By LYNETTE KHOO

Cash is king and against the backdrop of such a mantra, one can expect the government to put more money in the hands of businesses and individuals at the upcoming Budget for fiscal 2009.

Some believe the government has more gun powder to cut taxes and dish out more generous rebates, or even offer a tax holiday, as a constitutional framework revised last October may unlock more reserves for government spending.

But tax cuts and a tax holiday remain a wild card for now going by the usually prudent and conservative fiscal stance of the government, market watchers say.

Standard Chartered economist Alvin Liew says he expects both the corporate and individual tax rates to stay untouched, while there could be one-off measures such as partial waiver of profit tax, property tax, personal income tax, and corporate tax.

'It would be too hopeful to expect further cuts in personal and income taxes without a commensurate increase in other taxes to compensate for the lost revenue,' he says.

'Since the GST will not be revised this year, we should not expect income tax cuts that could lead to chronic fiscal imbalances in the future,' he adds.

The last corporate tax cut was a two percentage-point reduction to 18 per cent in the FY2007 Budget for Year of Assessment (YA) 2008. The personal income tax was left untouched at 20 per cent.

Still, some economists say a reduction in direct tax revenue does look more manageable now given the funding from the two-percentage-point GST increase in 2007, and more funds from a new Net Investment Returns (NIR) framework.

The new framework allows the government to tap up to half of the total returns from investing the reserves to include capital gains, instead of using only the interest and dividend income earned from investing the reserves.

'We think there is a good case for cuts in corporate and/or personal income tax,' says Citi economist Kit Wei Zheng. 'To further ease any potential strain on the fiscal position, the tax cuts could be staggered over two to three years, say one percentage point cut each year.'

Mr Kit adds that he does not rule out downside risk in the amount of funds to be tapped under the NIR framework, as it prices in changes in market value of investments. The government may also want to save some bullets for off-budget measures.

During the past downturns of 1998 financial crisis and 2001 tech recession, the government doled out off-budget packages totalling $12.5 billion and $13.5 billion respectively. Corporate and income tax cuts were made both in FY2001 and FY2002 but not in FY1997 or FY1998.

Some analysts have also tossed the idea of a 'tax holiday', which they believe will offer an immediate relief to businesses and households, and facilitate a shift to the 'pay-as-you-earn' tax system - tax liabilities based on this year's income rather than a year ago income.

'Despite its obvious merit however, it is uncertain if the government is keen to look at this proposal,' CIMB-GK economist Song Seng Wun says. He estimates that a tax holiday may cost the government $19-20 billion and result in a record primary budget deficit of 8 per cent of GDP.

Hope for generous rebates in this upcoming Budget is less likely to disappoint, market watchers say.

Some reckon that tax rebates could have a greater impact on spending than tax cuts since most consumption is imported and tax savings are likely to be hoarded rather than spent. Any change to the longer term tax rates structure will also be difficult to reverse when economic conditions support a policy reversal, say Ernst & Young tax partners Ang Lea Lea and Pok Soy Yoong. 'A tax rebate offers the advantage of releasing cash into the economy but leaves the present tax rates structure unchanged.'

KPMG's head of tax services Owi Kek Hean recommends a one-off corporate tax rebate to be given to help businesses ride the current economic hardship. For individual taxpayers, he suggests a 10 per cent uncapped tax rebate and expanding the zero percent tax bracket of $20,000 to help those at the lowest income level.

Deloitte's tax partner Ajit Prabhu suggests raising the partial corporate tax exemption from the first $300,000 chargeable income to the first $500,000 chargeable income to reduce the tax burden on the SMEs. He hopes the government will maintain the 20 per cent personal income tax rebate in this year's Budget and raise the cap from $2,000 to $5,000.

Among its recommendations, PricewaterhouseCoopers (PwC) suggests a scheme to defer individual tax payment for active job seekers who are retrenched to alleviate their short-term financial woes.

The big four audit firms also ask that the government allow the carry back of tax losses beyond one year and remove the $100,000 ceiling for tax losses that can be carried back.

To encourage local firms to remit foreign-sourced income back to Singapore to finance their operations here, tax experts are calling for tax exemption on foreign-sourced income, or a tax amnesty that provides exemption within a certain time.

As the property sector enters a rough patch, market watchers are expecting some temporary measures such as tax rebates for the commercial and industrial segments.

This article was first published in The Business Times on January 19, 2009.