More sugar needed for SMEs’ bitter restructuring pill

February 6, 201411:00 am210 views
More sugar needed for SMEs’ bitter restructuring pill
More sugar needed for SMEs' bitter restructuring pill

AT A recent community event, Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam said the upcoming Budget will include more measures to help companies – in particular small and medium-sized enterprises (SMEs).

SMEs are an important part of Singapore’s economy, contributing more than 50 per cent of its gross domestic product (GDP) and employing some 70 per cent of its workforce.

These firms often operate in highly competitive markets with thin profit margins. SMEs face challenges in terms of technology and labour constraints and rising business costs.

Since 2010, the Government has introduced a series of measures to restructure the economy. While Singapore has seen some progress in raising productivity, there is no question that the economy needs to continue restructuring to remain relevant and continue growing in a sustainable way.

SMEs, which traditionally have been reliant on foreign labour, have been hit by the tightening of foreign labour quotas, and are increasingly pressed to find other ways to cope with manpower shortages.

The process of restructuring is uncomfortable, but inevitable. There is therefore a need to extend a helping hand to SMEs during this difficult transition period.

Previous Budgets have recognised the need to help SMEs cope with the pace of restructuring. This Budget should build on those efforts.

For a start, consider that SMEs that are paying little or no taxes in Singapore will not enjoy the benefits of any rebate in corporate tax.

Instead, the SME cash grant, which offers a cash payout based on a percentage of the company’s revenue, can be re-introduced.

Then there is the Productivity and Innovation Credit (PIC) to encourage innovation and productivity among companies. The scheme is due to expire next year. It is probably timely to consider extending it.

Some tweaks to the PIC can encourage more SMEs to take it up.

Currently, SMEs that spend in each of six areas to lift productivity can reduce their taxes, by deducting from their taxable income up to four times what they have spent, subject to a spending cap of $400,000 per area. One change could be to let SMEs deduct up to five times their expenditure.

Although PIC is available across six areas of spending, making for a combined cap of $2.4 million per year, in practice most SMEs mainly claim PIC on automated equipment and training expenditure.

It is hoped that the expenditure cap can be combined across all six areas of spending instead of capping it per area, to give better support for any qualifying spending that increases productivity and the knowledge base in Singapore.

On top of this, SMEs that make use of the PIC scheme receive a cash bonus of a dollar back for each dollar they spend – up to a total bonus of $15,000 over three years – as long as they have spent at least $5,000 in PIC-approved activities.

Perhaps the minimum spending to qualify for this PIC bonus could be reduced to $1,000.

Rising business costs also remain a concern. Singapore could consider granting rebates on property taxes; these savings could then be passed on to SMEs through lower rental costs.

Some SMEs may have to restructure their business and operations, a potentially costly exercise. Measures to help could include extending stamp duty relief to business owners to group their businesses and allowing deductions of costs to undertake their corporate restructuring exercises.

Finally, targeted tax measures, such as providing deductions for overseas start-up costs or initial business losses, may help spur SMEs to expand beyond the limited domestic market.

As the Chinese saying goes, “good medicine is bitter“.

Restructuring is a bitter but necessary remedy for flailing SMEs. Some tax sweeteners will go a long way to help SMEs swallow this pill.



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