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Budget 2013: Helping SMEs transit to a new economic reality 

First published in The Business Times on 26 February 2013
For the small and medium-sized enterprises (SMEs) that are the lifeblood of Singapore’s economy, the message in this year’s Budget announcement couldn’t have been clearer – there will be no U-turn on its foreign labour policy. The thrust for Singapore going ahead is to generate growth by upping productivity and focusing on innovation. And most of the measures announced this year are a continuation of the journey that the Government started in 2010 to help businesses make the transition to this new economic reality.

As they say, the devil is always in the details, so where this year’s Budget departs from previous years, is of course, in the nitty gritty.

This year’s measures are more targeted than the broad-based measures of before in the way it attempts to wean businesses off cheap foreign labour and to pay greater attention to boosting productivity.

For example, the restrictions on foreign labour are seemingly calibrated to the circumstances of particular sectors and different categories of workers.

For sectors which continue to see significant growth in foreign worker numbers and which still lag behind the productivity levels of international productivity leaders, their Dependency Ratio Ceiling (DRC) will be selectively cut further. One sector which will see a reduction in the DRC is the services industry.

And even though there will be an increase in foreign worker levies for all sectors, the increases will be sharper for firms that are most dependent on foreign workers, for instance, in the construction and process sectors.

Some of the measures announced this year indicate that the Government has listened to and has taken into account the concerns raised by various businesses. It is giving SMEs help and time to restructure the way they conduct their business.

So, SMEs will be able to tap on the $5.9 billion Quality Growth Programme aimed at helping them to upgrade, create better jobs and raise wages over a span of three years.

Part of the restructuring package includes the $3.6 billion Wage Credit Scheme, which encourage companies to share their productivity gains with their workers through higher wages over three years. It will go some way in helping businesses manage the new reality of higher manpower costs as the Government will co-fund 40 percent of the wage increases of Singaporean employees (earning up to gross monthly salary of $4,000) for the next three years.

The Productivity and Innovative Credit (PIC) Bonus scheme is targeted at micro-SMEs to encourage meaningful productivity investments. Enterprises that invest a minimum of $5,000 per Year of Assessment in the PIC qualifying expenditure will receive a dollar-for-dollar matching cash bonus. They can claim up to $15,000 over three Years of Assessment.

There is also the Corporate Income Tax Rebate of up to 30 percent of tax payable up to $30,000 per Year of Assessment (YA) from YA 2013 to YA 2015. This will help companies cope with other cost pressures, such as higher rentals, although this help can be more comprehensive if it can be extended to small businesses operating as sole proprietorships or partnerships.

These, as well as a slew of other productivity measures, are geared at helping local SMEs make the transition to a higher quality economy.

Surprising though, is the fact that despite the emphasis on productivity and innovation, there are few measures aimed at promoting value-creation activities in companies, for example through innovation and branding.

At the end of the day though, taken in its entirety, this year’s Budget is one that is geared at making Singapore’s SMEs transition to the new economic reality. As Finance Minister and Deputy Prime Minister, Mr Tharman Shanmugaratnan summed it up in his Budget speech: “Restructuring will unfortunately lead to some businesses being winnowed out, but the end result must be a vibrant and sustainable local SME sector.”

Although some businesses will feel the pinch as the foreign worker tap is further tightened, those that bite the bullet and restructure may find themselves stronger and more competitive at the end of the day.

This article is contributed by Tay Hong Beng, Head of Tax at KPMG in Singapore.