INCOME TAX (AMENDMENT) BILL

Order for Second Reading read.

The Second Minister for Finance (Mr Lim Hng Kiang): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time".

The Income Tax (Amendment) Bill 2000 seeks to give legislative effect to the income tax changes announced in the 2000 Budget Statement. It also incorporates six other amendments to the Income Tax Act.

Tax Changes Announced in the 2000 Budget Statement

Let me first begin with the tax changes announced in the 2000 Budget Statement. There are a total of seven tax changes which require amending the Act. I will start with the tax changes affecting individual taxpayers.

Last year, the Government gave a one-off tax rebate to help mitigate the impact of the recession. As economic recovery is well underway this year, Dr Richard Hu announced a one-off, across-the-board rebate of 5 percent on individual income tax for Year of Assessment 2000. Clause 24 provides for the rebate.

To provide greater recognition to those who stay with their parents, the relief for the maintenance of each aged parent will be raised by $500 to $5,000. For those who maintain their aged parents but do not stay with them, the relief will remain at $3,500. The change will take effect from the Year of Assessment 2000. Clause 10(a) amends the relevant section of the Act for this purpose.

Apart from providing for their own financial security, individuals currently enjoy a tax relief for cash top-ups to the Minimum Sum Account of their parents. To promote inter-generational ties and the concept of extended families, Dr Richard Hu had announced that this relief will also cover top-ups in cash for grandparents with effect from Year of Assessment 2001. Clauses 10(b), 10(c) and 10(d) amend the relevant section of the Act for this purpose.

Next, let me touch on the Income Tax amendments to encourage innovation, creativity and enterprise. Currently, authors, composers and inventors can avail themselves of a tax incentive which limits their taxable royalty income to 10% of gross royalties received. To encourage the development of the arts and innovation in Singapore, this scheme is now being liberalised accordingly.

(a) Concession for authors, composers and choreographers

This concession will be extended to include royalty payments received by a composer, an author or a choreographer from music recording or film, dance or drama production businesses in Singapore with effect from Year of Assessment 2001. Clause 2(a) amends the relevant section of the Act for this purpose.

(b) Concession for Inventors and Innovators

With effect from Year of Assessment 2001, this concession will be extended to cover any approved invention or innovation from the non-manufacturing sectors. The scheme will also be extended to foreigners. To qualify for the concession, the work in developing the invention or innovation must be substantially carried out in Singapore and the invention or innovation must be protectable. The Economic Development Board will administer the incentive. A qualifying individual will enjoy the concession for up to 5 years. Clauses 2(b) and 2(c) amend the relevant section of the Act for this purpose.

In the recent announcement on 22nd May 2000, Dr Richard Hu introduced the new Entrepreneurial Employee Stock Option Scheme. This new scheme aims to foster an entrepreneurial spirit in the smaller and more risky companies and its employees, many of whom have forgone more secure and higher paying jobs to start or join these start-up companies. Under the Entrepreneurial Employee Stock Option Scheme, a 50% income tax exemption will be granted on gains arising from the exercise of employee stock options, subject to certain conditions. The 50% tax exemption is available for 10 years of assessment and for up to $10 million of gains derived. This enhanced tax treatment will apply to qualifying employee stock options granted on or after 1st June 2000. Clause 5 inserts a new section to the Act for this purpose.

Let me now move on to two tax changes affecting the corporate sector. To encourage the development of the swap market here, the concessionary 10% tax rate will be extended to income derived by financial institutions from trading in interest rate and currency swaps. This concession will take effect from Year of Assessment 2001 and will apply until 27th February 2003. Clause 14 amends the relevant section of the Act for this purpose.

Dr Richard Hu had also announced in the Budget the reduction of the corporate tax rate by 0.5% to 25.5% with effect from Year of Assessment 2001. The tax rates applicable to other persons which are pegged to the corporate tax rate will correspondingly be reduced to 25.5%. Clauses 9, 11, 12, 15(a), 15(c), 16, 17 and 18(a) amend the relevant sections of the Act for this purpose.

Tax Changes Not Announced in the 2000 Budget Statement

Let me now turn to the other tax changes not announced in the 2000 Budget Statement.

The first tax change pertains to the Qualified Employee Stock Option Plan Scheme which was announced in October last year. Under the scheme, the payment of tax on gains arising from certain qualifying stock options can be deferred for up to five years, subject to an interest charge. The Income Tax Act is thus amended to empower the Comptroller of Income Tax to extend the time for payment of tax on such gains and impose interest for the deferment of tax payment under this Scheme. Clauses 19, 20, 21, 22 and 23 amend the relevant sections of the Act for this purpose.

The second tax change pertains to share buyback through Special Trading Counters (STC) established on the Singapore Exchange. The Income Tax Act is amended to deem certain payment made by a company resident in Singapore to its shareholders, pursuant to a share buyback through an STC, to be a payment of dividend by the company and, in certain circumstances, to be a receipt of dividends by its shareholders. Clauses 3, 15(b) and 18(b) amend the relevant sections of the Act for this purpose.

In the 1998 Budget, Dr Richard Hu announced a temporary suspension of the annual limits on tax deduction for banks' general provisions of 25% of qualifying profits and 0.5% of qualifying loans and investments for a period of two years (Year of Assessment 1998 and Year of Assessment 1999). Clause 7 amends the relevant section of the Act to reinstate these annual limits.

The next tax change amends the Act to enable certain diesel driven vehicles which are affected by the Land Transport Authority's goods vehicle classification exercise to qualify for the one year accelerated capital allowance. Clause 8 amends the relevant section of the Act for this purpose.

On 1st December 1999, the Stock Exchange of Singapore and SIMEX were demutualised and became subsidiaries of a new holding company known as the Singapore Exchange. The Income Tax Act is amended to reflect the change of name from SIMEX to Singapore Exchange Derivatives Trading Limited. The existing tax exemption on certain income of the company will continue until 31st December 2003. The Act is also amended to allow tax exemption of dividends paid out of these exempt profits of the company, subject to certain conditions. In addition, the restructuring will not affect the 10% concessionary rate of tax applicable to certain income derived by any company which was a member of the former SIMEX. Clauses 4, 5 and 13 amend the relevant sections of the Act for this purpose.

Finally, the last tax change pertains to the tax treatment of CPF Investment Scheme (CPFIS) investments. A CPF member may use CPF savings to purchase units in any approved CPF unit trust. Currently, certain interest and foreign dividends distributed by such CPF unit trust are tax-exempt. However, once the units purchased by the CPF member are transferred to him when he is entitled to withdraw his CPF moneys, his investment in those units should be considered as not falling within the CPF Investment Scheme. Any income arising henceforth from such investment should be subject to the normal tax treatment. Clause 2(d) amends the relevant section of the Act for this purpose.

Sir, I beg to move.

Question proposed.

Mr Leong Horn Kee (Bishan-Toa Payoh): Mr Speaker, Sir, I rise to support this Bill. In fact, the amendments have been debated previously and quite thoroughly during the Government's 2000 Budget session. Similarly, the proposed Entrepreneurial Employee Stock Option Scheme was also debated previously in this House when Dr Richard Hu announced the scheme.

However, I wish to take this opportunity to raise a query on the Entrepreneurial Employee Stock Option Scheme. In clause 13J (4) of the Bill, it is specified that to qualify for the tax benefit, both the company and the holding company have to be incorporated in Singapore. I wish to point out that this rule of both the company and the holding company having to be incorporated in Singapore will mean that several Singaporeans or residents who are working in companies whose holding companies are not incorporated in Singapore will be excluded from this scheme and therefore unable to enjoy this benefit. There are also several high tech companies which could have their parent companies incorporated overseas, eg, foreign US companies setting up a base here. And because they may be offered stock options of their parent companies' stocks which could eventually be listed on the NASDAQ, therefore they are unable to enjoy this benefit when the company gets listed. However, these foreign companies setting up operations in Singapore actually will create employment and other benefits to us. They will also add to the overall high tech innovative and creative environment that the Government wants to create. Hence, I would like to ask the Minister whether we should consider how to incorporate amendments to the scheme, whereby persons working in foreign holding companies of local companies can also enjoy this benefit.

Mr Tay Beng Chuan (Nominated Member): (In Mandarin): Mr Speaker, Sir, I support the Income Tax (Amendment) Bill introduced by the Finance Minister to give legislative effect to some of the tax reduction measures announced in this year's Budget Statement. This includes reducing corporate tax by 0.5% to 25.5% with effect from Year of Assessment 2001. The reduction of corporate tax is mainly to maintain our competitiveness and to attract foreign investment. This is a policy of great urgency. Yet the Government is delaying until the next fiscal year to implement it. People in the business community are not happy because they could not derive any immediate benefit for this reduction.

From the statistics recently released by the Government through the media, the total tax revenue for the first half of this year was as much as $15.5 billion, an increase of $3 billion or 24% compared to last year. This is the result of the economic recovery and also the contributions from the enterprises and the people through payment of the various taxes. This very substantial tax revenue is taken from society. It should be used on society. As such, I am very happy with Prime Minister Goh's announcement at the National Day Rally that the Government has proposed a package of $3.2 billion to implement a series of measures relating to education, training, baby bonus, elderly fund and the CPF top-ups, etc, to develop Singapore into a more cohesive and competitive nation, and to help our people deal with the challenges in the new economy.

From PM Goh's speech and the policies announced, we can see the Government's strong confidence in the future of Singapore, and its compassion and willingness to help the lower-income group and the elderly people.

As for the Government's policy of high salaries to attract the talented and hefty remuneration to retain the able, we are pleased to learn of PM Goh's circumspect and farsighted views. I hope that the Government will encourage people to continue thinking and deliberating on this matter and to propose constructive suggestions, so that people from all walks of life will actively participate in this exercise and to derive benefits from there.

Mr Speaker, Sir, the Government is also very optimistic about the economic performance of Singapore in the second half of this year. The Ministry of Trade and Industry has adjusted the growth rate forecast upwards from 7.5% to 8.5%. This shows that the Government would have more tax revenue and considerable budget surplus to implement the various proposed policies and projects, unlike in the private sector where people are for lack of funds less daring to venture into new investment items.

However, looking from another angle, has the Government become complacent? Is the Government too persistent in its tax policies and unwilling to reduce corporate tax, foreign workers' levy, vehicle taxes, property tax and the other taxes which affect our business costs? As the Prime Minister said, we are running into the risk of being a complacent "incumbent". Because of our past successes, we may dangerously hope that the past formula will continue to work for us in the future. I hope that the Finance Minister and the elite in IRAS will heed PM's valuable advice to reform our tax system in a more innovative and enlightened attitude and be in consultation with the business community, and try their best to lighten the tax burden of the enterprises, big or small, so that they could accumulate adequate capital to venture into high-risk innovative businesses or long-term large-scale investments.

Sir, all along, Singapore has been labelled a "shoppers' paradise". This is mainly because Singapore is a duty-free zone. If we can go one step further to adopt a low-tax strategy in developing Singapore into a "business paradise", then we will instill more confidence in our people to start and develop their business and be better placed to attract foreign talents and capital.

According to the Government's explanation, Government's implementation of the policy of high salaries for the able is for the sake of Singapore's future, mainly to attract enough talents to go into politics and to be senior Government officials. This policy has great impact on the enterprises. This is something that we cannot overlook. Generally, the people's response to this policy is that before they could see benefit coming from it, the adverse effect is already felt. From the experience that we have learnt from the Asian financial policy, we greatly appreciate the importance of our cost competitiveness as a basic ingredient to the survival and development of our businesses. We were able to tide over the Asian financial crisis simply because we were able to implement the cost-cutting package effectively in the true spirit of tripartism. The most effective part of the cost-cutting package is the cut in the employers' CPF contributions and the employees' wages. These measures produced almost immediate effects in reducing the pressure of wage-increases and retrenchment. However, with the recent announcement of hefty pay rise for Ministers and senior civil servants and the rush of various Government departments to increase their staff salaries, the enterprises, especially the SMEs are once again faced with the strong pressure to raise the wages for their workers. This is even more severe than the pre-crisis level. Moreover, Government has already announced the part restoration of employers' CPF contributions early next year. This has caused anxiety and worry to many businessmen.

The biggest worry among our businessmen is that the Government will raise its various taxes to pay for these hefty increases in salaries. This will result in a vicious cycle of increasing business cost, thereby causing an erosion in our regional competitiveness.

If we do not take appropriate preventive measures, this will result in the loss of confidence among our potential investors, much to our detriment. Just not too long ago, a reputable international shipping company relocated its operational base to a neighbouring country in order to save cost.

Therefore, once again, I would urge the Government to take into consideration the huge pressure faced by the enterprises in terms of wages and business cost, and try its best to reduce the rates of the various existing business-related taxes, and provide more incentives to assist the development of SMEs so that the business community can share the fruits of the economic recovery together with the civil servants and employees in the private sector.

At the same time, I would also urge the Government to consider exempting non-profit making industrial and commercial associations, clan associations and other ethnic and religious bodies from the payment of income tax. These civic organisations can be said to be strong pillars of our social development. They not only cater for the needs of their respective members but also assist the Government in developing Singapore into a stable, prosperous and cohesive society. Exemption from the payment of income tax will surely encourage these organisations to work harder to raise funds and to accumulate more capital to implement longer term development and welfare scheme to make further contributions to Singapore's community development.

Mr Speaker, Sir, I support the Bill.

Mr Lim Hng Kiang: Mr Speaker, Sir, I would like to thank the two Members for their views.

First, in response to Mr Leong's query, Dr Richard Hu explained this previously when we discussed the Entrepreneurial Employee Stock Option Scheme. Basically, we are putting this scheme in place not just to benefit the individual but also to anchor the activities in Singapore. Therefore, to qualify for the scheme, the company must demonstrate that substantial activities are done in Singapore. Dr Richard Hu explained then that we want to start off by having both companies and the holding companies incorporated in Singapore and then they automatically qualify for the ESOP. However, if they can demonstrate that even though they are not incorporated in Singapore and that they have substantial activities in Singapore, Dr Richard Hu said that he was prepared to consider this on a case-by-case basis.

I would also like to thank Mr Tay Beng Chuan for his views. This is an early start to next year's budget. I will convey his views to the Ministry of Finance for their evaluation for the next budget, but let me just respond in general terms.

First, the tax burden in Singapore is not onerous. The tax incidence is actually quite light.

Second, we need to balance business cost versus a fair and competitive remuneration to our workers. Although we do appreciate the business community's concern about cost, we must also ensure that there is fair and competitive remuneration to our workers. Therefore, the whole idea is to strike this balance.

Third, I would like to assure Mr Tay that the Government will not have to impose tax increases to pay for the wage rise for the civil service. This is well within our budget.

I can assure the Member that we are not complacent. We are looking at the overall tax regime in Singapore. We know we have to be competitive. But at the same time, we have to distinguish the two trends that we are facing. One is the cyclical trend. Because the economy is doing well, one would expect the tax collection to increase during this cycle. The second is the structural trend. We know that because of globalisation, competition, and changes in the economy, certain tax collections would change over time. Therefore, we must be prepared for it. Similarly, Singapore's society is also undergoing restructuring. We will need to spend more not just on education but on life-long learning. We need to spend more on health and many other competing demands. So we need to balance our tax collections with our tax expenditure. But as I said, this is still early days before the next budget.

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 Lim Hng Kiang].

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