Tweak our tax policies to lend a hand to SMEs

SMALL and medium-sized enterprises (SMEs) play a significant role in sustaining Singapore's economy. As we await the release of Budget 2017, many SMEs will be looking to the government to help them during the current period of uncertainties where they face operating costs, labour shortage, technological disruptions and cashflow concerns.

It is timely to take stock of tax policies for SMEs and look at recommendations that the government can consider introducing in Budget 2017.

Start-up tax exemption (SUTE) scheme

To support entrepreneurship and help local enterprises grow, the SUTE scheme, introduced since the year of assessment (YA) 2005, allows eligible companies to claim 100 per cent tax exemption on the first S$100,000 and a further 50 per cent exemption on the next S$200,000 of normal chargeable income for each of its first three consecutive YAs after incorporation.

Though generous, this scheme has its shortcomings. It has been abused in the past and may not have benefitted new local enterprises as they typically do not chalk up sufficient profits or may even be making losses.

To address concerns of abuse, the authorities may consider introducing a condition that the start-up company should employ at least three local employees, excluding company directors, for the entire duration of each qualifying year. This condition is imposed in several tax schemes as a deterrent for potential abuses.

To spur the growth of genuine local enterprises, the authorities can also fine-tune the scheme to allow the three-year full tax exemption to start from the first year the company turns in positive taxable income instead of from year of incorporation. This will benefit SMEs that need time to grow their business but meanwhile, has to contend with tax losses in the initial years.

Partial tax exemption scheme

Companies that do not qualify for SUTE can fall back on the partial tax exemption scheme, which has been a permanent feature of our corporate tax system since YA 2002.

From YA 2008, the partial tax exemption scheme was enhanced to allow all companies that pay the prevailing corporate tax rate (currently 17 per cent) to claim 75 per cent exemption on the first S$10,000 and a further 50 per cent exemption on the next S$290,000 of normal chargeable income.

This partial tax exemption scheme can be fine-tuned to allow a 75 per cent tax exemption for the first S$100,000 and a further 50 per cent exemption on the next S$200,000 of normal chargeable income. This will increase the maximum partial tax exemption from the current S$152,500 to S$175,000, a move that will help mildly profitable SMEs sustain growth.

Corporate income tax rebates and SME cash grant

Temporary measures in the form of corporate income tax (CIT) rebates have been granted to further help companies, especially SMEs, since YA 2011. Starting from a 20 per cent CIT rebate capped at S$10,000 in YA 2011, this has increased to 50 per cent CIT rebate capped at S20,000 for YAs 2016 to 2017.

Recognising that loss-making companies are unable to take advantage of the CIT rebates, a 5 per cent SME cash grant capped at S$5,000 was introduced in YAs 2011 and 2012.

The government should continue the 50 per cent CIT rebate not just for YA 2018 but also for YA 2019 and 2020. If its fiscal position does not allow it to be generous, it can reduce the S$20,000 cap to S$10,000.

For loss-making companies, the government should consider re-introducing the 5 per cent SME cash grant capped at S$5,000 as a temporary relief for YAs 2018 to 2020 with anti-abuse measures.

Carry back relief system

Loss-making companies had much to cheer when the carry back relief system was implemented to alleviate their cashflow problems in YA 2006. Under this scheme, companies can carry back unutilised trade losses and capital allowances to the immediate preceding YA, subject to a cap of S$100,000, thereby claiming a refund of taxes paid in the preceding year when they were profitable.

The carry back relief scheme has proven to be relevant as it provides welcome relief for companies affected by any slowdown. A higher cap of S$200,000 with the flexibility to claim up to two preceding YAs to tackle the current challenging environment will go a long way in helping SMEs.

There are a number of SMEs in Singapore that deserve further assistance. In the same manner, as the government extends more help to the needy and less well-off individuals for an inclusive society, it should also lend a hand to struggling SMEs that are making losses or marginal taxable profits, to tide them over a challenging period.