Hong Kong's GST Proposals Need 'Thorough Discussion' Says Tang

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

17 January 2006

The introduction of a goods and services tax in Hong Kong is a controversial and complicated issue that requires thorough discussion in the community, Financial Secretary Henry Tang stated at the weekend.

Despite widespread opposition to a goods and services tax from the retail sector, Mr Tang argued at a budget forum on Saturday that it remains necessary to widen Hong Kong's tax base because government revenue continues to fluctuate, while spending remains constant.

Mr Tang explained that detailed reasons for introducing the new tax will be given when he releases the budget on February 22. The Government will then consult the public before a final decision is made.

Tang assured those who feel they will be unfairly impacted by the new tax that the government will implement a series of relief measures if it decides to go ahead with GST.

However, in response to calls for a tax reduction in the light of strong economic growth in the territory over the last two years, Mr Tang stressed that the government's first priority must be "prudent fiscal management".

Currently, more than half of the working population of the Special Administrative Region falls outside of the tax net. Moreover, a substantial portion of Hong Kong's non-tax revenues accrue from land sales and investment income, sources which are subject to a high degree of volatility.

This prompted the International Monetary Fund to note in its annual report on the Hong Kong economy published last October that "there remains a need to broaden the tax base to help stabilize revenue".

"We consider this an important tax reform and would encourage its implementation with few or no exemptions to prevent leakages and misuse," the IMF report stated.

The Fund urged Hong Kong to make an "early start" on GST legislation. However, given that Tang has estimated that it will take at least three years for the government to finalise legislation and set up a sales tax collection system, this means that a sales tax will not be in place until 2009 at the earliest.

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