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Need to give more restructuring support to SMEs in 2015 (Amended)
ONE talking point in the news has been that Singapore has once again missed its productivity target. The competitive business environment and rising costs of doing business in Singapore have not helped, particularly for the small and medium enterprise (SME) sector.
It is common knowledge and natural that SMEs are directing their limited resources towards dealing with immediate business needs instead of investing in long-term productivity and innovation.
The increased business costs - in particular, rising labour costs - could somewhat be a side-effect of economic restructuring, but productivity has not set in fast enough to provide the balance. Many SMEs therefore continue to struggle and have not recovered from the restructuring pain.
There is no question that the government has given support to help SMEs with their restructuring efforts to improve productivity. These include the Productivity and Innovation Credit (PIC) and PIC+ schemes, the expiring Wage Credit Scheme (WCS), the Innovation & Capability Voucher scheme, a series of support measures to encourage adoption of infocomm technology and a financing scheme to support companies to internationalise.
Given the importance of SMEs to the Singapore economy (contributing more than 50 per cent of the Singapore economy's output and more than 70 per cent of employment), is there more that can be done in the upcoming Budget 2015 to help SMEs by supporting restructuring or to helping deal with immediate business needs?
One initial thought would be to re-introduce the SME cash grant, as cash is lifeblood for the survival of SMEs. For SMEs that are making little or no profits, they are unlikely to benefit from the tax rebate scheme which is based on a percentage of the corporate income tax payable. SMEs would benefit more effectively from a cash grant, that is, one that is computed based on a percentage of an SME's revenue.
To help relieve the pressures on SMEs, the partial tax exemption scheme can also be tweaked to provide a full tax exemption on the first S$100,000 of chargeable income. A two-tiered tax system can also be introduced for a lower rate of tax - say 5 per cent - to apply for the next S$200,000 of chargeable income.
Conditions on group turnover, size of operations and local shareholdings can be set such that the support goes to SMEs. Another option may be to introduce a tax deferral scheme for SMEs where they can opt to defer their taxes for a limited number of years. This would assist SMEs in managing their cash flow in a more effective way.
The PIC and PIC+ schemes have generally been well received by SMEs. Most of the PIC claims are, however, falling under the qualifying categories of the PIC IT and automation equipment and training, and less in the categories of research and development, approved designs and acquisition of intangibles.
Companies should be allowed to determine which areas of productivity investments work best for their business and industry segment. To enable SMEs to benefit more effectively from the PIC scheme, the government can consider allowing the expenditure cap of S$400,000 per year per activity between qualifying categories to be combined.
In this regard, there would be no "wastage" of available PIC and PIC+ cap. Also, for SMEs that are in a less profitable position, the preferred option is generally cash payout for the PIC expenditure; one option suggested is that the current expenditure cap of the cash payout be raised from S$100,000 to S$300,000 for SMEs.
In addition, an extension of PIC Bonus which gives businesses a dollar-for-dollar matching cash bonus for Years of Assessments 2013 to 2015, subject to an overall cap of S$15,000 for all three years combined, can be considered. The current position seems to be that for the PIC bonus given to the company, 17 per cent of the amount will be taken back as tax. It could therefore be more beneficial if the PIC cash bonus could be tax-exempt.
The WCS and the Special Employment Credit scheme introduced to help SMEs cope with the rising cost of manpower in a tight labour market are expiring.
Given that the restructuring journey is not yet over and recent various calls for an increase in CPF contributions can translate to still higher business costs, these assistance schemes could be extended to provide further support to the businesses.
For SMEs to enjoy the full benefit of these schemes, a tax exemption on the grants received from these schemes can be considered.
The Mergers and Acquisition Allowance scheme could also be extended to provide support to SMEs which seek to consolidate and merge. Corporate restructuring may be necessary for business survival, efficiency and expansion.
In summary, although efforts from the government to help SMEs better cope with their business have been commendable, more could be done for the SMEs that have contributed significantly to the Singapore economy. With Budget 2015 around the corner, it is hoped that SMEs will soon get some help to better address the challenges ahead.
- The writers are tax partner and tax senior manager respectively at Deloitte Singapore. The views expressed are their own
An earlier version of this article incorrectly stated that the PIC cash payout is taxable. The writers have since noted that it's the PIC bonus that is taxable. The article above has been revised to reflect this.