Hong Kong's tax mandarins are finalising Budget plans in the knowledge that the financial crisis gripping Asia could trigger a tax time bomb. The narrow tax-base from which the SAR has harvested bountiful returns will be severely squeezed by the big dip in tax receipts from banking, property and business. The taxmen's concerns will be foremost in the mind of Financial Secretary Sir Donald Tsang Yam-kuen when he presents the SAR's first Budget next month. For Mr Tsang, the usual dilemma of scarce resources being stretched to meet competing needs will seem even more acute. He will have to balance the Government's proposed housing, education and social welfare reforms with dwindling tax receipts and the strictures of the Basic Law. The business community will be looking to him to ease their tax burden while currency speculators will be watching to exploit any weakness brought on by lax policy. The deflationary impact from the Government's avowed policy of maintaining the link to the United States dollar will put more pressure on the tax base. Falling tax revenues, rising demands for expenditure and calls for tax cuts will make it difficult to avoid someone being disappointed. Hong Kong's big tax generators are profits tax, salaries tax, stamp duty and betting duty. Figures provided by certified public accountants KPMG Peat Marwick show the biggest chunk - about 42 per cent - comes from profits tax, of which property and banking contribute more than half. The squeeze on the retail and commercial property sectors is expected to savage profits and tax revenues. This will have a multiplier effect across the economy, cutting profits and potential tax receipts of the banking and distributive sectors. The collapsing dominoes invariably will affect salaries tax, which last financial year accounted for about 24 per cent of revenues. About 1.4 million - or 44.3 per cent - of Hong Kong's 3.16 million working population pay salaries tax. Put another way, more than 50 per cent of the population escape the tax net. The prospect of rising unemployment and falling wages will further narrow this already shrinking tax base. There is little comfort in stamp duty receipts, which last year accounted for about 17 per cent of government income. Nearly 75 per cent of stamp duties is generated from property sales, with most of the rest from share transactions. Dwindling property business and a low-volume but volatile stock market point to a trickle rather than a torrent of income in the coming year. One hope for the Government is that betting - which accounts for 10 per cent of revenue - will provide a windfall. But with the luck Asia has been having during the past six months, the odds of a sharp turnaround would test the credulity of the most dedicated punter. The Government's accumulated reserves, including the Land Fund, are put at about US$400 billion. The mid-year economic downturn and expected holding-over of sales and profits tax payments has resulted in accountants' estimates for the fiscal surplus varying from $1.5 billion to more than $31 billion. It is clear the full impact of the slump in tax receipts will not be felt until next year. The downturn in property transactions, lacklustre stock markets and reduced economic growth will hit the core of public income. Options open to the Government are to cut spending, increase taxes, widen the tax net or improve collection. One response would be to boost collection by expanding the highly successful field audit and tax investigation teams. The Government's wish-list will be defined by the political agenda and restrained by the Basic Law's principle of keeping expenditure within the limits of revenue. Its dilemma is that a shrinking tax base places them between the unpalatable options of recommending new revenue sources or a cutting back on spending.