How to finance Development Expenditure?

What is Development Expenditure (DE)?

According to Ministry of Finance, DE refers to expenses that represents a longer term investment and result in the formation of a capitalisable asset of the Government.

How is DE financed currently?

Based on FY2007 Budget, $7.1 billion of total DE of $13.1 billion (ie. 54%) is financed out of current revenues, mainly taxes.

How should DE be financed according to Mr Basant Kapur?

Mr Kapur said most DE should be financed by borrowing. Exception - DE on military hardware which should be financed out of taxes.

What are the basis of Mr Basant Kapur's position?

DE, as in any investments, would generate a return over time. The return should be measured by the incremental GDP contributed by the DEs. The interest servicing and loan capital repayment should be paid out of taxes on the incremental GDP.

Using current tax revenues to pay for future returns may have negative repercussions. Mr Kapur argued that the 2% GST increase may thus not be necessary if the DE were to be financed through borrowing, from internal sources or otherwise. The GST increase has resulted in higher than expected tax revenue which may curb consumption and fuel inflation.

In summary, we should not impose cost to the present when we are investing today for future benefits based on economists' "efficiency argument".

Who is Mr Basant Kapur?

He is a Professor of Economics and Director, Singapore Centre for Applied and Policy Economics, NUS.

Reference - Basant Kapur, "Better to borrow than raise GST", Straits Times, 29 Feb 2008.

Destroying records and selling computer...

Png Yeow Leng, 35, pleaded guilty to 6 charges under GST Act when he faked transactions to claim $42,000 in tax rebates over 9 months to March 2005.

Nothing amazing about this so far.

The interesting thing is that he has the honour of being the first person in 14 years to be convicted of not keeping proper business records.

When the IRAS officers first attempted to commence investigation into his business dealings, he closed his shop, burnt its records and sold his computer to a karung guni man.

Under section 46(1) and (2) of the GST Act, a GST trader is required to keep business and accounting records, copies of all tax invoices and receipts issued by him and tax invoices received by him and to preserve such records for a period of not less than 7 years.

From 1 Jan 2007, you have to keep your records for 5 years.

Failure to do so is an offence. Under section 46(6), the offence is punishable with a fine not exceeding $5,000 or to imprisonment for a term not exceeding 6 months or to both and, in the case of a second or subsequent conviction, to a fine not exceeding $10,000 or to imprisonment for a term not exceeding 3 years or to both.

SRS enhancements

things people watch together

Old rule - Workers only can top up their own accounts.
New rule - From Oct 1, 2008, employers can top up the SRS accounts for their employees and enjoy tax exemptions.



So if you know that an employee of yours is going to contribute to SRS, why don't the company do it on behalf of the employee?



Old rule - Currently, members are given 10 years to withdraw their SRS savings from the retirement age of 62.
New rule - It will start only when a SRS member makes his or her first withdrawal.



Other features:-

• 50% of the amount taken out of SRS account during that 10-year period is taxable.


• Top-ups will still be capped at $11,475 for Singaporeans and PRs and; $26,775 for foreigners.

Section 94A of the Income Tax (Amendment) Act

two lonely petals

A piece of legislation, passed in Feb last year, has sharply upped the ante for filing late returns. The harsh new penalty kicks in for those who fail to file tax returns for two years or longer. There could also be a fine of up to $1,000.

The new Act has been giving sleepless nights to many, especially this fellow called Joe Ang. He felt so bad that he wrote a letter to IRAS.

"Dear Honourable Tax Officer of IRAS,

I have had many sleepless nights over the last two years for the tax owing. Please see the attached cheque of $100.

Good night.

Your humble taxpayer, Joe Ang.

P/S - If I still can't sleep, I will send the rest of the monies."

I will attribute the above adapted joke to Mr Sum Yee Loong who has kindly shared it with us during his budget review presentation on 27 Feb 2008. Cheers.

Mr Tharman explains...

Singapore achieved S$6.4 billion Budget surplus in fiscal year 2007 (equivalent to 2.7% of GDP) against S$0.7 billion deficit forecasted. The variance is a humongous SGD $7.1 billion between actual and budgeted.

The Finance Ministry has been urged to improve its fiscal marksmanship. Mr Tharman attempted to explain the variance in Parliament on Feb 27, 2008.

At the time of the Budget last year, the finance ministry estimated 2006 stamp duties to be $1.5 billion and hence projected the same level for 2007 on the basis that 2006 was itself already an exceptional year for property.

After the budget was released, the data showed a significant increase in stamp duty collection for Jan-Mar FY2006 to $2 billion, not $1.5 billion figure used at the time of preparing the Budget. Eventually, the property market accounted for more than $3.5 billion in extra revenues, lifting the budget surplus for FY2007 to $6.4 billion.

Well Mr Tharman has explained SGD$2 billion of the SGD$7.1 billion variance, how about the rest of the variance?

There was also uncertainty on whether the buoyancy in luxury projects would filter through to the rest of the property market. They did not expect the surge in the volume of transactions.

Singapore is a very open economy and thus very expose to external factors, positively and negatively.

I wonder we can quote Mr Tharman when we miss our business targets and hope our bosses will still see us positively by saying, "We cannot expect too much prescience in the budget planning process."

Our bosses may respond, "Mr Tharman is running the country's finances while you are just running a department's/section's finances."

For the record, there had been six instances of over-projection in the Budget positions in the last 10 years.

Reference - Chen Hui Fen, Govt uses 'realistic' assumptions instead of 'optimistic' ones, Business Times, 27 Feb 2008.

Hong Kong pushes the ante in its budget

HK slashes taxes and doles out the goodies, with greater generosity than Singapore's, funded by its record budget surplus achieved in 2007.

Singapore achieved S$6.4 billion Budget surplus (equivalent to 2.7 per cent of GDP) while Hong Kong's record FY2007 HK$115.6 billion (S$20.7 billion) surplus - 7.2 per cent of GDP.

1. Both governments to give out tax rebates. 20% tax rebate, up to $2,000 for Singapore. For HK, 75% tax rebate on salaries and corporate tax, up to a ceiling of HK$25,000.
2. While Singapore holds its corporate and income tax rates steady, HK has decided to cut its headline corporate rate by 1% to 16.5% (Singapore - 18%). For income tax, HK's top tier rate is 15% compared to 20% in Singapore. That is HK's way of sharpening its competitive edge in the international arena.
3. In promoting entrepreneurship in its already highly entrepreneurial society, HK is waiving business registration fees for a year. Singapore has decided to develop its competitiveness for its future by placing its chips on specific targeted areas:-

• seeding Research and Development culture in all business entities in Singapore if possible, with tax grants and relaxation of restriction to perform R&D related to your existing business and;
• targeted incentives for specific financial and maritime industries, and tech start-ups.

4. While HK has decided to scrap its 40% tax on its wine and beer duty all together, Singapore has instead decided to moderate its liquor duties by charging duties based on its alcohol content.

5. On Green front, HK is ahead of Singapore with tax concessions for environmentally-friendly vehicles and even machinery. We were just lamenting the lack of concrete intention ie. $, by Singapore on this front.

6. For the lower income group in both economies,

HK will do the following:-

• mandatory pension payments - to inject cash of up to HK$6,000.
• extra month's payment under Comprehensive Social Security Assistance (CSSA).
• The elderly were also given additional funding of HK$60 million a year for day care, residential and infirmary places.
• Old Age Allowance recipients will also receive a one-off grant of HK$3,000, costing the government HK$1.5 billion.
• set aside HK$50 billion for health care financing in the ageing society.
• subsidy of HK$1,800 for electricity charges per household, costing the government HK$4.3 billion.

Singapore will do the following:-

• Singapore is disbursing some S$1.8 billion of 'growth dividends' to all Singaporeans still holding on to their shares.
• Another S$1 billion in benefits under a GST offset package unveiled earlier when the consumption tax rate was raised by two percentage points.

Reference
Anna Teo, A tale of the Budgets of two cities, Business Times, 29 Feb 2008.
Jane Moir, HK slashes taxes, doles out the goodies, Business Times, 28 Feb 2008.