GST could see tax rate cut to 11pc

The standard tax rate could be cut by up to 5 percentage points - to 11 per cent - and the tax bands considerably widened under a proposed goods and services tax (GST), according to a consultation paper to be unveiled next week.

The cut is one of the possible scenarios outlined in the government document, which will kick off a nine-month consultation on plans to widen Hong Kong's tax base by introducing a GST as early as 2010. The new tax, to be imposed across the board at a rate of 5 per cent, is estimated to raise $30 billion a year for the public coffers.

Instead of granting exemptions for goods and services considered daily necessities, the paper suggests giving allowances of up to $3,500 per household and extra relief to lower income families.

The revenue generated by a GST would create room for cuts to direct taxes, including salaries tax or property tax.

A government source familiar with the subject said if the net revenue generated by the GST was applied to cuts in personal income tax, it could lead to a reduction of the standard tax rate to 11 per cent.

The lowering of the standard tax 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.

Such a change would mean a single person earning $40,000 a month could save more than $30,000 in salaries tax per year, although they would then have to pay GST.

The source said the tax cut might be a combination of different concessions. Extra spending may also be allocated for social welfare or services in need.

But he said the new tax should be able to channel wealth to the city's middle-income families.

'Although they will have to pay GST, the middle-income group will see a reduction in the amount of direct tax they pay,' he said.

The government expects a GST to have a short-term impact on consumption and a one-off 3 per cent increase in inflation.