Tang Promises Tax Relief For Businesses In GST Proposals

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

19 July 2006

The Hong Kong government has released the details of its proposals for a Goods and Services Tax, which form the basis of a nine month public consultation.

Speaking to the press on Tuesday morning, Financial Secretary Henry Tang stated that 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 that 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 explained.

Mr Tang emphasised that 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 stated.

The major features of the GST proposals include:

• Exemption for exported goods, international supplies and financial services;
• Generous GST postponement schemes to alleviate importers' cash-flow issues arising from GST;
• A Tourist Refund Scheme to allow visitors to obtain a refund of GST on goods they had purchased in Hong Kong and were taking home with them;
• Exemption for residential property sales and rentals;
• The government to be GST-registered to ensure a level playing field with the private sector; and
• Charities treated as "taxable persons" to allow them to reclaim the GST they had paid on purchases.

Assuming a 5% GST rate is levied, the government estimates that the tax will raise HK$30 billion (US$2.89 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 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 government expects the introduction of the tax to have a "modest" impact on prices and estimates that there will be a one-off 3% increase in prices in the short-term.

The government has included a number of relief measures for businesses in its proposals, including:

• 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;
• 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 import and export trade;
• Abolishing the hotel accommodation tax to avoid double taxation together with GST;
• Increasing tax-deduction limits for charitable donations; and
• One-off set-up assistance to small and medium-sized businesses and not-for-profit organisations that volunteered to register for GST.

Tax relief measures for households include:

• 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;
• An annual cash GST allowance of HK$2,000 would be provided on a per-household basis for low-income households not receiving CSSA;
• An across-the-board annual "GST credit" of HK$500 for each household to be used against water and sewage charges for an initial five-year period; and
• An across-the-board annual "GST credit" of HK$3,000 per household to be used against rates for an initial five-year period, which would be subject to review after that.

It is estimated that there would be approximately HK$20 billion remaining after meeting all administrative costs and the costs of providing the proposed household, business and charities compensation measures.

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 announced.

Mr Tang added that if the decision is taken during the next term to introduce the tax, it would take at least two to three years to be implemented.

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