Government proposes revenue neutral tax reform to broaden Hong Kong's tax base

    The Government today (July 18) issued a consultation document outlining proposed reforms to the current tax system in Hong Kong. Having considered a range of options to broaden the tax base, the Government has concluded that reform via the introduction of a Goods and Services Tax (GST) is the preferred option for consideration.

     Financial Secretary, Mr Henry Tang, said the proposed reforms to the tax system were necessary to ensure Hong Kong's future prosperity. "For many years we have been overly reliant on a limited number of widely fluctuating, cyclical sources of revenue," Mr Tang said. "The introduction of a 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.

     "I want to emphasise that the Government has no intention of altering Hong Kong's envied position as a low-tax environment."

     However, he said the Government was acutely conscious of the potential concerns of the community over the introduction of a GST, particularly its impact on the economy and on low-income households.

     "In this consultation document, we have proposed a package of tax offset and relief measures to address these concerns. We are sharing our thoughts with the community so that we can make the process of consultation as comprehensive and transparent as possible. It is the Government's goal that everyone should have the opportunity to contribute to this discussion, which is of vital importance to Hong Kong's future development," he said.

     Hong Kong's existing tax base is very narrow by international standards, relying on only a limited range of taxes and non-tax income to support our public expenditure. Additionally, income from these sources varies widely according to economic conditions outside the Government's control, thus greatly constraining the Government's ability to make long-term plans and investment decisions to sustain growth and development.

     Mr Tang said, "Hong Kong needs to respond to this challenge by identifying new sources of secure, steady income from a broader and growing tax base. A broader tax base would also give us room to cut our Salaries and Profits Tax rates sustainably, thus enhancing our attractiveness to internationally mobile talent and capital.

     "Additionally, the rapid ageing of Hong Kong's population will be accompanied by higher spending pressures on healthcare and services for the aged. At the same time, the higher number of senior citizens will mean fewer people in the workforce generating Salaries Tax revenue."

     Of all the options available, a low, simple GST has been identified as the best way to broaden the tax base. A low, single-rate GST would be:

* able to produce stable and predictable revenues. It would be based on consumption expenditure, which does not fluctuate to the same extent as income or asset values;

* able to maintain Hong Kong's competitiveness and low-tax business environment as a means of attracting foreign capital and talent;

* broad-based. It could be levied at a low rate, but still produce significant revenues;

* fair. Individual consumption determines the amount of tax paid. The more money spent, the more tax paid; and

* capable of growing in line with consumption in the economy, even with an ageing population.

     It is the Government's intention that the tax reform package would not need to generate additional revenue. For the first five years after the introduction of a GST, all revenue generated (after deducting administrative costs) would be returned to the community as tax relief and other compensation measures. The Government proposes that all primary elements of the tax reform, once finalised and introduced, would also remain unchanged for the first five years.

     Overseas experience is that a relief or compensation package is usually introduced upon the launch of a GST to compensate those affected for the impact on their livelihood through any increased living costs. Accordingly, the Government proposes to reduce tax rates for all existing taxpayers including the rates for Salaries Tax, Personal Assessment, Property Tax and Profits Tax. These reductions would also enhance Hong Kong's competitiveness in attracting and retaining talent.

     A broad range of relief measures is also proposed. An upfront, one-off supplement equal to the estimated GST impact on the Social Security Assistance Index of Prices (SSAIP) would be provided to households under the protection of Comprehensive Social Security Assistance (CSSA), with actual price adjustments to follow in subsequent years. Low-income households not in receipt of CSSA would be provided with an annual cash GST allowance of $2,000 per household. An across-the-board annual GST credit of $500 to be used against water and sewage charges for every household for an initial five-year period is also proposed, subject to review after this period. Finally, an across-the-board annual GST credit of $3,000 per household to be used against Rates for an initial five-year period is proposed, again subject to review at the end of the period.

     "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. "We do not need to rush into a decision and can take our time to consult, consider and plan the best approach to reform our tax base and manage our public finances.

     "As the introduction of tax reform would have implications for the entire community, we shall progress this issue cautiously and carefully. Accordingly, we propose a consultation period of around nine months. We will listen to the views of the community widely and carefully and will prepare a report on the views received for the Government of the next term to consider whether a GST should be implemented in Hong Kong.

     "We welcome all views on this consultation document, in particular on the proposed GST framework, the household compensation package and other tax changes and relief measures. The proposals put forward in this document are not meant to be conclusive, but have been drawn up as a basis to stimulate rational and informed discussion on this subject."

Ends/Tuesday, July 18, 2006
Issued at HKT 11:52