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In his Budget Statement for the Financial Year (FY) 2007, Second Minister for Finance, Tharman Shanmugaratnam announced a two percentage point reduction in the corporate income tax rate to 18% to sharpen Singapore’s competitive edge.
However, the corporate tax cut will be balanced against a number of revenue raising provisions, such as a 1.5% increase in employer contributions to the Central Provident Fund (CPF) to 14.5%, and an increase in the GST rate from 5% to 7%, both from 1 July 2007, to provide "critical additional revenues". A S$4 billion GST Offset Package to help Singaporeans adjust to the GST increase was also announced.
Shanmugaratnam said that Singapore’s prospects for the next five to 10 years were "excellent", and that companies and entrepreneurs from around the world were coming to do business in Singapore. He went on to announce further measures to ensure that Singapore remains an attractive location for foreign companies, including the injection of an additional S$500 million into the R&D Trust Fund administered by the National Research Foundation (NRF), and a significant increase in the partial tax exemption threshold from S$100,000 to S$300,000, which would be especially helpful to SMEs. As a result of the latter measure, almost 80% of SMEs will pay tax at effective rates of less than 10%, making Singapore one of the most competitive locations internationally for SMEs. He also announced cash rebates to partially offset the additional CPF costs faced by SMEs in the two years after employer CPF contribution rates go up.
The Budget also contained several measures to promote the growth of legal services, financial services, logistics, maritime and aviation services. Shanmugaratnam announced that the government planned to make Singapore a hub for global philanthropic organisations, and would remove the rule that currently required charities to spend at least 80% of their annual receipts in Singapore within two years to qualify for income tax exemption.
A new Workfare Income Supplement (WIS) Scheme to help older low-wage workers would reduce CPF contributions for both employees and employers, to make these individuals easier to employ. The principal target group of the WIS Scheme are full-time workers above the age of 45 and who earn S$1,000 or less. A worker earning S$1,000 a month will get S$100 of WIS, which is a 10% supplement. The WIS will also be extended to those above the age of 35 who earn S$1,500 or less, but at a lower rate.
Changes aimed at rationalising the indirect tax regime include the removal of the current broad-based Cess, which applies to F&B outlets, a reduction in road tax for passenger cars and motorcycles, a reduction in Foreign Domestic Worker Levy and a reduction in the second-tier Foreign Worker Levy for the manufacturing and services sectors. Other changes included an enhancement of stamp duty relief, and the taxation of beer and stout on the basis of alcoholic content rather than volume.
Shanmugaratnam also announced that the government intends to amend the constitution to revise the rule that allocates Net Investment Income (NII) from past reserves for spending. The additional income would be spent on further improvements in Singapore’s competitiveness, making longer-term investments in infrastructure and R&D, and topping up endowment funds that Shanmugaratnam said will "bring value to Singaporeans for many years to come".
Under the GST offset package, S$1.8 billion will be dispersed in cash to all adult Singaporeans over a period of up to four years. The amount payable will depend on the individual’s assessable income (AI) and the annual value (AV) of his home. There will also be S$200 million worth of property tax rebates for all owner-occupied residential properties in 2008 and 2009. The one-off rebates will be up to S$100 per year.
“The additional income from our reserves, together with the increased GST revenues, will give us the resources to strengthen Singapore’s social security system, build new capabilities for the future, further sharpen its competitiveness, and meet the challenges of the future from a position of strength," the minister said.
Shanmugaratnam expects the Singapore economy to grow by a healthy 4.5% to 6.5% in 2007, amidst a favourable external environment. He reported that the fiscal deficit for FY2006 was expected to be S$1.3 billion, smaller than the deficit of S$2.9 billion projected at the start of the year. For FY2007, Shanmugaratnam is expecting a surplus of S$1.1 billion, excluding Special Transfers and tax changes. After taking these into account, the Budget is expected to be in deficit by S$0.7 billion. Shanmugaratnam assured Members of Parliament that the deficit could be fully financed by funds accumulated within the current term of government..
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