Companies and accountants say the Productivity and Innovation Credit (PIC) scheme should be made more accessible to firms engaging in research and development.
Firms say they find it tough to use the popular tax credit scheme for R&D as this type of spending is often more difficult to accurately quantify compared with spending on equipment such as iPads and printers, or staff training.
These concerns are being raised ahead of the Feb 23 Budget.
The PIC scheme, introduced in 2010, gives generous tax deductions to companies investing in six qualifying categories related to productivity.
The qualifying activities are: acquisition and leasing of automation equipment; training; acquisition of intellectual property rights; registration of patents and trademarks; R&D; and design projects.
The programme is part of government efforts to restructure the economy and raise productivity.
Data from the Inland Revenue Authority of Singapore (Iras), which administers the scheme, suggests only about 3 per cent of PIC claims are related to innovation.
These include claims for the purchase, licensing and registration of intellectual property rights, and investments in design or R&D.
As at August last year, more than $1.8 billion in tax savings and cash payouts had been granted to businesses under the scheme.
The key area of difficulty is the threshold determining what can qualify as R&D, said Mr Harvey Koenig, tax partner at KPMG in Singapore. Claims that involve developing "breakthrough" or "revolutionary" technologies usually get approved.
"However, many small and medium-sized enterprises (SMEs) are just starting on their innovation journey, and current thresholds are too high for many to qualify," he added.
"The use of the scheme to support R&D activities is something that should be encouraged... because the projects have to involve innovation... This is unlike other parts of the PIC where there is no requirement to demonstrate productivity improvements."
Mr Koenig cited an example of a food manufacturing firm undertaking development work to improve product formulations.
The company was working to grow its range of flavours for existing products and substitute ingredients with healthier alternatives, but its claims under the PIC were rejected.
"These types of projects can sometimes involve significant developmental work and are technically challenging to SMEs."
Mr Roderick Chia, the vice-chairman of the Singapore Business Federation's SME Committee Innovation Sub-committee, said manpower costs usually make up the bulk of R&D expenditure.
"It can be very difficult to account for manpower costs in tax claims... Companies sometimes have to find ways and means to package their claims to show that they're doing R&D," said Mr Chia.
The chief executive of a technology company that develops applications for the education sector agreed that manpower is the most significant cost in R&D.
"When we started on R&D I thought the PIC scheme might be able to help, especially since it's tough to hire developers in Singapore and they are commanding higher and higher wages," the CEO said. The firm's PIC claim for an application it developed is awaiting approval.
‘Smoothen process of R&D claims’
"The Government should have a clearer definition of what R&D means, so the money can go to companies that really improve productivity," he added.
R&D claims often involve "protracted discussions on the technical eligibility of the projects", or are stalled because of "a lack of appreciation for the technical aspects of the R&D process", said Ms Tan Bin Eng, business incentive advisory partner at EY Solutions.
"While it is important for the Iras to ensure that there is no abuse of the scheme, it is equally important that the process of making R&D claims is not overly onerous or the application of the R&D definition so stringent as to render the scheme ineffective," she added.
Outside of R&D, however, firms say the PIC scheme has been an incentive to invest in training and technology.
Mr Tan Yew Kiat, the founder of fashion retailer Bysi International, said the company has used the scheme to upgrade its inventory systems and customer data tracking tools.
It has spent about $80,000 to $100,000 on these projects, which also include launching an e-commerce platform this year.
"We still have to do a lot more before e-commerce kicks off. But we're really confident about getting things in place."
Additional reporting by Michelle Lee