Hong Kong Tax Plans Open Up Sales Tax Controversy

by Mary Swire, Tax-News.com, Hong Kong

09 August 2001

Earlier this week the Hong Kong Advisory Committee on New Broad-based Taxes unveiled its plans for the introduction of new taxes in a bid to raise more revenue for the jurisdiction. The one proposal to attract the most controversy so far is the Sales Tax.

Levied at 3 per cent, it is estimated that the tax could bring in an extra $18 billion to the government's coffers alone. But during a press conference this week initially to announce that the Standard Chartered Bank intended to revise its growth forecast for Hong Kong from three to two per cent this year, the Bank's chief economist for the region, Kwok Kwok-chuen, said that the sales tax would be difficult for the public to swallow in its present form and called for a range of benefits to broaden the appeal of the scheme.

Mr Kwok explained: 'I think the consumption tax could be packaged with something else so that the government could come up with a package deal ... If the consumption tax is going to be introduced it could be accompanied by cuts here and there and benefits here and there so as to reduce the pain. And then I think we will have a deal. [Otherwise] the tax point itself would be very difficult for the public to accept.'

Mr Kwok also raised concerns over the timing of the Advisory Committee's decision to release its proposals. With the government already in possession of HK$400 billion in reserves, he said the government should not be considering raising taxes at this point. 'We are still sitting on a lot of fiscal reserves and, therefore, it is not a very opportune time for the government to be talking about raising taxes,' commented Mr Kwok.

Political analyst, Lau Siu-kai, told the local media that the tax system while in need of a review should not be tampered with during an economic recession. He said: 'It is a matter of political error. This will only fuel public discontent.'

In an earlier press release from the Hong Kong government, Chairman of the Advisory Committee, Mr Moses Chen said that the purpose of introducing the sales tax was not to raise taxes but to broaden the tax base, 'and this makes the tax system stronger. Tax evasion can be prevented if new taxes are levied at the retail level.'

Amid complaints that the Sales Tax will widen the gap between the rich and poor because the poor spend a larger proportion of their earnings, he pledged that measures would be implemented to protect those on low incomes or social benefits. 'The new sales tax would not have an adverse effect on Hong Kong's tourism. Tax rebates would be made available to tourists,' noted Mr Cheng.

It is puzzling though that it is only seven months until the next Chief Executive is voted in to office, yet just days before the Advisory Committee announced its unpopular proposals, Financial Secretary Anthony Leung Kam-chung publicly declared that the government was not intending to raise taxes while the economy was still slow-moving.

But according to the South China Morning Post, a member of the Advisory Committee, who wished to remain anonymous said that the government recognises that timing is the crux of the issue and it is likely that the tax will not take effect until 2006. He said that in the experience of other countries such as Australia it can take up to ten years to implement such a tax after the debate has raged. 'It has to wait for good timing. Also, different ruling parties may have different views on the tax, thus delaying its implementation,' the official explained.

Perhaps the most cutting remarks are those from the editorial of the pro-Beijing Wen Wei Po newspaper which stated: 'This is a consultative paper that has proposed flawed and ridiculous tax-increase proposals at the wrong time, under the wrong environment. This shows some people in the executive branch have poor political judgment, are lax about political discipline and adopt a bureaucratic attitude towards the sufferings of people.'

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