The Singapore 2015 Budget – its impact on local businesses
February 25, 2015
Yesterday we looked at the impact of the budget on individuals. Today, we shall see how it impacts businesses, especially SMEs.
SkillsFuture is a double-edged sword for businesses. On the one hand it allows for continuous development of individuals in a structured and subsidized environment, leading to professional qualifications; qualifications that will allow for greater productivity and business results. Yet, these qualifications also allow for greater mobility, increasing staff turnover. This is not necessarily bad because it theoretically allows a company to also resource upwards, but the cost of recruitment and training can make this a costly endeavour. Hence, a double-edged sword.
Transition Support Package
The Wage Credit Scheme (WCS), which is a 20% co-funding for wage increases is a good support for leveling up wages, and the Corporate Income Tax (CIT) rebate, will continue to provide some support against increasing business costs. While businesses will still have to absorb the 80% of increased wages, the fact that the need for Cost of Living Adjustment is a given, the WCS is a boon to businesses. And the CIT, while it has been lowered to cater more for SMEs, will continue to impact positively on businesses. However, the other aspects of the Transition Support Package will be discontinued, including the PIC Bonus, which has been subject to abuse since its inception. So, all in all, there is still good support in this jubilee year for businesses.
This is not a good thing for businesses, but looking at the bigger picture, there is good reason to understand why this is being implemented. But by increasing the CPF ceiling from $5,000 to $6,000, there will be a concomitant increase in costs of up to $200 for each of these employees. The implication here can be negative. If I want to keep my labour costs down or for it to be on par with present costs - the Enhanced Temporary Employment Credit (TEC) notwithstanding - I might let go employees whose salary lie in the $5,000 to $6,000 range and hire those less than $5,000. This will create an additional problem for the government, where it has not existed before. All the credits to help businesses cope with the rise in CPF costs do not fully offset the cost increases, thereby making this budget less friendly to businesses, more friendly to individuals.
Recalibrating foreign worker levies
It is a good thing that the government has deferred the levy increases for this year in view of the sharply curtailed inflow of foreign talent. While that is good news, it does not solve the problem that the sharply reduced labour supply has caused, sometimes to the point where we are now making losses. It might not be surprising to see an increased number of businesses closing down for lack of manpower, even while the levies remain the same.
Strengthening support for innovation
While the government has made it easier to receive, and increased the quantum of, grants to encourage innovation, the truth of the matter is that the limit of cheaper foreign labour has impacted SMEs to such an extent that there are no margins to set aside for innovation. And we are not talking about startups but even 20- to 30-year-old businesses! Without a sustainable buffer brought about by healthy margins, SMEs are unable to innovate. This leads to a vicious cycle that can only be broken by even better support schemes than are proposed in this budget. If the government will not tie the grants to capricious objectives, it can see a flourishing of innovation.
As noted in yesterday’s article, the government has made internationalisation a key focus in 2015. To support this, there is a slew of support, from increase grants from 50% to 70%, enhanced double tax deduction to the introduction of the International Growth Scheme. These are all well and good for a business that is poised to go regional. However, it will do nothing for those businesses that are not ready, or lack the business size, to take the business regional. Ultimately, IE Singapore can only support SMEs of a certain size (some say there is a minimum revenue level of $10M, though that cannot be confirmed), so it will not do any good to a high margin, highly productive SME that is only just breaking $3M.
The increase of tax deductions from 5% to 25% of cost of acquisition, brought about by only a 20% equity stake (rather than a 50% stake) is very generous. However, it again favours larger companies, and while SMEs can benefit from this, very few of them will ultimately qualify. Hence, this may be moot, even if the government has allocated $100M for this.
The other measures, like the enhanced tax deduction from donations, extended care and share scheme, and various vehicle-based policies, may have limited impact on businesses, unless they operate a fleet. In quite the same vein as the M&A credits, they have limited impact on the average SME.
There isn’t much to rejoice about the budget for businesses, especially for SMEs. On paper it looks good, but as they always say, the devil is in the details, and when you pare the limitations of each of these initiatives away, there may only be a trickle for businesses, especially for SMEs. But I suppose the budget is more long term in its focus. It is designed to bring about a more strategic and long-term effect on the sustainability of the business. Hence, business owners will have to invest today’s profits for tomorrow’s growth. The question is, are we in the right position to do that? Do we have enough margins to make these long-term bets? From my anecdotal understanding, the answer may be more “no” than “yes”. Which may take away some of the lustre from the euphoria of the 2015 budget.