SINGAPORE, May 3 (UPI) -- The Singapore government has announced a 2002-2003 budget designed to help the small island-state retain its competitive edge by offering sharp tax cuts for individuals and corporations.
The government also hopes the personal tax cuts will encourage entrepreneurship.
Delivering the budget in Parliament on Friday, Deputy Prime Minister and Finance Minister Lee Hsien Loong announced corporate and top personal taxes, currently at 24.5 percent and 26 percent respectively, would be reduced to 22 percent for this fiscal year, and would be further reduced to 20 percent by 2004.
To counterbalance the lost in revenues, which Lee estimated at $718 million the Goods and Services Tax will be raised to 5 percent from 3 percent effective next January. But similar to 1994, when the GST was implemented, the government has promised a slew of measures for the next five years to alleviate its affect on poorer Singaporeans.
Lee said the proposed tax cuts will cost the government 9 percent of its annual revenue or 1.7 percent of the country's gross domestic product, with the estimated rise in GST making up for half of the revenue loss.
"This budget lays the basis for our economic restructuring. The intensity of global competition is unprecedented. Our restructuring process will be neither easy nor painless. But the world has changed, and we have no choice," Lee said.
This is a budget to help re-make Singapore into an even more conducive place for foreign companies and talents, so as to alleviate the current unemployment problem, said Jimmy Koh, head of Treasury Research at United Overseas Bank.
"Clearly the main consideration has been to make Singapore more competitive and to encourage greater entrepreneurship," added the Singapore Chinese Chamber of Commerce and Industry.
Even before the proposed cuts, the Singapore tax rate is relatively low by international standards, but is well above Hong Kong's 16 percent corporate tax, and over the last few months, Singapore appears to have lost some of its competitiveness, as major companies moved their staff, and in some cases their headquarters, toward North Asia. The moves have exacerbated local unemployment, which is reaching 4.5 percent, a 15-year high.
"Singapore is still attracting good quality investments and business activities, but companies are feeling the pull of Northeast Asia, and some are relocating their activities northwards, particularly to China and Hong Kong," Lee noted in his speech.
"Our strategy must be to develop a vibrant private sector: entrepreneurial, regionally and globally competitive and profitable," the minister added.
Although the level of taxation is only one of the factor foreign companies and talents look at, the tax reduction will go some way into making the country more attractive, tax experts said.
Analysts said the budget in itself had little surprises, as the government had adopted most of the recommendations by the Economic Review Committee, set up late last year to rethink economic policies over the long term.
Besides cutting taxes, the government will also introduce a loss-transfer system of group relief so corporations can offset the losses of one company against the profits of another. To simplify the tax code, the current full imputation corporate taxation system will be replaced with a one-tier corporate taxation system under which the tax collected from corporate profits will be final and dividends are exempt.
To further promote entrepreneurship, the government will be revising the Employee Stock Option Scheme. For example, stock options granted for overseas employment will not be taxed, even if they are exercised in Singapore.
The government will also cushion the impact of the GST increase by implementing the Economic Restructuring Shares scheme, which will cost $1.98 billion over the next three years.
But the budget did not please on all front. The SCCCI noted that not enough had been done for small and medium-sized enterprises, which are operating in an increasingly difficult external environment. "We are disappointed at the paucity of measure directed at SMEs," the SCCI said in a statement.