can-a-goods-and-services-tax-be-good-for-you

Can a goods and services tax be good for you?

The Hong Kong government proposes to impose a consumption tax that may actually help businesses in the long run. Citigroup analysts point out the positive sides of the proposal.
If the Hong Kong government does eventually impose a consumption tax on Hong Kong, how will it work? And will it be any good?

The government recently published a consultation paper on a consumption tax, or a goods and services tax (GST) û and barring any hiccups it plans to start to levy the GST in 2011. It is proposing a single-rate GST at 5% with a few exemptions, such as relief for low-income households. The government estimates the tax could raise HK$30 billion ($3.8 billion) in revenue a year.

Analysts say businesses and the average tax payer in Hong Kong could benefit.

The idea is to introduce the consumption tax so as to widen the tax base to reduce dependence on a small number of taxpayers and the volatile property market; reduce revenue volatility due to economic shocks; and, provide a sustainable tax base with minimum distortions to meet spending on healthcare and public services for the ageing population.

One key selling point is that the government also proposes to return a net revenue gain of HK$20.4 billion ($2.6 billion) after costs and subsidies to the community through a tax cut or improved public services.

According to the consultation paper, the return of the annual net revenue gain may be achieved through any or a combination of the following measures: lowering the salaries tax rate by up to 5 percentage points (ppt); lowering the profits tax rate up to 5ppt; or, increasing spending to enhance public services.

Citigroup analysts, however, point out that a substantial increase in public spending would be unlikely as it would be difficult for the government to cut back on such spending after five years. They also reason that an expansion of the public sector in the economy would be against the governmentÆs policy of ôsmall government, big market.ö

So what might Hong Kong do?

In a recently released research report Citigroup analysts write: ôIn our view, the government would likely return most of the net revenue gain to households and businesses equally through cuts in other taxes. We expect the salaries and profits tax rates to be reduced the same by 2.5 ppt. An equal reduction in salaries and profits tax rates would maintain Hong KongÆs simple tax system, which charges the same tax rate on all sources of income with minor exceptions. A big difference in tax rates on different sources of income could create major tax loopholes.ö

They note that such a cut would reduce the tax payment of the business sector as a whole by about HK$10 billion ($1.3 billion) a year. This would benefit businesses because companies are only GST-collecting agents not final taxpayers, so they would gain from any profit tax cut after the GST levy. Of course, the business sector would incur administrative costs in collecting the GST, but they would be minimal in comparison to the benefits of any tax cut.

Furthermore, certain retailers û such as vendors of motor vehicles, liquor and fuel would probably gain from stronger sales. The plan calls for cutting existing taxes on these goods so as to keep the total tax level unchanged û but if consumers are given tax cuts, theyÆll have more disposable income. And given that the tax cut and subsidies would affect households differently based on income levels, those with higher incomes would likely receive a larger tax cut, so they could spend their extra cash on cars and wine (but hopefully not mix the two in use).

The property market could also benefit. As Citi analysts write: ôBecause we believe the GST would promote savings and investment, it would be positive for the demand for property and financial assets. The positive impact would be further enhanced by the zero GST on the purchases of residential property and financial services. GST would, therefore, have a positive impact on the property market and financial sector. We believe that in longer term the impact of GST for promoting investment would improve the growth potential of Hong KongÆs economy.ö
¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media