The proposals were welcomed by businesses and investors, but met with scepticism among lower income earners and job seekers faced with the highest unemployment rate in 15 years.

The plan calls for the top rates of both corporate and income taxes to be cut to 20 percent in three years, with large cuts coming early, from 24.5 percent and 26 percent respectively. The broad-based goods and services tax (GST) would be raised to five percent from three percent next year.

"These measures are necessary to improve Singapore's economic prospects in a very different world and a much more competitive world," said Senior Minister of State Tharman Shanmugaratnam, who chaired the committee proposing the changes.

The proposals, made by a government-appointed committee comprising top public and private sector advisers, would still leave Singapore's top rates higher than rival financial hub Hong Kong, where corporate and personal rates peak at 16 and 15 percent, respectively.

The government is expected to incorporate the plan into its May 3 budget. Shanmugaratnam, who told a news conference the income and corporate tax cuts should ideally be large upfront, said the tax system will position Singapore as a business hub and support the growth of local enterprises.

"We have recommended a significant reduction in the first year. It's up to the government to see how far they can go."

Corresponding cuts across income bands were also proposed to make sure lower wage earners would benefit from the changes.

CLOSING GAP, BUT NO DEFICIT

While Singapore wants to encourage new investments and reduce business costs, it has indicated a strong preference for a budget surplus over each business cycle, implying that more of the revenue burden will shift to indirect from direct taxes.

Securities house Kim Eng estimates the government derives S$14 billion (US$7.6 billion) of its revenue from income tax, or 40 percent, while consumer taxes contribute S$2.4 billion, or seven percent.

"The cuts did not come as a surprise after Singapore cut its corporate tax rate below 25 percent, which is the international benchmark for tax havens, last year," said Nicholas Miao, director at KPMG Tax Services.

"It is still higher than Hong Kong, where rates have been stable for a while. But Singapore is becoming more competitive with the latest cuts," he said.

"We are closing the gap significantly but not completely," said Shanmugaratnam, in response to the reporters questions on the comparison with Hong Kong's tax structure.

But he added that Hong Kong was currently considering its own tax structure and options and may also make changes.

"Whether this is radical enough or too radical is something that time will tell. Tax is not the sole criteria to attract business into Singapore," said Steven Timms, tax partner at Ernst and Young.

Market reaction was upbeat with the key Straits Times stock index rising 2.17 percent by mid-afternoon to 1752.64 after a more than two percent fall on Wednesday.

"It will definitely improve earnings of companies. The market will also feel that the government is taking active steps to rehabilitate the economy and that's very re-assuring," said Teng Ngiek Lian, chief executive and chief investment officer of Target Asset Management, which manages about S$130 million.

Singapore is emerging from its worst recession in four decades, but the unemployment rate is likely to worsen in the second half of the year.

GST HELPS REVENUE COLLECTION

The increase in GST, still among the lowest such rates worldwide, should recoup about half the revenue loss from the income tax cuts over the medium term. But it could also hurt small businesses, retailers and lower income workers.

"I'm not earning much so the income tax cuts won't have an impact on me. The side effect is the GST," said Jaffar Sadik, a salesman working at a retail shop selling electrical goods.

"The three percent GST was painful. If the five percent GST is implemented, there will be increased pain," he said, noting that business had slowed since the recession. The father of four earns around S$2000 a month.

The committee has asked for a package of measures to help Singaporeans adjust to the hike in GST, and for the government to pay special attention to its impact on education, healthcare and public transport costs.

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