ECONOMIC EXPANSION INCENTIVES (RELIEF FROM INCOME TAX) (AMENDMENT) BILL

Order for Second Reading read. 2.20 pm

The Minister of State for Trade and Industry (Mr Goh Chee Wee): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

The Bill will amend the Economic Expansion Incentives (Relief from Income Tax) Act, which I will refer to as the EEI Act in short. The Bill introduces the new Development and Expansion Incentive and two tax changes to the Investment Allowance incentive. Two of these three tax changes were announced in the 1996 Budget Statement. The Bill will also make two technical amendments to the Investment Allowance incentive.

These amendments shall take effect from the Year of Assessment 1997, and will therefore apply to income earned in 1996

I will now describe each of the proposed amendments in turn.

Development and Expansion Incentive (DEI)

The new Development and Expansion Incentive, or DEI in short, was announced in the 1996 Budget Statement. It replaces the Post-Pioneer Incentive which will no longer be awarded. The DEI complements the Pioneer Incentive in encouraging companies engaged in high value-added manufacturing or services activities to invest, expand and upgrade in Singapore. To explain how the DEI works, let me firstly briefly touch on the Pioneer and Post-Pioneer Incentives.

The Pioneer Incentive is awarded to investment projects that bring substantial economic benefits to Singapore. These are typically high value-added, technology and capital intensive manufacturing investments. Income of approved Pioneer projects is exempt from tax for up to 10 years. At the end of their Pioneer status, companies that upgrade or expand their activities further may apply for the Post-Pioneer Incentive. Income derived from the Post-Pioneer projects is taxed at a concessionary rate of no lower than 10% for up to 10 years.

Like the Post-Pioneer Incentive, the DEI confers a concessionary tax rate of no less than 10%, but for a maximum incentive period of up to 20 years. The DEI fulfils a need. Currently, the Pioneer Incentive is awarded only to the most desirable projects and the Post-Pioneer Incentive can only be given to Pioneer companies. With DEI, Pioneer and Post-Pioneer companies can be induced to further expand or upgrade their activities in Singapore at the end of their incentive period. The DEI can also be awarded for investments that have not enjoyed Pioneer status, but nevertheless bring strong economic benefits to Singapore.

Singapore faces strong competition from both developed and developing countries for highly-desirable, high value-added manufacturing and services investment projects. The DEI will help ensure that Singapore remains an attractive location for these projects. Clause 2 of the Bill introduces the DEI.

Tax changes to Investment Allowance Incentive

The next two tax changes are to the Investment Allowance Incentive, or IA in short. Under this incentive, up to 50% of approved fixed capital expenditure may be deducted against the company's taxable income.

The first of the two tax changes raises the IA cap from 50% to 100% of fixed capital expenditure. The enhancement to the IA will make it more attractive to companies making sizeable capital investments in projects with long gestation periods. Where the company has insufficient profits in the year to fully set off the IA, the unutilised IA can be carried forward and set off against future profits. In contrast, the tax relief period for the Pioneer Incentive commences upon production, even if the company makes losses during the initial years.

IA at 100% will typically be for projects that would also qualify for Pioneer Incentive, but may find the Pioneer Incentive less attractive because of the project's long gestation period.

The second tax change to the IA allows us to more effectively encourage companies to reduce the consumption of water. Presently, IA is awarded to help defray the high capital expenditure on water recycling plants or other means of water conservation. However, for companies already enjoying concessionary tax rates or tax exemption, IA is not sufficient as an inducement to install such equipment.

The tax change will allow IA for equipment used to reduce water consumption to be set off against the company's other income streams taxed at the normal rate. This enables the company to derive maximum benefit from the IA for water conservation or recycling.

Clauses 5 and 6b relate to these amendments. Technical amendments

I will now move on to the technical amendments to the Investment Allowance Incentive.

The first technical amendment clarifies that the IA may not be awarded to a project that derives income which already enjoys a concessionary tax rate. The amendment makes explicit the tax practice of not double-incentivising a company for the same investment project. However, an exception to this principle is made for reducing water consumption as I have explained earlier.

The second technical amendment widens the scope of water conservation projects allowed. The IA is presently given for projects that reduce the consumption of potable water. The word "potable" is to be deleted so that the IA can be used to encourage the conservation of both potable and industrial water.

Mr Speaker, Sir, the proposed amendments to the EEI Act will improve our tax incentives to better attract investments into Singapore.

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. - [Mr Goh Chee Wee].

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