Deal reached to raise profits tax by 1pc

Three major business groups yesterday agreed to a 1 per cent rise in profits tax just 24 hours after a deal was reached to cut civil service pay in an attempt to tackle the $70 billion budget deficit. The agreement came after representatives of the Hong Kong General Chamber of Commerce, the Hong Kong Chinese Manufacturers' Association and the Federation of Hong Kong Industries met Chief Executive Tung Chee-hwa. If implemented, the profits tax would rise from 16 per cent to 17 per cent, generating an extra $2.6 billion a year in government revenue. It also paves the way for a rise in salaries tax. Details will be announced by Financial Secretary Antony Leung Kam-chung when he makes his Budget speech on March 5. After yesterday's meeting, the chairman of the Federation of Hong Kong Industries, Victor Lo Chung-wing, said: 'We hoped the tax hike would be conservative. We agreed to raise profits tax by 1 per cent in one go.' But not all the groups agreed on the timetable for implementing the rise. Chan Wing-kee, chairman of the Hong Kong Chinese Manufacturers' Association, said he hoped the increase could be implemented in two stages. He was worried the measure would affect foreign investment because neighbouring countries had cut profits tax. The civil service pay cut - 6 per cent over two years - will slice $7 billion off the deficit by 2006. Executive Councillor and Liberal Party chairman James Tien Pei-chun had said the Hong Kong General Chamber of Commerce would agree to a 1 per cent increase in profits tax if civil service pay was cut by 6 per cent. Mr Tien, who represents the Hong Kong General Chamber of Commerce, said the chambers differed on the timetable to raise profits tax. He said one of the chambers had agreed to a 1 per cent rise but wanted the tax reduced by 0.5 percentage points in each of the two subsequent years. On the decision to cut civil service pay in two stages, Mr Tien said the government should be fair to other sectors of the community as well. 'They should be treated fairly. Profits tax, departure tax and Comprehensive Social Security Assistance should be raised in stages. The government should not be lenient to civil servants but tough to the business sector and underprivileged.' Civil service unions claimed some political parties had used their pay as a bargaining chip for raising profits tax. Pang Tat-choi, the Senior Non-expatriate Officers' Association chairman, said on a Commercial Radio phone-in programme: 'The pay is part of the contract terms between the civil servants and the government. It would not be appropriate to link it to revenue-raising measures. We have to clarify who is running the government. 'The government is not run by the business sector or the political parties.' Leung Chau-ting, chairman of the Federation of Trade Unions, said: 'We don't want to be treated as bargaining chips. I don't know who is the chief executive. An executive councillor has said there should not be tax hikes if civil servants pay is not cut. 'How can civil servants trust you?' he said, apparently referring to Mr Tien. Liberal Party legislator Howard Young said it would not be fair to raise taxes in one go while cutting civil service pay in stages. Maria Tam Wai-chu, a member of the Basic Law Committee, which advises the National People's Congress Standing Committee on interpretation of the mini-constitution, said civil service pay could be cut by more than 6 per cent. 'The Basic Law means civil servants' purchasing power and standards of living should not be less favourable. There is room for further cuts . . .' she said. Article 100 of the Basic Law says the salaries and conditions of service of civil servants should not be less favourable than before the handover. Professor Andy Kwan, associate professor in the department of economics at Chinese University, said if both the pay cut and increase in profits tax were implemented in stages, it would put more of a burden on other taxpayers in tackling the deficit. 'There have been rumours that some tax will be introduced again, such as tax on cosmetics, which has been abolished for nearly a decade,' he said. 'If the government cannot balance the books by 2006-07, its credit rating may also drop.' Police Commissioner Tsang Yam-pui said the staged pay cut was reasonable and fair. 'It can also allow some time for the civil servants to adjust their spending,' he said. The Secretary for Civil Service, Joseph Wong Wing-ping, sent a letter to civil servants yesterday informing of the consensus reached on the pay cut. He said the pay of officials at or above D3, who are now paid $128,365 a month, would have their pay cut to 1997 levels in January 2004 because their pay rises since the handover had been minimal. Earlier yesterday Mr Tung told a gathering of the media that economic growth in the fourth quarter of last year would be better than the third quarter, which was 3.3 per cent. Mr Tung said he was confident Hong Kong would get rid of the budget deficit by the financial year 2006-7. Graphic: PAY23GET