rates in Part B of the Second Schedule of the Income Tax Act. With the lowering of the corporate tax rate to 30%, the highest effective tax rate imposed under Part B of the Second Schedule to the Income Tax Act will be limited to 30%. This will ensure that those who are taxed under the existing Part B marginal rates, such as management corporations and clubs, will, in effect, not be taxed above the corporate rate of 30%. Clause 12 amends section 42(5) for this purpose.

I shall now deal with the remaining tax changes not announced in the 1992 Budget Statement. Two of them are necessary to fine-tune the existing provisions in our tax legislation.

The first concerns sections 14(b), (c) and (d) of the Income Tax Act which allow a further deduction for expenses incurred in export promotion of Singapore-made goods by manufacturers and traders; and approved research and development projects in selected knowledge-based industries. At present, the portion of the income that is granted further deduction is not deemed as exempt income for purpose of declaring tax-free dividends. Clause 7 amends these sections of the Act to allow companies granted this incentive as well as the newly announced tax incentive for skill and knowledge-intensive financial activities to pass on the benefits of further tax deduction to their shareholders without incurring further tax.

The second amendment relates to the penalty for repeat offenders. Section 94(2A) currently provides for a further penalty against the taxpayer who has been convicted more than once for the same Year of Assessment for failing to comply with specific sections of the Income Tax Act. However, the existing provisions do not spell out the circumstances under which non-compliance is deemed to be a subsequent offence. Consequently, section 94(2A) cannot be invoked. Clauses 16 and 19 will amend section 94(2A) and provide for new sections 44(8A) and 94(2B) to rectify the anomaly.

The rest of the amendments are consequential in nature. Clause 11 amends section 39 to allow tax deduction for compulsory contribution to Medisave by the self-employed with effect from Year of Assessment 1993. Following the increase in the employer's CPF contribution rate from 17 1/2% to 18%, clause 6 amends section 14(1)(e) of the Income Tax Act to allow, up to the limit of 18%, the deductions in respect of an employer's contribution to an approved pension or provident fund.

The remaining consequential amendments, namely, clauses 3, 4, 5 and 13, result from the tax incentive for approved international shipping enterprises, the commodity futures market, the change in tax basis for life insurance companies as well as the tax exemption on dividends paid out of foreign income.

Sir, I beg to move.

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. - [Dr Richard Hu Tsu Tau].

Bill considered in Committee; reported without amendment; read a Third time and passed.