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HK ponders imposing its first sales tax

HONG KONG: The Hong Kong government is considering imposing its first sales tax to broaden the tax base after traditional sources of revenue shrank during Asia's crisis.

But analysts caution that the details and timing of any such move should be carefully planned so as not to impose significant new burdens on an economy still in the fragile first stages of recovery from recession.

"The idea is not to get more revenue but to widen the net," said Yvonne Law, Partner-in-Charge of Hong Kong and China Tax Group at Deloitte Touche Tohmatsu.

She added: "When I say I am in favour of having a sales tax...at the point in time that we have it, there should be a corresponding reduction in direct tax."

Hong Kong has some of the developed world's lowest tax rates, with a maximum income tax of 15 percent and corporate tax of 16 percent on Hong Kong-derived profits.

Before the Asian financial crisis erupted in mid-1997, the Hong Kong government derived a substantial proportion of its revenue from property-related activities, such as land sales, property tax and stamp duty.

When Hong Kong's property bubble burst, revenue was slashed and the government incurred a budget deficit of HK$32 billion (US$4.1 billion) in fiscal year 1998/1999.

In March 1999, Financial Secretary Donald Tsang projected a fiscal deficit of HK$36.5 billion for 1999/2000 and HK$5.6 billion for 2000/2001.

Seeking new, and perhaps more evenly distributed taxes, Chief Executive Tung Chee-haw said this month his government was considering a sales tax and would decide before March 8, when the fiscal 2000/2001 budget is announced.

GOVERNMENT REVENUE REFLECTS ASSET PRICES: Morgan Stanley Dean Witter economists Andy Xie and Denise Yam said in a recent research report the problem was that government revenue had become a function of asset prices as opposed to the level of overall economic activity.

The government's property-related income plunged by more than 60 percent in fiscal year 1999 and was "unlikely to return to pre-crisis levels for many years to come."

With 1998 consumption at HK$886 billion, each percentage point of sales tax charged on all consumption (goods and services) with no exemptions, would reap HK$9 billion revenue.

"A sales tax is an alternative and potentially lucrative source of revenue...a three percent sales tax rate would nearly eliminate the budget deficit and contribute 12 percent of total revenue," the report said.

SALES TAX COULD JEOPARDISE RECOVERY: However, experts including Morgan Stanley agreed that with the economy only at the beginning of a fledgling recovery, this was not the right time to introduce a sales tax.

Some experts have suggested Financial Secretary Donald Tsang could announced the new tax in March but put off imposing it for a year or more.

Hong Kong's contracted 5.1 percent in 1998 and the government had forecast 1.8 percent growth in 1999.

In real terms, private consumption rose three percent in the third quarter of 1999 compared to the same period a year ago, but nominal consumption was still down 3.7 percent year-on-year.

Merrill Lynch's north Asia economist Guonan Ma forecast Hong Kong GDP would rise 4.7 percent in 2000, but said this would fall to 4.0 percent if a three percent consumption tax was implemented in 2000/2001.

Analysts said while the government should be looking at ways to broaden the tax base, there was no urgency to introduce a sales tax in this fiscal year since recovery in direct tax revenues and the privatisation of the Mass Transit Railway Corp should mean a nearly balanced budget.

Deloitte Touche Tohmatsu expected to see a small fiscal surplus of HK$3 billion for 2000/2001, and Law said the financial secretary was likely to introduce the idea of a sales tax in his March budget speech for implementation in 2001/2002.

THE CARROT AND STICK APPROACH: Law said a sales tax of two to three percent to be levied in around 18 months' time would be reasonable, provided the government also offered a reduction in direct tax or other incentives and exemptions.

"If we start with two percent, we can talk about what will be the exempted items. If (the tax) is built within the sales price, people might not notice it as much," she said.

"When I see that we really have a shrinking income, when I see that we don't want a big reduction in government expenditure, then planning it ahead with that type of timetable in mind is a good move."-Reuters