Open for discussion: Financial Secretary Henry Tang says Hong Kong's tax base is narrow and the introduction of a low, single-rate GST is a viable option for the city.

A nine-month consultation exercise has been launched inviting views on a proposal to introduce a goods and services tax to broaden Hong Kong's tax base.

Speaking to the press this morning, Financial Secretary Henry Tang said although the subject is controversial, the Government will not evade the issue because it has a great impact on Hong Kong's future stability and prosperity.

Noting Hong Kong's tax base is narrow, he said the introduction of a low, single-rate GST is a viable option for Hong Kong.

"This would secure the long-term sustainability of our revenue base and our capacity to meet public expenditure needs," he said. 

Mr Tang emphasised the Government has no intention of altering Hong Kong's envied position as a low-tax environment.

"As our present economic circumstances and those in the foreseeable future are positive, we have an opportunity through this consultation process to think clearly about this important issue," Mr Tang said.

Major features

Some important features of the proposed GST framework include the following:

* exports of goods, international supplies, and financial supplies would not be subject to GST;

* generous GST postponement schemes would be provided to alleviate importers' cash-flow issues arising from GST;

* a Tourist Refund Scheme would be included to allow visitors to obtain a refund of GST on goods they had purchased in Hong Kong and were taking home with them;

* residential property sales and rentals would not be subject to GST;

* the Government would be GST-registered and account for output and input tax to provide a level playing field with the private sector; and

* charities would be treated as "taxable persons" to allow them to reclaim the GST they had paid on purchases.

First 5 years revenue neutral

Assuming a 5% GST rate is levied, it would be capable of generating $30 billion in gross revenue.

The Government proposes that, for the first five years after the GST's introduction, all revenue it has generated after deducting administrative costs would be returned to the community as tax relief and other compensation measures.

It also proposes that all key elements of the tax reform, once finalised and introduced, would remain unchanged for the first five years.

The proposed GST is expected to have a temporary, modest impact on household living costs. For example, with a 5% GST, the one-off, short-term price increase is estimated to be approximately 3%.

Relief measures for households

To alleviate a GST's impact on households, a number of relief measures are proposed alongside its introduction, including:

* reduced tax rates for all existing taxpayers including rates for Salaries Tax, Personal Assessment, Property Tax and Profits Tax for unincorporated businesses;

* an upfront, one-off supplement equal to the estimated GST impact on the Social Security Assistance Index of Prices would be provided to households under the protection of Comprehensive Social Security Assistance. This group would be fully compensated for the GST's impact on price levels, as the inflationary effect would be fully accounted for;

* for low-income households not receiving CSSA, an annual cash GST allowance of $2,000 would be provided on a per-household basis;

* an across-the-board annual "GST credit" of $500 for each household to be used against water and sewage charges for an initial five-year period, which would be subject to review after that; and

* an across-the-board annual "GST credit" of $3,000 per household to be used against rates for an initial five-year period, which would be subject to review after that.

Business tax relief

Proposed business tax-relief measures include:

* a cut in profits-tax rates to boost Hong Kong's attractiveness to business;

* abolishing the capital fee to encourage more businesses to incorporate in Hong Kong;

* making reductions in the motor vehicle first registration tax and duties on liquor, petrol, diesel, aircraft fuel and methyl alcohol;

* cutting charges for import and export declarations to boost the competitiveness of our import and export trade;

* abolishing the hotel accommodation tax to avoid double taxation together with GST;

* increasing tax-deduction limits for charitable donations; and

* offering one-off set-up assistance to small and medium-sized businesses and not-for-profit organisations that volunteered to register for GST.

Options for remaining funds

It is estimated that there would be approximately $20 billion remaining after meeting all administrative costs and the costs of providing the proposed household, business and charities compensation measures. There would be many options available to return the remaining balance of funds to the community in the form of tax relief or other alternatives.

The Government may consider devoting the remaining balance of funds to salaries or profits tax reduction. Another option could be to use the funds to increase public spending on education, health, social welfare, law and order or infrastructure.

"We are aware that GST introduction would have widespread implications for Hong Kong. Therefore, we will listen to public views extensively before making a recommendation to the Government of the next term to consider whether and if so, how Hong Kong should pursue tax reform and introduce a GST," Mr Tang said.

Even if a decision was made by the Government of the next term to introduce a GST, it would take at least two to three years for this tax to be implemented in Hong Kong.

For full details of the consultation document, click here. Views can be sent to the Financial Services & the Treasury Bureau, 4/F, Main Wing, Central Government Offices, Lower Albert Road, Central, Hong Kong; by fax to 2868 5641, or by email to taxreform@fstb.gov.hk by March 31, 2007.