Goods and Services Tax to help address fiscal deficits over the longer term

The Advisory Committee on New Broad-based Taxes has recommended that a Goods and Services Tax (GST) be adopted over the longer term to raise additional revenue to help solve Hong Kong's structural fiscal problem. As it takes time to implement a GST, the Advisory Committee further recommends an increase in rates, a reduction in personal allowances under salaries tax and the introduction of a land and sea departure tax to help bridge the gap pending the implementation of GST. These options are broad-based revenue sources and are relatively simple to administer.

"The actual timing of the implementation of the Advisory Committee's recommendations, if accepted, remains the sole prerogative of the Government. I have no doubt that the Government will take into account relevant factors such as the projected fiscal position, the economic outlook, etc, before deciding on the timetable," said Moses Cheng, Chairman of the Advisory Committee.

The Advisory Committee was set up in May 2000 in the face of consecutive years of operating deficits which suggested a potentially serious fiscal problem. The Advisory Committee's work is one of the two-pronged initiatives to address the problem.

The other initiative was the establishment of the Task Force on Review of Public Finances, which published its report last week, concluding that Hong Kong is facing an ongoing and persistent structural fiscal problem which should be dealt with decisively. The Task Force considers that priority should be accorded to controlling government expenditure and notes that the Advisory Committee will address the issue of what broad-based taxes would be suitable for introduction in Hong Kong.

Before finalising its recommendations, the Advisory Committee has conducted a two-month public consultation from August to October last year to solicit the views of the public on the various revenue options.

"We are very grateful to the community for their views on the subject. Obviously we anticipated some dissenting voices regarding all revenue measures but we have taken note of the various concerns and useful ideas on individual options. These have been suitably incorporated into our report," said Mr Cheng.

GST, the principal recommendation of the Advisory Committee, has been widely practised in most developed tax jurisdictions. It taxes private consumption as against income taxes which tax, for instance, salaries and profits. Within the OECD, the US is the only economy that does not have a federal consumption tax although many states have their own sales taxes.

"While GST is collected at every stage of production and distribution chain, the ultimate tax is paid by the consumer. Intermediate purchasers of goods and services pay GST but can claim back a tax credit without incurring any GST liability," explained Mr Cheng.

Using private consumption expenditure statistics in 2000 as illustration, the Advisory Committee estimated that each percentage point of a GST can yield around $6 billion annually. The cost of GST administration by the tax authorities is understood to be in line with the cost of administering income taxes, according to the experience in other jurisdictions.

"GST is certainly for the longer term, as it takes years of preparation to ensure successful implementation. We have therefore recommended three other revenue options for implementation should the Government require additional revenue in the meantime - increase rates, reduce the personal allowances under salaries tax, and introduce a land and sea departure tax," said Mr Cheng.

These options can be implemented relatively quickly and should help broaden or maintain the broadness of the tax base. The Advisory Committee has also considered the pros and cons of increasing the revenue productivity of some other existing taxes (including profits tax and salaries tax) but concluded that from the perspective of broadening the tax base, they are less desirable options.

The Financial Secretary Mr Antony Leung welcomed the report which provides very useful advice for the Government on a controversial yet important subject. He thanked the Chairman and the Members of the Advisory Committee for their hard work over the past 21 months.

"The Government will very carefully consider the Committee's recommendations, along with the views of the community expressed in recent months on the various revenue options," said Mr Leung.

Mr Leung added that as previously stated by the Chief Executive, the Government is determined to address the structural deficit problem. The Financial Secretary will reveal the plan of the Government when he delivers his Budget Speech on March 6.

End/Friday, March 1, 2002

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