THE reduction in tax exemptions for startups unveiled in Budget 2018 on Monday will have little impact on Singapore's startup ecosystem. While it will disadvantage startups that have just turned profitable, it is a necessary, progressive move for the Republic as its startup ecosystem grows and matures, industry players told The Business Times.
Serial entrepreneur Darius Cheung said the move will "impede the growth rate" of startups that have just become profitable, and less so for startups that have been profitable. But he also noted that the latter forms only a small segment - 5 per cent or less - of startups in Singapore.
"Most startups, especially those that require support and incubation, are not profitable. For startups that are profitable, the move will not make much of a difference to them as it will amount to only a few thousand dollars in savings. So this adjustment would not matter much."
Mr Cheung, who is now chief of real estate search portal 99.co, said that his startup, for instance, is currently unprofitable and would be so for the next five years as it continues to expand across South-east Asia.
Huang Huanmin, head of corporate development at e-commerce startup ShopBack, agreed that the move will have an insignificant impact on Singapore, affecting only the small number of profit-making startups that are three years old or younger.
"This adjustment will not affect many startups, at least those that are not profitable in their first three years of assessment (YA). Most software startups that are focused on rapid growth belong to this category."
Mr Huang added that the "thought behind the adjustment" should take the limelight instead of the direct impact of the adjustment.
"In place of a broad-based approach of exempting startups from taxes, Singapore is adopting a streamlined approach that supports its tax base needs and concurrently provides resources, such as more targeted grants, for companies that have shown potential for growth."
On Monday, Finance Minister Heng Swee Keat announced in his Budget 2018 adjustments to two major tax schemes for startups.
The Startup Tax Exemption (SUTE) scheme, applicable to new startup companies, will exempt 75 per cent - instead of 100 per cent currently - on the first S$100,000 of a startup's normal chargeable income. Under the revised SUTE scheme, a startup will enjoy 50 per cent exemption on the next S$100,000 - instead of S$200,000 currently - of its normal chargeable income.
The Partial Tax Exemption (PTE) scheme (applicable to all companies excluding those that qualify for the SUTE scheme) was also tweaked. While a startup still enjoys an unchanged 75 per cent exemption on the first S$10,000 of normal chargeable income, its second tier of tax will be adjusted: instead of the current S$290,000, its next S$190,000 of chargeable income will get a 50 per cent tax exemption.
Changes to both schemes will take effect on or after YA2020.
Mr Heng said: "Even with these adjustments, corporate tax will remain low for startups and smaller firms. For a taxable income of S$100,000, the effective corporate tax rate is 4.3 per cent for startups and 8.1 per cent for older firms, as compared to the headline rate of 17 per cent."
Eugene Wong, managing director of Singapore-based venture capital firm Sirius Venture Capital, agreed that the 4.3 per cent effective corporate tax rate for profitable startups is "still very low" and will have "minimum impact on good startups".
"Singapore has grown to be the top country in Asia for startups. The SUTE scheme is a unique and attractive tax incentive scheme that helps startups overcome their initial growing pains. Most other countries do not offer such incentives."
The Startup Tax Exemption scheme will exempt 75% - down from 100% currently - of the first S$100,000 of a startup's normal chargeable income
The Partial Tax Exemption scheme will exempt 50% of the next S$190,000 - instead of S$290,000 currently - of a startup's normal chargeable income
Corporate tax to remain low for startups at effective 4.3% for a taxable income of S$100,000, compared to the headline rate of 17%
Author Info: This article was first published by Jacquelyn Cheok on The Business Times