Hong Kong is known for having low taxes. So why does the government want to introduce Goods & Services Tax (GST)? It certainly doesn’t seem to be popular (take two stories just from today’s SCMP, for example, or older stories in The Standard that are freely available).
First of all, are taxes really low in Hong Kong? Well, yes, up to a point. What is easily overlooked is that because the government owns all the land in Hong Kong (apart from St Johns Cathedral) and can charge land premiums when developers want to built apartments, offices, shopping malls (or basically anything at all), we are all paying a hidden tax. Well – you are if you buy a property or if you rent in the private sector, but if you live in public housing you not only avoid paying this tax but also have your rent subsidised by the government.
So at the bottom end you are OK – rents are low and you probably aren’t paying income tax either. At the top end, the very rich benefit from the low rates of profits tax and salaries tax – and the fact that capital gains and dividends are not taxed, and nor is anything you earn abroad. The problems come largely for the "middle classes", who struggle to buy property and have difficulty finding somewhere affordable to rent in the private sector. To a large extent this is because of this hidden tax and the way that development is controlled (in order to maximise government revenues).
Lately the government has become concerned that the revenue from land sales and premiums is highly cyclical. Property developers generally have large land banks and are willing to wait to start a new project until they can negotiate a price that suits them. This can leave a large hole in government revenues.
So you might think that the government would want to do something about these problems.
Not really – although they do recognize that the tax base is too narrow, and revenue can be highly cyclical, they are not actually going to do much about it. They say that there are two possible solutions – either cut personal allowances so that more people pay salaries tax, or introduce a Goods & Services Tax (GST).
The argument about cyclical revenue appears to be a red herring – if these changes are introduced the government will be just as reliant on land sales and land premiums as ever, and anyway Hong Kong has huge reserves that can be used to fill the gaps when revenues are low. If the government was serious about solving this problem then more radical measures would be needed, but instead they seem to have ducked that issue altogether.
So what we have here is simply a switch from direct to indirect taxation. It achieves the government’s stated aim of widening the tax base, by getting those on lower incomes (and visitors) to pay more tax. Correspondingly, the tax burden for those on higher incomes should fall because direct taxes will be reduced (but the government has been vague on the details).
It will also mean (in theory at least) that if you buy goods outside Hong Kong you would have to pay GST when bringing them into Hong Kong – well, good luck with enforcing that at Lo Wu, chaps. As well as the extra civil servants need to collect and enforce this tax, there will be additional costs for private firms to administer and forward the tax to the authorities – and you can bet that these costs will be passed on to consumers. In addition, exporters will need to pay GST and then claim it back.
So why bother with making this change? The Economist offers one plausible explanation:
Indirect taxation has become increasingly popular with politicians because it may be less noticeable to people paying it than income tax and is harder to avoid paying.
However, Hong Kong already has the taxes on land and development that meet the same criteria (they are difficult to avoid and most people aren’t even aware of them).
The government say that it’s not about raising extra tax revenue, but the more cynical amongst us wonder if maybe it is – perhaps in 5 years time the rate of GST will be increased from 5%. Frankly, I can’t think of any other logical explanation for introducing GST. Why make things more complicated for everyone unless the government needs the revenue?
BWG has an online petition if you think that that sort of thing does any good.
[Update: Phil’s on the case, but BWG has pulled his petition]
Ordinary Gweilo 
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