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Singapore's 2011 Budget Announces Increases In Worker's Levy And Employer's Contribution To CPF

Worker levy increase

In Singapore's recent Budget release, Finance Minister Tharman Shanmugaratnam emphasised Singapore's long-term goal of encouraging firms to progressively upgrade their operations and workforce by way of rewarding employers who invest in productivity improvements and innovations. This means firms will enjoy higher tax deductions to offset rising business and wage costs. Mr Tharman elaborated that firms can now deduct from their taxable income 400 per cent up from 250 per cent of expenditures in any of the six broad categories of investment in productivity and innovation under the enhanced Productivity and Innovation Credit (PIC). The cap for such claims would also be raised from $300,000 to $400,000 of the expenditure. For small-and-medium-sized enterprises (SMEs), they would also be able to combine annual expenditure caps for the 2013 to 2015 years of assessment.

However, the attempt to encourage firms to raise productivity is also accompanied with the Government's intention to reduce their reliance on foreign labour. The Budget also unveiled an increase in worker levies across all sectors, surprising many in the business community. On average, levy rates for most Work Permit holders will be raised by between $60 and $200 by July 2013, on top of increases announced in last year's Budget.

Rates for S-Pass holders, who are workers with mid-level skills, will go up from $50 to between $300 and $450 by July 2013, depending on the number of S-Pass holders hired. Mr Tharman explained that the economy's faster-than-expected growth led to the steps taken to raise foreign worker levies so as to prevent the proportion of foreign workers from rising over time, and exceeding the long-term target of one-third of the nation's workforce. This is the second round of increases in levy rates in as many years.

Ernst & Young Solutions tax partner - Ms Ivy Ng, commented that if (firms) spend on training or automation, the reduction in taxes as a result of government measures like the PIC, would help them offset the hike in foreign worker levies.

0.5% Employer Rate Increase - CPF Contributions Back To 36%

The Budget release also unveiled that the total Central Provident Fund contributions will be back to 2003 pre-Sars levels of 36 per cent in September, another surprise move by the government to lift the employer contribution level by another 0.5 percentage point. Come September, the employer contribution will stand at 16 per cent while employees pay the other 20 per cent. This means the total CPF contribution will be at the top of the Government's target range of 30 per cent to 36 per cent. It was cut amid the Sars crisis in 2003. In addition, the income ceiling to which CPF contributions apply was raised from $4,500 to $5,000 a month. Income earned above this level is not subject to CPF contributions. This move affects only those earning $4,500 and above, who will see their take-home pay shrink by up to $100, while their employers will have to contribute slightly more to their CPF accounts. Finance Minister Mr Tharman Shanmugaratnam explained that the change aligns the salary ceiling back to the 80th percentile income, to aid middle-income Singaporeans.

National University of Singapore labour economist - Shandre Thangavelu, noted that the continued economic momentum makes this the best time to levy the CPF increases. He highlighted that this is a good time to share out to workers some of the wealth that has been created in the economy. He cautioned that waiting too long might result in growth moderating. Managing Director of Swiss firm DKSH Singapore - Mr Leonard Tan, agreed and pointed "Business sentiment is good this year, so we should be able to absorb this half percentage."Experts felt that the governments' direction to increase CPF funds is essential to cope with a rapidly ageing society.