Hong Kong Financial Secretary Henry Tang announces Tuesday that the Hong Kong Special Administrative Region (HKSAR) government will not advocate Goods and Services Tax (GST) proposal as the only option to solve the narrow tax-base problem, and Chief Executive Donald Tsang backs his decision.

Speaking to the press on Tuesday morning, Henry Tang said the HKSAR government has so far received 2,200 submissions on the consultation.

The public has two clear but differing views, he said, with the majority of them understanding that the tax base is narrow and the problem needs to be addressed. However, they do not consider GST an appropriate solution.

"Although the public understands that GST can broaden our tax base, it is clear from the views collected that we have not been able to convince the community to accept GST as the main option to address the tax-base problem," he said.

"We accept that at this time there is insufficient public support, nor are the conditions right, for introducing GST," added Tang.

Tang said the SAR government will publicize the other options recommended in the 2002 tax-reform report and encourage the public to offer feedback.

Chief Executive Donald Tsang said he and Executive Council members support Tang's decision.

"We believe the decision he has made respects fully the wishes of Hong Kong people that we should seriously consider widening our tax base. At the same time he has paid full regard to the strong opposition of the people to the introduction of GST at this time," said Tsang.

"I have all along emphasized the importance of gaining sufficient public support in formulating public policy, so the way that the Financial Secretary has proposed to do it is in accordance with that view and it is certainly a pragmatic way of going forward. It deserves all public support," Tsang said.

Two ratings agencies, Standard and Poor's and Fitch, said Tuesday they were disappointed by the government's decision to shelve the proposed sales tax. Standard and Poor's credit analyst, Kim Eng Tan, said the move would make public finances more vulnerable to external economic shocks.

A nine-month consultation exercise was launched in Hong Kong on July 18 inviting views on a proposal to introduce a goods and services tax to broaden Hong Kong's tax base, which has touched off a heated debate. Critics said the tax would not address the fundamental problem of wealth redistribution.

Assuming a 5-percent GST rate is levied, it would be capable of generating 30 billion Hong Kong dollars (US$3.87 billion) in gross revenue.

The HKSAR 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 to the community as tax relief and other compensation measures.

It also proposes that all key elements of the tax reform, once finalized and introduced, would remain unchanged for the first five years.

The proposed GST is expected to have a temporary, modest impact on household living costs. For example, with a 5-percent GST, the one-off, short-term price increase is estimated to be approximately 3 percent.

(Xinhua News Agency December 6, 2006)