A nine-month consultation exercise was launched in Hong Kong yesterday to invite views on a proposal to introduce a goods and services tax (GST) to broaden Hong Kong's tax base.

Speaking to the press on Tuesday morning, Hong Kong Financial Secretary Henry Tang said that although the subject is controversial, the Hong Kong Special Administrative Region (HKSAR) government will not evade the issue because it has a great impact on Hong Kong's future stability and prosperity.

Noting that Hong Kong's tax base is narrow, he said the introduction of a low, single-rate GST is a viable option for Hong Kong.

"This would secure the long-term sustainability of our revenue base and our capacity to meet public expenditure needs," Tang said.

Tang emphasized the HKSAR government has no intention of altering Hong Kong's envied position as a low-tax environment.

"As our present economic circumstances and those in the foreseeable future are positive, we have an opportunity through this consultation process to think clearly about this important issue," Tang said.

Assuming a 5-percent GST rate is levied, this would translate to HK$30 billion (US$3.87 billion) in gross revenue.

The HKSAR government proposes that, for the first five years after the GST's introduction, all revenue generated after deducting administrative costs would be returned to the community in the form of 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 and 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.

To alleviate a GST's impact on households, a number of relief measures are proposed alongside its introduction, such as reducing tax rates for all existing taxpayers including tax rates for salaries, personal assessment, property, and profits for unincorporated businesses.

The proposed GST framework also includes business tax-relief measures, such as a cut in profits-tax rates and abolishing the capital fee requirement to encourage more businesses to incorporate in Hong Kong.

It is estimated that there would be approximately HK$20 billion (US$2.58 billion) remaining after meeting all administrative costs and the costs of providing the proposed household, business and charities compensation measures.

"We are aware that GST introduction would have widespread implications for Hong Kong. Therefore, we will listen to public views extensively before making a recommendation to the government in the next term to consider whether and how Hong Kong should pursue tax reform and introduce a GST," Tang said.

(Xinhua News Agency July 19, 2006)