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Despite the looming spectres of a sales tax and an expected bid to broaden the tax base, experts believe Financial Secretary Donald Tsang Yam-kuen may be about to give Hong Kong's stock market speculators some sap by reducing stamp duties on securities.

 They say Mr Tsang may cut the current stamp duty from 0.25 per cent to 0.2 per cent on the total amount of shares bought when he announces his Budget for 2000-2001 on Wednesday.

 'This reflects the global trend to reduce the cost of share-dealing transactions,' said Guy Eliss, a tax partner at PricewaterhouseCoopers.

 Mr Tsang has mentioned on previous occasions his intention to bring down the stamp duty on stocks. After the merger of the three exchanges, it seems he may have the opportunity to do so.

 Tax experts also suggest tax relief may be introduced for offshore fund managers. This is mainly because of the introduction of the Mandatory Provident Fund in December.

 In its latest Budget, Singapore offered more tax concessions for foreign fund companies based there. Analysts say to counter Singapore, Hong Kong would have to add more sweeteners after neglecting this sector for some time.

 The talk in the fund management industry is that this lack of flexibility and uncertainty has forced some fund managers to move to greener pastures, such as Singapore, which offer tax holidays.

  'There is danger that Mr Tsang may not [give tax relief] in this Budget. However, if the Government wants Hong Kong to become one of the international financial centres . . . this type of incentive will be necessary,' said Mr Eliss.

 Tax experts said that with the economy and stock market on an upward trend, the Government might give concessions to maintain a 'feel good' factor by encouraging people to buy equities and funds.

 However, as undesirable as tax increases are, experts suggest changes have to be made to the system to increase revenues for Government coffers.

 'Our analysis shows that the Government is not crying wolf when they say that the deficits are structural,' said Mr Eliss.

  Structural deficits cannot be reversed when the economy is on the mend, whereas cyclical deficits can ride the ups and downs.

 'There has been a heavy reliance on property revenue in the past, which accounted for 40 per cent of total tax revenue. In absolute terms, the level of total recurrent revenue has been declining since 1997-1998, mainly from the property sector, while at the same time Government expenditure has been increasing. As a result, the gap between revenue and expenditure has widened,' Mr Eliss said.

  Yvonne Law, partner-in-charge of Hong Kong and China taxes at accounting firm Deloitte Touche Tohmatsu, said the fundamental problem of the taxation system was that the base was too narrow.

 'The Government has to explore various alternative revenue options, with sales tax being one of them,' she said.

  Deloitte Touche Tohmatsu estimates a moderate deficit of $2 billion for 1999-2000, while PricewaterhouseCoopers predicts a $5 billion shortage for the past fiscal year, compared with the $36.5 billion deficit prediction made by the Financial Secretary in last year's Budget.

 The much-reduced deficit estimate is in line with computations by other accounting firms, which maintain that the deficit figure announced by Mr Tsang was overly conservative.

 'I think it will be basically a balanced budget, which means under $10 billion on either side,' Ernst & Young tax partner John Reid said.

 'The $36.5 billion deficit was based on the worst-case scenario.'   The lower than expected deficit for 1999-2000 was a result of healthy returns from the Government's investment in the stock markets and revenue from land sales.

 However, tax experts believe that these sources are themselves non-recurring, uncertain in nature, and subject to the general state of economy.

 'To broaden the tax base, one needs to look at the indirect taxes,' said Ms Law.

 She said that could be done by either increasing the existing indirect taxes, or introducing new ones, such as sales tax and departure tax.

  The contribution to Government coffers from sales taxes - a major type of indirect tax - could be significant.

 'An increase of 1 per cent in sales tax, in broad terms, will bring $7 billion tax revenue to the Government,' said Mr Eliss.

 Although the subject of sales tax has caused an outcry since the idea was mooted a few months ago, it is not unfamiliar in most other countries. Most Asia-Pacific countries including the mainland, Japan, Singapore and Australia have a form of value-added tax (VAT).

  Most western countries also have wholesale or retail sales taxes.

 Ms Law said the Government had to prepare people psychologically before sales tax could be introduced.

 'There has to be a collection mechanism in place; and the financial situation has to be better,' she said.

  Sales tax in the form of consumption tax can be very unpopular.

  As a result, tax specialists suggest a sales tax in the form of VAT or a wholesale sales tax, as this would provide a more stable and protected revenue source.

 Mr Eliss said that a multi-stage VAT system at a level of 3 per cent with exemptions for certain necessities, such as food and clothing, merited serious debate.

 Tax experts believe Mr Tsang will introduce a land departure tax this year, which will probably fall in the $10-$25 range and bring in revenue of $500 million to $1 billion. They note that taxes of the same nature have been in place for air and sea travel.

  Mr Reid said people should not expect surprises such as last year's 10 per cent tax rebate.

 'There is no expectation or pressure for [Mr Tsang] to do so; plus, I do not think the concession last year accomplished what it was set out to do, which was to increase the general consumption. Rather, the money went into a few corporate giants' pockets,' said Mr Reid.

Clara Li 



The last temptation of Tsang