It is time to talk about broadening the tax base and imposing new kinds of taxes, Financial Secretary Henry Tang said at a Legislative Council Financial Affairs Panel Monday.

An internal committee is conducting a detailed and comprehensive study on the implementation of a goods and services tax (GST) and will develop a GST framework suitable for Hong Kong by year-end, Tang said.

GST is imposed in more than 120 countries and regions in the world and Hong Kong is the only developed economy without such a tax, Tang said.

He also suggested a capital gains tax, levying an individual on the basis of global income, an environmental protection tax and a higher toll in the Cross Harbour Tunnel to increase government incomes.

Incomes from land auctions are a kind of non-recurrent expenditure and it is difficult to predict whether the target of HK$12.3 billion in investment income for the government can be achieved, Tang said.

In 2003-04, the windfall from foreign exchange investment was higher than expected at HK$25.9 billion.

"This year's external investment environment is extremely bad and I don't think it can yield HK$12.3 billion for the government as budgeted," he said.

To meet the target of restoring fiscal balance in the operating and consolidated accounts by 2008-09, a broader, sizeable and steady income source is needed, Tang said.

The expenditure for social welfare has risen 236 per cent in the past decade because many people were out of jobs and received social security allowances as a result of structural economic transformation.

But most legislators said the government should give more benefits to the public since the government is in a better economic position with the good land auction results and economic growth recently.

Sin Chung-kai, of the Democratic Party, called for a reduction of salaries taxes to the 2002-03 level.

Lee Cheuk-yan, of the Confederation of Trade Unions, said that social security allowance for elderly people should not be cut.

Lee and Mandy Tam, from the accounting constituency, also called for a progressive tax system for profits tax levied from business entities.

To solve the deficit problem, the Liberal Party's James Tien said more efforts should be made to slash civil service wages. Kwong Chi-kin, from the Hong Kong Federation of Trade Union, suggested taxes be charged on luxury flats to punish property speculators. But Tang replied that the government will not "double-tax" luxury flat buyers with stamp tax already in place.

Experts: vital to end reliance on salary tax

Economists and taxation experts hailed the financial secretary's suggestion to start discussions on broadening the tax base, saying the government must reduce its dependency on salary tax to solve the structural deficit problems.

Daniel Chan, an economist and senior investment strategist of DBS Bank (Hong Kong), Monday said, "If the (deficit) problems remain unresolved, it would affect Hong Kong's credit ratings, undermine investors' confidence, trigger capital outflow and weaken the territory's status as a leading financial hub in the long term.

"The Hong Kong government has been heavily reliant on salaries tax, land sales and investment incomes.

"During the economic recession, the revenue from salary tax has dwindled," he said.

Chan said the market outlook remains uncertain with unfavourable external factors, such as rising US interest rates, surging crude oil prices and the mainland's macro-economic adjustment measures to curb an overheat of economy.

"The introduction of GST could be one of the practical measures to stabilize government revenue source and resolve the structural deficit problems," he said.

Responding to concerns that GST may discourage consumer spending and affect poor people's livelihood, Chan said the dilemma can be solved by not imposing tax on daily necessities.

He added that the government should continue reforms to trim the growth of recurrent expenditure, including reducing the number of civil servants.

Li Man-fai, president of Hong Kong Taxation Institute, said it is the right time for the community to think about the timetable and format of GST.

Li said the introduction of sales tax could help the government achieve its goal to attain a fiscal balance before the planned 2008-09.

The GST could be introduced within three years, allowing one year for public consultation and two years for legislation, he said.

Stephen Cheung, City University's professor in economics and finance, said the government must continue the fight to resolve the structural deficit problems.

"We need to introduce more practical measures to expand the small tax base, and study the possibility of indirect taxes which do not affect government revenues because of cyclical economic downturn."

At present, about 1.24 million of the 3.2 million working population pay salary tax.

Cheung said people who have the financial ability to pay tax should make a greater contribution to society.

(China Daily HK Edition November 2, 2004)