Friday, August 25, 2006


My dad's uncle likes to write on a wide range of topics although he is a busy lawyer. This is one of the published articles he sent to my dad, who then read it to me. It's very well written.

Hong Kong’s low and simple taxation system is about to be demolished. A Goods & Services Tax — or VAT as it is known in Europe — is to be introduced, though at the lowly rate of 5 percent compared to Europe’s 15 to 22 percent.

But on balance I must agree that a sales tax in HongKong is both overdue and a sound idea. I definitely do not agree with the comment by our last colonial governor, the meddlesome Fat Pang, that such a tax would be ‘socially inequitable’.

For as long as anyone can remember, which means within the lifetime of everyone here in Hong Kong, we have enjoyed a system where a few people pay low direct taxes on their salaries, while the majority pay no tax at all Indeed the super rich have had no need to pay any tax at all since they can always earn their income in the form of dividends which are not taxable.

But I was worried to read that property developments are to be exempted from the new sales tax which is bound to look like government favouritism towards powerful property tycoons.

The crucial point is that, as is being commented on with increasing frequency, only a minority of the working population pays any direct salaries tax. Remember that Hong Kong has no general ‘income tax’, only a selective ‘salaries tax’! Out of a working population of 3.4 million people only 1.2 million people pay the salaries tax. And company tax rates are set low by international standards.

So Hong Kong is noteworthy for being a very rich community where only a small number of people pay tax and the government is greatly dependent on revenue from land sales and rents.

It was the British who invented this clever device and for many decades the Hong Kong people were happy with this colonial system. Landowners, property speculators and tycoons made themselves very rich on the property bandwagon. Meanwhile owner occupiers of flats have increasingly come to realise that the government’s high-land-value policy is in effect a distorting, disguised and indiscriminate form of taxation.

The government owns all the land. If it needs money it sells a little bit and at its sole discretion may permit a skyscraper to be built. So everyone who buys property is paying tax to the government by way of the inflated price. Rentals prices are also a disguised form of taxation.

So if the government now wishes to broaden the tax base by introducing a GST I must congratulate the government. The decision is long overdue but it raises one major question. Does a broader tax base mean the government will be less reliant on revenue from land sales and property? If so, the implication is that land and property prices are likely to fall. Is this why property developments are being exempted from the GST?

The government is caught between two opposing policies. The majority of the population would like to see the lower property prices and rents that the GST could bring, but big business wants property to continue to be vastly overpriced.

The idea of a GST also needs some fine-tuning. Personally, I believe a 5 percent GST is about right but there has to be some adjustment for the poorer members of the community. I also strongly believe that education, including newspapers and magazines, should be exempted from GST.

Certainly teachers who play a crucial part in the dissemination of knowledge should not have their services taxed. I have no quarrels if luxuries are taxed at a higher rate but one thing is certain. In the years to come the tax will only go up and not down. Once blood is tasted who is willing to forgo the pleasure?