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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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