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Widening the Tax Base

We all would like the government to spend more on education, healthcare and boosting the economy, but to finance this we need to widen the currently very narrow tax base, and a goods and services tax may be a possible solution, writes the Chamber's Legco Rep, The Hon JEFFREY LAM

Hong Kong is a highly open and free economy, which leaves it vulnerable to outside forces if it cannot maintain a stable and healthy financial base. Following changes in our economic environment and adjustments to public expenditure, the need for the Hong Kong SAR Government to balance the budget is a problem that will impact our long-term wellbeing.

Hong Kong's taxation system is simple and the rate is low. However, if we wish to increase our revenues, we need to seriously review how we can broaden our tax base.

Currently, we rely heavily on a small group of taxpayers for direct tax. Among the 3.2 million jobholders in Hong Kong, only 1.2 million pay any tax; and nearly 60 percent of profit tax comes from less than 1 percent of companies in Hong Kong. When we urge our government to improve social welfare, and complain that our medical and education resources fall behind other countries' standards, do we bear in mind that other countries' citizens also envy us for not having to pay on average a quarter of our salaries in taxes?

Few would disagree that our tax base is too narrow, yet some worry if we broaden it through a (goods and services tax) GST, it will impact Hong Kong's reputation as a shopping paradise, reduce consumption, and widen the rich-poor gap. SMEs are also afraid that the introduction of a GST might raise their operating costs and add to their administration work.

Our Financial Secretary has vowed that if a GST is to be introduced, it will go in parallel with subsidies to low-income families, and tax concessions to the middle-class. As our population ages, future expenses on welfare for the elderly will be huge. Moreover, there have been recent reports that over 200,000 Hong Kong children are living in poverty and need help from the government. If the administration can utilise its revenues wisely, perhaps more can be done to improve the lives of the unprivileged by effectively re-allocating the wealth of our society.     

More than 100 countries have implemented a GST. Some may have got off to a bumpy start, but in general most are a success. Like Australia, the country successfully reformed its taxation system without any adverse effect on its economy. In fact, its domestic economy even recovered soon after a GST was introduced.

Indeed, based on the taxation study, a GST can bring many advantages if it is handled correctly. Whether it can win public support depends very much on the methodology of implementation which includes measures to relieve the burden on the grass roots sector and SMEs.

Based on other countries' experiences, it is important to educate people about the workings of a GST, as well as giving them ample time for consultation, to prepare for the new tax.       

The Financial Secretary has said that even if Hong Kong decides to implement a GST, it would not come into effect until 2009 at the earliest. This gives different sectors ample time to conduct in-depth reviews and studies on a GST when the consultation document is released, and sufficient time to discuss the details.

The government has made a good first move. The next step will depend on whether our Financial Secretary is strong enough to finalise a GST plan that will have minimal impact on the general public. It is important that he strikes a balance between reforming our taxation system and protecting the interests of the business community and the general public. 

If you have any comments or proposals on my views, please send them to me directly at, jefflam@fowind.com.hk 

Jeffery Lam is the Chamber's Legco Representative.