PRESS RELEASE

LCQ3: Proposal to introduce a Goods and Services Tax

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Following is a question by the Hon Frederick Fung and a reply by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in the Legislative Council today (November 1):

Question:

The Government has proposed the introduction of a Goods and Services Tax (GST) on the grounds that the existing tax base is very narrow and such a tax will ensure stable revenue. In this connection, will the Government inform this Council:

(a) whether it has assessed if the disparity in income is one of the causes for the existing narrow tax base; if so, whether it will consider adopting measures to alleviate the disparity in income, instead of adding more types of taxes, in order to broaden the tax base;

(b) given that based on a 5% tax rate, the revenue to be derived from a GST will account for less than 12% of the Government's total revenue, consumer spending will fall in times of economic downturn (for example, private consumer spending in 2003 fell 14% in comparison with 1997), and the revenue from land sale remains volatile, whether the Government has assessed the actual effect of a GST in stabilising government revenue, and whether it has assessed if it is reasonable to shift the risk of unstable revenue in times of economic downturn from the Government to members of the public who face wage reductions and unemployment in such times; and

(c) given that the Financial Secretary said in September this year that when another round of economic downturn set in, the financial deficit would be higher than the $190 billion deficit recorded during the last round, of the basis for his remarks, and whether he has taken into account a recent comment by a credit rating agency that after nearly 10 years of reform, the capability of the banking systems in Asia to withstand attacks has been significantly strengthened, making another financial crisis unlikely?

Reply:

Madam President,

(1) The narrowness of Hong Kong tax base is mainly related to our tax structure. All along, we have had limited types of tax. Nearly two-third of the total tax revenue comes from Profits Tax, Salaries Tax and Personal Assessment. These two taxes are mainly paid by a small number of businesses and salaries taxpayers. One of the reasons for this is that the basic allowance of Salaries Tax and Personal Assessment is higher than the other jurisdictions. Our basic personal allowance is HK$100,000, while the basic personal allowance is about HK$35,000 in Australia, HK$66,000 in United States and HK$73,000 in the United Kingdom. Moreover, we have a number of other allowances, such as Dependent Parent Allowance, Child Allowance and Dependent Brother/Sister Allowance, etc.

Regarding the issue of income distribution, low-skilled workers in more developed economies generally face the problem brought by economic restructuring as a result of market changes and keen competition arising from globalisation. The Government is very concerned about this problem and has taken various measures, including education and training, to upgrade the quality of the workforce and enhance its competitiveness to meet the needs of economic development. The unemployment rate has now dropped to 4.7%, and the long-term unemployment has fallen by 50% compared with the peak in 2003. The earnings of low-income people have gradually increased, while the number of low-income economically active households has dropped significantly. This shows that the employment and income situations of low-skilled workers have improved in recent years.

(2) While personal consumption generally falls during economic downturns, its fluctuations are smaller than those of real estate, business profits and salary income. Therefore, the consumption-based Goods and Services Tax (GST) could provide a more stable revenue source for the Government than our existing major revenue sources. Based on Hong Kong's economic situation in the past eight years, we have modelled the revenue that could be generated by the proposed GST. The result shows that the volatility of the revenue generated by the GST is much smaller than that of the revenue from land sales, stamp duties, Profits Tax and even Salaries Tax. For example, during this 8-year period, revenue from land sales fluctuated by up to 540%, stamp duties by 140%, Profits Tax by 85%, and Salaries Tax by 51%. Assuming that a 5% GST was introduced during this period, the revenue generated would fluctuate by only 25%.

Moreover, under the proposed GST framework, there would be sufficient relief and compensation measures to ensure that the cost of living of the low-income households would not be affected upon implementation of a GST.

(3) While the fundamental economic conditions as well as the management and governance of the banking sector of most Asian economies now are better than that before the 1997 Asian financial turmoil, globalisation has led to a closer relationship and more interaction among all the economies in the world. In fact, the linkages among different financial markets are now much closer than that in 1997. Therefore, if any economy faces any sudden economic shock, its effects will ripple to other economies of the world through financial markets and other economic and trading channels. Although any economy will try its best to handle its economic problems, it is difficult to assess when the next financial crisis will come and we should not under-estimate its chance of occurrence and gravity. Therefore, we should be prudent and maintain the fiscal stability as far as we can in order to cope with any potential economic problems.

Thank you. Madam President.

Ends/Wednesday, November 1, 2006
Issued at HKT 12:25

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