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Singapore Budget 2014: Potential challenges for Singapore SMEs
Post-Budget 2014, we take a look at some of the potential challenges that Singapore SMEs face despite - or as a result of - the initiatives that have been laid out.
As seen in our earlier coverage, the Budget 2014 has laid out several schemes that benefit SMEs, such as the initiatives that encourage them to focus on productivity and innovation. However, the Budget did simultaneously pose some challenges to SMEs. Here, we outline these challenges and consider their potential impact.
Increase in Employer CPF
Starting 1 Jan 2015, employers’ CPF rate will be increased by 1% for all workers, which will be deposited into their Medisave account. Additionally, employers will also have to contribute 1% extra for older workers within the 50-55 age group and 0.5% extra for those in the 55-65 age group.
Impact: This increase works out to a 37% (employers 17%, employess 20%) CPF rate for workers up to 50 years old. SMEs, in particular those whose workers are proportionately older, will experience this the most.
To help employers cope with the new rates, the government will be providing a one-year Temporary Employment Credit (TEC) which is an offset of 0.5% up to the CPF salary ceiling of S$5,000 a month for the first year, effectively compensating for half of the 1% increase. The Special Employment Credit (SEC) will also be enhanced, whereby employers hiring Singaporean workers aged 50 and above earning up to S$4,000 a month in 2015 will receive an additional offset of up to 0.5% of wages.
SMEs can also expect CPF rates to stabilise for some time after this raise, as the government explained that the overall 37% increase is a higher figure than what was originally planned in 2003 - and that there are unlikely to be further increases in the near future.
Foreign Worker Levy Hike
The construction sector was singled out as one of the sectors that has been underperforming. During this year's Budget, it was announced that the levy for foreign workers - in particular, the levy for basic skilled construction workers (R2) work permit holders employed within Man-Year Entitlement (MYE) will be increased from $600 to $700. This levy hike will be effective from July 2016. Levies for higher skilled workers will remain unchanged, and the maximum period of employment for R1 work permit holders has been extended from 18 to 22 years. It was also announced that the Ministry for Finance will continue to monitor the growth of foreign workers and might propose additional tightening measures if necessary.
Impact: Construction companies involved in longer-term projects that will stretch beyond 2016 are the ones who are likeliest to feel the immediate impact of these hikes. The levy also has the potential to spillover to the rest of the business, for example how construction companies restructure their bids for new projects.
As the hikes will take effect two years from now, the sector has some time to consider the impact carefully, as well as to prepare for the change. Companies who will be impacted by this hike should start forecasting their manpower needs and its costs two years ahead in order to be ensure they can have a smooth transition when the hike takes effect. Also, in line with the government's push for increase in productivity, companies may want to start or increase their investments in automation or innovation to address the manpower crunch.
The PIC+ Scheme
The focus during Budget 2014 was for SMEs to invest in technology and innovation so as to increase productivity. For instance, the PIC scheme was extended and a PIC+ scheme was introduction. The PIC+ now offers a higher expenditure cap for SMEs. However, the cash payout limit, which currently stands at $100,000 was not increased.
Impact: Cash-rich SMEs are in a better position to benefit from the extended PIC and PIC+ scheme, as opposed to SMEs that are low on cash or making losses. Such SMEs can, however, consider looking into lower-cost ICT solutions (such as the adoption of SaaS apps, which do not have high upfront costs) as a more affordable means of introducing innovation to their businesses and in time, invest more to further increase productivity.
Another way to manage cash flow on PIC-related purchases is to purchase equipment just prior to submitting the PIC claims for the quarter and to opt for a cash payout instead of a tax deduction. The PIC scheme also applies to lease agreements: this is one way to take advantage of the scheme whilst not requiring large capital for purchasing equipment.
Read on for more on Singapore Budget 2014:
- Singapore Budget 2013: Key Initiatives Impacting SMEs
- Singapore Budget 2014: Frequently Asked Questions
- Singapore Budget 2014: Update on the Latest Developments
- Singapore Budget 2014: 7 Key Points for SMEs
- Singapore Budget 2014: Potential challenges for Singapore SMEs
- Singapore Budget 2014: FAQ for ICV and PIC Schemes