GOODS AND SERVICES TAX (AMENDMENT) BILL

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GOODS AND SERVICES TAX (AMENDMENT) BILL: Order for Second Reading read.

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

The Bill will amend the Goods and Services Tax Act to give legislative effect to the following measures to:

(a) zero-rate services ancillary to the handling of ships or aircrafts and the handling or storage of goods carried in a ship or aircraft;

(b) introduce a scheme to ease the cash flow burden of exporters in a qualifying industry;

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(c) clarify that zero-rating is allowed only where the services are made contractually to, and beneficially for, a person outside Singapore;

(d) facilitate electronic transaction via IRAS's new IT system; and

(e) empower the Minister to appoint the Deputy Chairmen for the GST Board of Review.

Sir, I shall now explain the amendments in the Bill.

Zero-rating of ancillary services for handling of ships, aircrafts and goods carried in a ship or aircraft

Section 21(3)(l) of the GST Act presently allows zero-rating for services provided within the Free Trade Zone or designated area(s) of a port, terminal or airport for the handling of ships or aircrafts and the handling or storage of goods carried in a ship or aircraft. To qualify for zero-rating, these services must be provided within the specified physical boundaries of the Free Trade Zone, port, terminal or airport. Section 21(3) of the GST Act seeks to include services that are integral to the handling of ships or aircrafts and the handling or storage of goods carried in a ship or aircraft even if they are not carried out physically in the Free Trade Zone, port, terminal or airport.

GST scheme to ease cash-flow burden on exporters

Presently, there are a number of schemes that serve to mitigate the cash-flow problems of exporters by waiving GST on imports bound for re-export. However, there is no scheme that relieves GST on local purchases even though they may be destined for export. Exporters that largely make local purchases for subsequent export have to pay GST on the local purchases and only subsequently

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obtain a refund of the GST when the items are exported.

For qualifying industries which predominantly engage in supplying products for export with no local consumption, a new scheme will be introduced whereby GST will be waived on specified products supplied from an identified party to another identified party in the qualifying industry. For a start, the scheme shall apply to the supply of marine fuel oil from oil majors or oil traders to bunker suppliers in the bunkering industry. The Act will be amended to effect the scheme.

Zero-rating of services provided for and to overseas persons

Section 21(3)(j) is amended to clarify that for the supply of services to be zero-rated, the services must be made contractually to and beneficially for an overseas person. This amendment, which reinforces the policy intent that only services consumed by overseas persons can be zero-rated, acts as a safeguard against round tripping and tax avoidance.

Facilitating electronic transactions via IRAS's new system

IRAS will be replacing its information system, the Inland Revenue Integrated System (IRIS), with a new system, as I mentioned earlier,the Inland Revenue Interactive Network (IRIN). To enhance customer service, IRIN will enable the provision of e-services to taxpayers via personalised portals (eg, e-notices and e-applications). With the GST Act amendment, electronic transactions and notices will have the same legal force as paper documents.

GST Board of Review

Currently, the Chairman of the GST Board of Review must preside at the

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meetings of the GST Board of Review. To allow the efficient processing of cases, section 50 of the GST Act will be amended to allow the Minister the flexibility to appoint Deputy Chairmen to preside over hearing committees in the authority of the Chairman.

Section 51 of the GST Act currently allows the appellant and the Comptroller to object to certain members of the GST Board of Review from hearing the case. To prevent frivolous objections, the Act shall be amended to require the appellant and Comptroller to state reasons for their objections and to enable the Chairman to assess the merits of the reasons provided. Where the Chairman turns down the objection, reasons for the decision would be explained to the appellant and Comptroller. This will enable all members of the Board to be more gainfully deployed for the appeal process.

Similar amendments are being made to the Income Tax Act for the Income Tax Board of Review and Property Tax Act for Valuation Review Board.

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 Raymond Lim Siang Keat].

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

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ESTATE DUTY (AMENDMENT) BILL: Order for Second Reading read.

The Minister of State for Finance (Mrs Lim Hwee Hua): Mr Speaker, Sir, I beg to

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move, "That the Bill be now read a Second time."

New interest rate regime

In the Budget Statement this year, it was announced that the estate duty processes would be streamlined. Specifically, this amendment seeks to provide a reasonable amount of flexibility. Currently, interest is charged on unpaid estate duty from the date of death. Clause 5 amends section 36 so that for deaths occurring from 1st January 2005, the first six months from death will be interest-free. This gives administrators and executors six months to file a complete estate duty return before interest is charged.

It also provides for a grace period of 30 days after the Notice of Assessment has been issued, after which there will be a penalty for late payment. The changes ensure that those who file and make payment promptly are not unduly penalised. Due to the changes in how interest will be charged, clauses 4, 6 to 9 make consequential amendments to sections 31, 38, and 45 to 47 respectively.

Increase in deduction for funeral expenses

Sir, the next amendment in clause 3 to section 27 increases the maximum deduction for funeral expenses from the current $1,000 or 5% of the ascertained value of the estate, whichever is smaller, to a flat $6,000. This amendment will take effect for deaths occurring after 1st January 2005. The change takes into account the increase in funeral expenses over the years.

Other amendments

Sir, I now briefly outline two other amendments to the Act. Clause 2 amends section 14(7) to reflect that the Technopreneur Home Office Scheme has

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been replaced by the Home Office Scheme under the Urban Redevelopment Authority or the Housing and Development Board. Clause 10 amends section 58 so that notices issued under the Act can bear the name of the officer authorised by the Commissioner of Estate Duties under section 4(4).

Sir, I beg to move.

Mr Speaker: Order. I propose to take the break now. I suspend the Sitting and will take the Chair again at 3.55 pm.

Sitting accordingly suspended

at 3.34 pm until 3.55 pm.

Sitting resumed at 3.55 pm

[Mr Deputy Speaker (Mr Chew Heng Ching) in the Chair]

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ESTATE DUTY (AMENDMENT) BILL: Debate resumed.

Questionproposed.

Dr Ahmad Mohd Magad: Mr Deputy Speaker, Sir, I rise to express my support for the Estate Duty (Amendment) Bill.

The key changes to this Bill, namely, the increase in funeral deductible expenses from the current $1,000 to $6,000, and the improved interest rate regime, which includes offering incentives for early filing and payment of estate duty, are both favourable changes which benefit the community.I only wished that these changes were made sooner, considering the substantially changed economic environment we are living in today.

However, I have one point to make, ie, whether the current Act has sufficiently addressed the issue of making it attractive enough for foreigners to put in their

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money in Singapore in the light of our desire to promote our country as a wealth management hub. To do so, foreigners need to be assured that their investments and properties, specially liquid assets, are easily moveable out of the country to wherever they want to transfer them to, without the fear that this may attract hefty estate duties. I would appreciate it if the Minister of State could clarify whether the Act has sufficiently addressed this.

I know on the whole that Singapore tries to shoot for a reasonably low tax regime, using the OECD nations generally asa benchmark. I applaud this initiative and vigilance, as we need to be competitive and, wherever possible, maintain an advantage in comparisonwith the OECD countries.

I trust the debate on estate duty will continue in the future as we find ways and means to address the issue of competitiveness and make Singapore an attractive place for Singaporeans and foreign talent to live in.

Miss Penny Low: Mr Deputy Speaker, Sir, I rise to support the Bill.

The Bill is a good balance between the interest of the family grieving the loss of their loved ones and the need for speedy collection of the duty owing to the State. Towards this balance, I applaud the amendment provisions, but I do urge for clarity relating to waiver of late payment interests.

First, I applaud the increase in funeral expense deduction to $6,000 and the removal of interests which were previously chargeable on the estate duty during the first six months after the death of the family member. This brings the Act more in line with the current cost of funerals and the timeframe for sorting the estate matters out.

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I also applaud the extension of the grace period to six months, although I would be interested to find out how the period of six months is arrived at, whether this is the experience of the average amount of time taken to sort out the filing requirements. The 6-month grace period may sound long, but it is a period that is needed for the grieving family to find an accountant and a lawyer, identify the assets belonging to the estate, even looking for the will, apply for probate or letters of administration, prepare the estate duty returns and file them with the Commissioner of Estate Duty. That is a lot of work to be done during the first six months. Thereafter, after the submission of the estate duty returns, the family and the estate of the deceased would then wait for the Commissioner of Estate Duty's Notice of Assessment to state the amount of estate duty payable to the State.

The Bill tries to strike a similar balance for the payment of estate duty. The estate duty is payable after the family and the estate's receipt of the Commissioner's Notice of Assessment, and the grace period in this case is 30 days. Thereafter, interest is payable on the outstanding duty, if there is any. There is no doubt that the timeframe for payment has to be prescribed and some form of interest or penalty has to be payable after the grace period, to deter any unnecessary delay in the payment. However, the question is where to draw the right balance. Thirtydays appear to be

too short a time ifthe family or the estate has to liquidate some of the assets orestate in order to raise the funds to pay the estate duty. The rapid escalation of interest rate from 6% to a maximum of 12% at 1% per month from the second to the seventh month after the receipt of the Notice of Assessment does appear quite intimidating. This is especially so in view of today's low interest rate environment.

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In particular, there is a group and, in fact, there might be a growing group of asset-rich, cash-poor widows and widowers who may live in big houses, but have very poor cashflow. They may need some time to liquidate their home or their property, and forcing them to do so within a very short time would be forcing them into a fire sale, which means a reduction in their nest-egg.

This rapid escalation of interest would also require more computing power. While the Commissioner of Estate Duty may have sufficient computer power to embark on such complex calculations, the ordinary folk may not have the capacity to do so. In contrast, the late payment interest for inheritance tax in the UK fluctuated from between 3-5% per annum from 2000-2004. Hence, I urge the Minister to review (a) whether the aforesaid rapid escalation of interest rate is excessive; and (b) whether the paperwork involved in this complex calculation itself is justified.

Next, I would also urge for clarityon the waiver of late payment interest. I notice that the Bill empowers theCommissionertowaive the late payment interest. This power may mitigate the distress of the need to pay the interest very quickly and to suffer a hefty increase in the interest rate if it should be late. However, the Bill itself is silent on the circumstances in which late interest payment may be waived. Families in grief may be distressed by the lack of clarity on when late payment interest may be waived. For example, some individual members of the grieving family may have to raise funds or even borrow money to pay the estate duty within30 days ofassessment. Would it be wrong that they should be allowed some time to sell off their assets and pay the estate duty out of the funds of theestate and when these are actually insufficient, that the assets of the estate be liquidatedto pay the estate duty? The question is: how much time

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would the Commissioner give for such liquidation procedures to be completed, and are the family and the estate expected toliquidate their assets in a fire sale?These are the grey areas where clarity in the law would spare the grieving families further distress.

On this note, I urge the Minister to issue the relevant guidelines as soon as possible so that grieving families and estates of deceased persons may be clear on their responsibilities and liabilities.

Mr Deputy Speaker, Sir, I support the Bill.

Mr Chiam See Tong (Potong Pasir): Sir, the amount of estate duty collected each year is small. The estate duty, of greatersymbolic than of practical significance of all taxes collected in Singapore,is the least productive of revenue. In both absolute and percentage terms, I believe that its relative importance hasdwindled with the growth of income, goods and services, property and gambling taxes and also the revenue from the ERP system.

In Singapore, the estate duty collected each year is the lowest of all taxes collected. In the last two previous years, for each of those years, the estate duty collected comprised only half or 1% of Singapore's total revenues. When compared to income tax, the estate duty collected by the Government for years 2002 and 2003 comprised only 0.7% of each of those years. I believe that for any one year, two ERP gantries placed at any busy road can collect just as much revenue as those derived from estate duty for that year. This clearly illustrates how low revenue is derived from estate duty.

The pattern of yield from other countries in respect ofdeath taxes is about similar to ours. In the United States, the federal estate tax generally has produced less than 2% of federal tax revenues. In the Irish Republic, the

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percentage is about the same. In Canada, the figure has been closer to 1%. The Australian national estate duty has also produced less than 1% of the total national revenue. A similar small percentage has held in Sweden. Even in Great Britain, where estate duties are high, the yield has always been about 3% of the total revenue. I believe that the rate of estate duty in Singapore, despite its relatively high interest rate imposed for late payment by this Bill, is amongst the lowest in the world. As such, I further believe that the economic effect of the estate duty, by nature of its small size, is, to use a word,"unimportant" by the usual criteria. Therefore, I wonder whether the Minister wants to consider scrapping it altogether.

The benefits of not having a death tax in Singapore outweigh those of having one. The oft-given reason for having an estate duty is that it doestend to achieve a more equal distribution of wealth. ButI believe in Singapore, the magnitude of the effect is small. But, on the other hand, if businessmen, not only in the region but around the world, come to know that there is no death tax in Singapore, there is a greater tendency that they may want to keep their money here. The effect is that a tax haven, in respect of estate duty, can be established here. The money and businesses that can be attracted to Singapore shall greatly exceed the $72 million estate duty collected by the Government last year.

In respect of the Bill itself, I would like to comment on clause 3. The amendment to section 27to allow the funeral allowance claim to be increased from $1,000 or 5% of the value of the estate to $6,000 for a person dying on or after 1st January 2005, I think that sum allowed for funeral expenses is still quite unfair. When I was in legal practice, my Chinese clients often complained to me. They said they had spent over $20,000 in

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funeral expenses and why only an allowance of $1,000was allowed. I wish to repeat my former clients' complaint to the Minister. It is not fair to cite an arbitrary amount of $6,000. If the Minister really wants to exempt funeral expenses from estate duty, then the wholeamount spent on funeral expenses should be allowed. After all, in mostcases, the money spent on funeral is the deceased's own money in the first place. He should be allowed to lavish on himself for the last time.

The next comment I want to make on the Bill is the grace period for estate duty to be paid without having to pay interest on it. For persons dying on or after 1st January 2005, the grace period is six months, after which an interest, at the rate of 6% per annum, is payable. The rate of interest is 12% per year if the estate duty is not paidwithin 18 months after the date of death.

There are two main reasons why some estates are slow in paying estate duty. Firstly, they are unable to come to a satisfactory valuation of the assets of the estate. Business people, especially people running their own businesses, do not plan their tax liability in the event of death. The executors or administrators find it difficult to locate all their assets and are unable to file the estate duty return withinsix months of death.

Secondly, the problem of liquidity -the inability to raise cash to pay their duty. Often, business people have most of their property in fixed assets which cannot be converted quickly into cash. Some governments do appreciate the problem of liquidity, that is, getting cash with which to pay the taxes. Those governments do not want business concerns with a deceased partner to go into liquidation to raise cash for payment of death duty. They allow the tax to be

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paid over a period of years, or allowing various insurance arrangements to make liquidation of a business unnecessary. I do not expect that this Governmentwould be so understanding and sympathetic. My plea to the Minister is to allow an estate a longer period of time to pay up its estate duty free of interest, maybe in 12 months' time, instead of the six months allowed in the Sixth Schedule.

Dr Wang Kai Yuen (Bukit Timah): Mr Deputy Speaker, Sir, I did not plan to speak butsince we are on the Estate Duty (Amendment) Bill,I thoughtthatwe should address the principles in debating this Bill.

According to Dr Tony Tan, in his speech to Parliament in March 1984, he mentioned that estate dutyis, in principle, the fairest of all taxes. When a person dies, the State takes it all. But priorto 1984, there were many Members calling for the abolition ofestate duty, including Dr Augustine Tan and Mr Chau Sik Ting. The principle is that the rich men can avoid estate duty, but the burden of estate duty tends to fall on mostly the middle-income group. So, in his Budget Speech in 1984, Dr Tony Tan amended the estate duty rate to the current rate,thereby relieving the burden of the middle-income group. So my question to the Minister is whether the current regime continues to fulfill that objective and whether there is a need to review the wholeestate duty,and whether Mr Chiam's call for scrappingestate dutyis justifiable. Of course, my GPC Chairman, Dr Ahmad Magad, has pointed out that in today's global environment, we might have to review estate duty in view of competition.

I refer to the South China Morning Post of21st Julythis year which commented that the long running debate on whether Hong Kong's estate dutyshould be scrapped should be resolved by the next Budget. So within Asia, at least

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we have a territory, whichis a competing economy, that might scrap estate duty altogether. That is the principle that I would like to address. I would like to ask the Minister for her reply.

In terms of estate duty collection, I have a clarification to seek. The Straits Times , in November this year, highlighted that with abooming economy and a solid economicrecovery, it swelled the taxman's coffersby $1.3 billion. And it gave a table which showed that estate duty increased from $49 million for the first nine months of the year in 2003 to $339 million for 2004.

My question is:how would a booming economy increase the collection of estate duty? Because, most of the time, estate duty is levied on assets, and assets, I presume, are primarily based on, besidesshares, mostlyassets like real estate and, in the prevailing period, I do not believe real estate has increased that much. So I wonder whether it is more rich men have died during this period or the collection has become more efficient.

On this note, Sir, I support the Bill.

Mrs Lim Hwee Hua: Sir, I wish to thank all four Members -Dr Ahmad Magad, Miss Penny Low, Mr Chiam and Dr Wang -for speaking in support of the amendments, with the exception of perhaps Dr Wang and Mr Chiam. Let me just answer the questions in turn.

First, I would like to thank Dr Ahmad Magad for his comments on the need for Singapore to remain competitive, vis-a-vis the different tax regimes. I would like to state that our estate duty regime should not deter foreigners from putting money in Singapore, as our estate duty rates are currently among the lowest and our exemption limits are among the highest in the world. Our estate duty regime is more attractive than countries such as the UK and Hong Kong. In addition, for foreigners whose permanent residences

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are outside Singapore, all the movable assets are not subject to estate duty.

Let me now move on to a few other points that have been raised by Miss Penny Low. She has raised some interesting issues. The first is as regards the choice of the six-month period. This six-month period coincides with the deadline to file. Also, the bulk of the cases are actually cleared well within the six-month period and so it is more than sufficient.

As regards the grace period, the grace period before interest starts to accrue is actually 30 days from the issue of the notice of assessment or 6 months from death, whichever is later. So, the provision is made such that the executor or administrator of the estate has at least 6 months to find means to pay the duty owed. Less than 3% of all deaths result in estates large enough to be dutiable,that is really the incidence, so that there should be no problems in meeting these payments. The man-in-the-street is, therefore, unlikely to face any of these problems.

As regards the escalation of the interest rate penalty, let me just say that this treatment is really not dissimilar from the penalty on the late payment of other taxes like income tax. For example, if income tax is not paid on time, an initial penalty of 5% of the unpaid tax would be added and an additional penalty of 1%would be added for each month of the tax that remains unpaid, up to a maximum of 12%. Computer programmes currently exist to compute the appropriate interest rates.

Let me just add that the imposition of interest rates by IRAS is really that of an enforcer, rather than that of a banker and, therefore, it is not so appropriate to compare it with the current bank or deposit interest rates.

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Next, I would like to clarify that the Commissioner of Estate Duty has full prerogative toreduce the interest rates for both late filing and late payment, if he is satisfied that there are reasonable causes for delay. One of the circumstances would be when the executor has difficulty liquidating the assets, which is also a point raised by Mr Chiam.

Finally, let me just go on to Mr Chiam's comment, as well as the point raised by Dr Wang, which is on the principle of it. Although, Sir, this is outside the substance of this Bill, which is premised on the continuation of the estate duty regime, let me just recap the reasons for continuing the imposition of estate duty. There are good reasons to retain estate duty in Singapore as a statement of social equity. A survey of countries shows that it is very common for countries to have some kind of death tax. If it is not estate duty or estate tax, then it takes the form of inheritance tax or gift tax. The few countries which had eliminated death taxes, all have other forms of wealth tax or capital gains. Singapore does not have a capital gains tax. Our choice is, therefore, not to abolish estate duty but to decide if there is a more effective alternative duty we should adopt, like inheritance tax. Sir, it is also important to note that the collection from estate duty may not be very significant when compared to other major revenue sources, only because we target it at the very wealthy estates. Only 2.6% of estates paid estate duty. Nevertheless, the sum collected in dollar terms is not insignificant. It was $75 million in the last financial year, no small change when one is balancing the Budget.

Sir, I am under no obligation to explain how the media report has come about, and I would leave Dr Wang to his decision as to whether he wants to accept the

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stories or the arguments that were put forth.

On Mr Chiam's question about the funeral expenses, let me just assure him that the $6,000 is not an arbitrary figure as he has implied. His comment is that the $6,000 level is still low. We have actually done a survey based on data from the Singapore Casket. Let me take the House through some of these. A no-frills funeralwould cost between $1,500-$6,000 which would include a plain casket and cremation. An intermediate funeral would cost between $6,000-$7,000, which would include a wake, casket, embalmment and cremation. An expensive funeral, of course, would cost northwards of $7,000, which would be an expensive casket, elaborate rites at wake, embalming and cremation. So, as to whether we should allow the dead or the deceased person to have his last wish, I could only say it is a dead loss.

Sir, I believe I have answered all the questions.

Mr Chiam See Tong: Sir, I would like to ask the Minister of State whether or not it is fair to get an estimate from the Singapore Casket alone. Actually, she should go to the HDB flats and find out at the funeral wakes how much they spent. They have to give lavish dinners, employ priests, and musicians to come and play. So it costs upwards of $20,000. I have heard this many times.

Mrs Lim Hwee Hua: Sir, I would just want to reiterate that I believe Singapore Casket caters to a large part of the deaths that we have in Singapore,and that these are really fairly reliable numbers which would apply. The rule is not to go overboard in terms of allowing for exemption. It is our belief that $6,000 would be sufficient.

Mr Chiam See Tong: Sowe try to curbfuneral expenses, just like certain

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countries had curbed expenses on wedding dinners.

Mrs Lim Hwee Hua: Sir, I think the Government's responsibility is to ensure that a reasonable level is set, and this is a reasonable level.

Dr Wang Kai Yuen: A clarification, Sir. Is the Minister of State, in her reply, implying that the tables produced by the Straits Times from the IRAS data on the revenue collectedfor the first nine months, were subject to my interpretation? In other words, they are not accurate. And, if they are not accurate, would the IRAS not issue or request the Straits Times to clarify or makeamendments rather than leaving the data in the minds of the public?

Mrs Lim Hwee Hua: Sir, I believe this House does not have to clarify media queries but I would reiterate again that $75 million were collected under estate duty for the last financial year.

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. - [Mrs Lim Hwee Hua].

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