Significant widening of tax bands also suggested in government's consultation The standard tax rate could be cut by up to 5 percentage points - from 16 per cent to 11 per cent - and the tax bands considerably widened after the proposed goods and services tax (GST) is introduced, according to a consultation paper to be unveiled next week. The new tax formula, which promises differing degrees of savings for taxpayers, is one of the possible scenarios for tax cuts outlined in the government document. The release of the paper will kick off a nine-month consultation on the proposed reform to widen Hong Kong's tax base by introducing a GST as early as 2010. With a proposed across-the-board rate of 5 per cent, the new tax is estimated to bring in about $30 billion a year to the public coffers. Instead of granting exemptions to goods and services that are considered daily necessities, the document suggests offering allowances of up to $3,500 per household and additional relief to lower income families. A government source familiar with the subject said the revenue generated by a GST would create room for cuts to direct taxes, including salaries tax or property tax. If all the net revenue generated by the GST was directed towards cuts in personal income tax, it could lead to a reduction of the standard tax rate to 11 per cent, the source said. Under the new regime, the lowering of the standard rate would be accompanied by a widening of the tax bands, with the first band above the basic allowance raised from $30,000 to $75,000 and the tax rate for that band halved from 2 per cent to 1 per cent. As a result of the change, a single person earning $40,000 a month could save more than $30,000 in salaries tax per year, although he would incur GST payments through his consumption of goods and services. Personal income tax is calculated according to progressive rates of the salaries earned by taxpayers, but under the standard rate cap a taxpayer will not pay more than 16 per cent of his total income minus deductions. The source said that the future tax cut may be a combination of different concessions. Additional spending may also be allocated for social sectors or services in need. But he stressed that the new tax should be able to channel wealth to the city's middle income families. 'Although they will be subject to GST charges, the middle income group will see a reduction in the amount of direct tax they pay.' Noting that the document would not recommend GST exemptions for necessity goods and services, the source said the GST system would be extremely cumbersome if the government began to exempt certain products. He cited the example of food items, which could both be defined as a necessity and non-necessity when treated as a meal or a snack. In Canada, any purchase of six doughnuts or above is treated as a meal and therefore exempted from GST. '[The Canadian example] has created the so-called doughnut club phenomenon, whereby customers simply wait outside doughnut shops to team up with others to buy six doughnuts or more.' The source said exemptions would complicate the tax regime and increase the cost of compliance by the business sector. And exemptions might not necessarily benefit lower income groups, as higher income households tended to also spend more on food and other daily necessities. 'We believe the approach set out in the paper will keep the scheme simple and administrative cost low. Introducing exemptions is not a good way forward,' the source said. The government estimated that the impact of a GST on inflation and consumption would be short-term. It expects a one-off increase in inflation of 3 per cent.