More moves expected to promote innovation in Budget 2025, say industry watchers

MOVES to enhance Singapore’s position as an innovation hub are expected to continue in Budget 2025, said industry watchers. 

Targeted tax incentives, grants or co-funding schemes could encourage companies to invest in areas that drive both business and societal impact. This will enhance Singapore’s reputation as a future-ready economy, said Ajay Kumar Sanganeria, KPMG’s head of tax in Singapore.

Based on the Global Innovation Index last year, Singapore came first in Asia and was fourth globally. Singapore has committed S$25 billion to research, innovation, and enterprise between 2021 to 2025, indicated the Singapore Economic Development Board (EDB).  About one-fifth of this amount is specifically dedicated to strengthening innovation platforms and capabilities and developing entrepreneurial talent. 

In Budget 2024, an additional S$3 billion was announced, with funds earmarked for research and related investments in areas such as advanced manufacturing, sustainability, the digital economy and healthcare.

Critical area  

Artificial intelligence (AI) is a critical area affecting all aspects of business and economy. 

With the rapid adoption of AI, KPMG’s Sanganeria said that Budget 2025 could “include support for innovations in bias detection, data privacy solutions and transparent AI decision-making frameworks”.

This will help businesses tackle the ethical and technical challenges of AI deployment, ensuring fairness, accountability and compliance with regulatory standards. He added that by encouraging responsible AI innovation, the Budget can position Singapore as “a pioneer in sustainable and ethical technology advancement”.

Combination of initiatives 

Lee Bo Han, who is a partner at KPMG Singapore’s research and development (R&D) and incentives advisory unit, expects Budget 2025 to deploy a combination of broad and targeted initiatives to ensure widespread adoption of advanced technologies such as AI.

For small and medium-sized enterprises (SMEs), he expects moves to “enhance and expand existing grant programmes to help smaller businesses integrate AI and other digital enablers into their operations”.

Lee said: “Pre-built, industry-specific use cases – such as AI tools for personalised marketing, intelligent supply chain management or automated operational solutions – can provide small businesses with ready-to-use innovation tailored to their needs.”

Large enterprises could “develop connectivity to their platforms, enabling suppliers and smaller partners to access and integrate the latest innovations including AI without having to build them from scratch”, he added.

R&D and competition from the region 

Regionally, countries have been supporting innovation too. Lee Tiong Heng, global investment and innovation incentives leader at Deloitte Southeast Asia, pointed out that Vietnam has a new Investment Support Fund which offers incentives to attract foreign direct investment in AI, semiconductor manufacturing and green energy for example. Thailand has corporate income tax exemption for up to 13 years for companies investing in industries including biotechnology and digital services.

In Singapore, one of the ways innovation has been supported is via the Enterprise Innovation Scheme.  

Yvaine Gan, global investment and innovation incentives leader at Deloitte Singapore, said that the scheme provides deductions for qualifying R&D activities, registration of intellectual property (IP), acquisition and licensing of IP rights, training and innovation projects carried out with polytechnics, the Institute of Technical Education or other partners qualified by the tax authorities. This means that businesses can benefit from tax deductions of more than 100 per cent of these eligible expenses – in fact, up to 400 per cent with capped amounts.

Under current tax rules, only local R&D expenditure qualifies for enhanced tax deductions. KPMG’s Sanganeria noted that companies often need to conduct design activities, experimentation, and testing overseas.

He suggested that Budget 2025 should provide 150 per cent tax deductions for overseas R&D expenditure, either capped at S$200,000 per year of assessment or limited to no more than 50 per cent of local R&D expenditure. “This will allow businesses to remain agile in their innovation efforts while maintaining a strong base in Singapore,” he added.

Apart from this question of tax relief and overseas R&D expenditure, Tan Si Ying, partner specialising in R&D and innovation tax at PwC Singapore, highlighted the issue of in-house R&D versus outsourced R&D. 

Generally, a business can claim tax deductions for expenses incurred in undertaking in-house R&D in Singapore, with the exception of those which are non-deductible or capital in nature.

However, if these activities are outsourced to a R&D service provider locally or overseas, the outsourced service fee is generally fully deductible, even though the R&D service provider may also have incurred the same underlying expenses which are non-deductible if they had been incurred directly by the business.   

Hence PwC’s Tan suggested parity in tax treatments so that it “can encourage Singapore-based businesses to develop in-house R&D capabilities and promote R&D-related employment in Singapore”.  

On R&D and tax, Tan said that the process for claiming tax incentives can be made smoother.  

The current documentation requirements can place a disproportionate compliance burden on taxpayers making deduction claims for R&D expenses when compared to tax deductions for business expenses such as salary costs or services fees, she noted. 

She added that some companies have raised the point that significant time is required for their R&D personnel to explain the technical aspects and results of the projects.