Tax System and Tax Reform in Hong Kong

Introduction

Overseas investors play a tremendous role in tax planning and also help in developing a booming strategy that provides help in undertaking the business or investment. In Hong Kong, similar to other countries individual’s tax liability is completely based on the chosen business structure. For instance, whether apart from the individual liability he or she has established a business as a taxable entity. However, a coordinated strategy is necessary in order to plan tax in the global market place. Normally, in planning this strategy, both investor’s country and federal state’s tax laws are considered.

In this regard, in Hong Kong federal state levies taxes and other different forms of taxes are evaluated by domestic government. In this context, both state and domestic government has its own legislation but these legislations work under some constitutional restrictions. As far as state’s taxes are concerned, there is no uniformity, thus, levy on state’s unemployment taxes, property taxes, etc are sometimes done by state government by itself. In addition, most state governments have also imposed fees of franchising and qualification.

Hong Kong the region of the Peoples Republic of China located on the Eastern side of the Pearl River Delta. The Central Peoples Government is responsible for the defense and the foreign affairs. Hong Kong has its own legal system, monetary affairs, custom policy, immigration policy, police force and having much importance in the international events out side or in the bordering countries. In Hong Kong, all types of territories are under the control of the local Government except in those areas where the Hong Kong national defense and the foreign relations. The Chief Executive and Head of the State is selected by the Election Committee and all other members of the Government are selected by the Hong Kong’s Chief Executive. Hong Kong has its own unique cultural economic and traditional systems and infrastructure. All the laws in Hong Kong are only approved by the approval of the Chief Executive of the State. All the seats of Government are elected under Universal Suffrage Law. Donald Tsang is the Chief Executive at present and was appointed in 2005. The provisional legislative council was formed in 1996, the laws formed by the Council with the name of Universal Suffrage. (Apple, 2001)

These Legislative Council members are elected with the election system. In Hong Kong, there is the centre following of the Common Law by the Government in legal systems. The court systems of Hong Kong consist of the Court of Final Appeal that is replaced the Judicial Committee of the Privy Council. That is made up of the Court of Appeal, the Court of First Instance, the District Court and the Family Court. The interpretation in Basic Law was made by the Standing Committee of the National People’s Congress. The lawyers in Hong Kong have the classification as either the barristers or the solicitors. There is the right to the person to choose within one of the filed, not the two fields. Only the barristers of the court have the permission to appear in the Court of Final Appeal. The criminal prosecutions are controlled by the Department of Justice. This is the biggest legal institution in Hong Kong. It covers legislation, judicial, administration, prosecution, civil representation, legal and policy drafting, reforms and the profession.

This is the institution that is responsible for not only the criminal laws, but also the other civil laws of Hong Kong. It may work in case of any public interest and may make to set the judicial reviews for public interest. It has the right to assign the judicial representative on behalf of the public interest. The economy of Hong Kong is highly capitalistic economy that is it is the economy that is based on the privatization. The economy has the free market policy and capitalistic system. It is at its best in international trade and finance. The Hong Kong Special Administrative Region Government mostly leaves all of the final results to the free market to set the economical condition. It is the city that is counted as the example of the laissez faire capitalism. It is the economy that is ranked as the free economy in the index of economic freedom. The currency used is the Hong Kong dollar. The economy is based much on the Gross Domestic Products (GDP). In 2006, per capital GDP of Hong Kong is measured as the sixth highest Gross Domestic Product in the world. (Barnett, 2000a)

Literature Review

Tax System in Hong Kong

Hong Kong was once the territory that has the simple and low values of tax system. It has less taxes system as compare to the other countries of the world. It has such type of tax system which provides less number of damages. So in many countries, the tax system of Hong Kong is taken as the example of making the good tax system models. In the view of economist, the tax system in Hong Kong is at its best as compare to the other countries of the world. According to the Alan Reynolds:-

“As the Economist wrote a few years ago, the territory’s tradition of simple and low taxes… is widely seen as a main reason for its stunning rise to prosperity. Many advantages of the Hong Kong tax system have been widely emulated in Asia, yet remain poorly understood. One such misunderstanding may have resulted in an unfortunate spat between two old friends, Steve Moore and Bruce Bartlett. Steve Moore and Bruce Bartlett were advisers to Jack Kemp’s tax reform commission in 1995, and I was Research Director. Asked by one Commissioner about Hong Kong’s “flat tax,” I replied that the tax on salaries is not flat but steeply progressive. There are four marginal tax, brackets of 2 percent, 8 percent, 14 percent and 20 percent. I would prefer a single tax rate, for reasons I explained last November in “The Case for One Tax Rate.” But any tax with a top rate of 20 percent is hard to fault”. (Barnett, 2000b)

Hong Kong has the tax system that is different from the other countries of the world. The tax system is also not as compare to the tax system of the United States. “It is not the tax system that creates the random spikes in the marginal tax rates when the credits are out”. (Barnett, 2000b) There is less number of personal exemption taxes and the benefit to the people living in Hong Kong is that they have no any type of taxes on salaries. Their salaries are free of any tax system. However, those who have the high amount of salaries, they have the fixed sixteen percent rates to pay the taxes to Government but this is not the final deduction of taxes from their salaries. It is cheaper to include the personal exemptions instead of following the deductions from salaries. Hong Kong Government has set the standard rate of paying the taxes and this is based on the personal exemption system from the salaries of those who have the high amounts of salaries. This standard rate is considered as the alternative maximum taxes from the salaries of the people but this standard rate is the fixed rate and it is not depended on the choice of the people. Every body whose salary rate is high and has to patty the sixteen percent set rate of tax to the Government.

This not means that there is large number of deductions made from the taxpayers’ salaries. It is based on the thing that the Government only takes the as amount of exemption of taxes from the taxpayers’ salaries and the rest is send to them with the bill. This type of standard rate of Hong Kong is taken by some of the economist as not the simple system of taxes in Hong Kong. The studies related with the taxes shows that the marginal rates of taxes should be lowest at the highest rates of income. “As from the researchers point of view, such as Joseph Stieglitz wrote in 1987 as the marginal tax rate on the individual income should be zero”. (Barnett, 2000b) So there standard fixed rate of exemption is not the simple way of taxation in the Hong Kong’s tax system. But the thing which is most important in the Hong Kong tax system that their businesses and peoples are different as compare to the businesses system follows in other countries of the world. The people or owners involve in businesses in Hong Kong pays the full tax to the Government out of profits and the employees in Hong Kong pays all of the taxes to the Government from their salaries in most of the countries. (Boyer, et. al, 1994)

There is not such type of system followed for the development of the economy and the business class and other people use to tax evasion in order to prevent them from the taxes of the Government. That is why the economic system of the Hong Kong is much better as the people there takes the responsibility to fully pay the taxes to the Government and no one is going to hide the salaries and profits from the Government. Most of the economists’ view this thing makes the Hong Kong’s tax system a good and simple tax system as compare to the tax system of the other countries of the world.

There is nothing the Payroll Taxes in Hong Kong for the social security. There is nothing the General Sales and the Value Added Taxes. There is nothing the rule of the personal taxes or income on the financial assets of the peoples. Hong Kong is following the rule of the dual tax system that is the taxes are placed on the labour income which is the flat tax of 17.5 percent on Corporate Profits. There is less number of Taxes on the Profits in the economist view, the lower taxes on profits will generate much revenue rather then the taxes on salaries. This is to compare with the tax system in United States that comprises of the high amounts taking from the profits and less from the salaries. The corporations in Hong Kong accepts the duties of paying taxes and they pay off the taxes before the distribution of dividends to the shareholders of the companies so after the taxes deductions the dividends are made make possible that there would be no extra amount of taxes to be deducted from the dividends of the shareholders that safe the individuals salaries. Because of this, the reinvested profits will generate large number of profits in future and the high values in taxes also. (Clark, 1998)

So, there is no type of system that collects the Taxes from the Capital Gains of the individuals. “Companies in Hong Kong are also liable to pay the interest payments at times; this makes the tax individuals on income that received from the corporate bonds”. There is no need for the individual to report or represent the interest income to the Government. It follows the principal of symmetry those who makes the payment is to be the taxable income for those who are receiving the payments. Before the Transference of nay payment the flat taxes are already pays out to the Government so there would be no any other types of taxes deductions made after the payments to the individuals. (Clark, 2001)

“The United States could easily adopt something similar to the Hong Kong tax. It would require no wrenching changes, such as giving up interest deductibility for corporations or home owners. Some tax rates would presumably have to be higher (the 2 percent rate is ridiculously low anyway), but not as much higher as you might think.. Hong Kong’s Taxes on Salaries and Profits amounted to about 7 percent of GDP last year, while combined U.S. corporate and individual taxes brought in only 8.6 percent of GDP. Since a larger percentage of American employees have higher salaries, a salary tax such as Hong Kong’s would raise more money even without higher tax rates”. (Clark, 2001)

The Hong Kong’s system of taxes is placed more advantageous as compare to the tax system follow in the other countries of the world. (Coaldrake and Stedman, 1999)

Inland Revenue Department

The tax system in Hong Kong is maintained by Inland Revenue Department of Hong Kong. The Income Taxes are charged by the Department on the incomes which it has its own sources of the collection of Income Taxes. The Stamp Duty is charged by the Department on the value of property. The Stamp Duties are charged on the Hong Kong’s assets. The residence or the people of Hong Kong have not to be effected by the tax system of Hong Kong has its type of tax system that affects only the certain special portion of the economy, not the whole economy. Income Taxes are levied on the separate or individual categories. The individual can select Personal Assessment that it is deducted by combining all of his incomes from different aggregates.

The taxes are always placed on the aggregate income profits of the person from different sources. There is the direct assessment of taxes on all of the profits but except those who are the non-residents of Hong Kong. This is the income that is generated from the royalties and the income received by the agents. Profits Taxes and Property Taxes are the fixed rate set by Inland Revenue Department to pay off the taxes. The tax which is based on the progressive basis is on the Taxes of Salaries and Personal Assessment. This tax rate has its fixed limit and it never affects the residents of the Hong Kong because it only deducted with the fixed standard and final value before the checks are paid to the residents. (Currie, 1998)

Initial Taxes

The low and standard rate of tax is 15% and the tax rate on the corporations has the rate of 16%. This is the standard rate of tax follow at the initial stage by Inland Revenue Department of Hong Kong. This is the tax rate which is less as compared to the tax rate follow in the other countries of the world. There is no any other types of taxes that are followed in the other countries of the world such as the Capital Gain Taxes on the Dividend Income, no Taxes on the Holiday, Allowances, Home Leaves and the Other Types of Taxes. So this is the simple system of the collection of taxes set by Inland Revenue Department of Hong Kong. There are no such taxes treaties are follow in the Hong Kong. (Currie and Subotzky, 2000)

Types of Taxation at Primary Stages

There are different types of taxation follow and set up by Inland Revenue Department of Hong Kong but this is the simple way of the collection of taxes it is divided to Salaries Taxes, Profit Taxes and Property Taxes. There is the fixed rate of progressive taxation over the Salaries and the Standard Rate of tax is 15% normally the tax rate is calculated on the 10% of the employment income. The corporations in Hong Kong are liable to pay the taxes before they pay the dividends to the shareholders. Usually the fixed rate of paying the taxes by corporations in Hong Kong is 16% of their income and the other businesses such as the unincorporated businesses are liable to pay the taxes up to 15% to the Inland Revenue Department of taxation in Hong Kong.

These corporations in Hong Kong must have the rules that they must have the annual audit systems within the corporations, who with the help of audit find outs the overall income of the corporations and the corporation has the duty to pay the full standard rate of tax to the Department. There is the certified audit system follow in the corporations of Hong Kong. There is less amount of tax on the property and the rate is 5%. There are also some other types of taxes such as Estate Duty, Stamp Duty, Airport Departure Tax and Betting Duty. There are also some of the additional deductions from the Estate Duty, the Profit Taxes and there’s the Mandatory Provident Fund, the Social Security Taxes in Hong Kong. However, they are not in practice at the standard rates like the other taxes. (Education Commission. 2000)

Income tax is levied under separate categories, i.e., Profits tax, Salaries Tax and Property Tax. An individual taxpayer can elect, under Personal Assessment, to have all his assessable income from all sources aggregated together. Tax shall then be assessed on the aggregate income/profits. “All Income Taxes are directly assessed except for certain types of income of non-residents, such as Royalties and Income received by Agents. For Profits Tax and Property Tax, the tax is levied at a fixed, standard rate. It is only in the case of Salaries Tax and Personal Assessment that tax is calculated on a progressive basis, but the overall tax cannot exceed the standard rate on the net assessable income before deduction of Personal Allowances”. (French, 1999)

A Broader Tax Based System in Hong Kong

The reduction in Government expenditure is counted as the main policy of the Hong Kong Government today for the reduction of the narrow based tax problems in Hong Kong. The broader frame of the tax based system depends on the Government reserves such as the Fiscal Reserves, the Retained Earnings of the Exchange, Funds, the Government Shareholding, Operations and mostly all of the Government operations needs the privatization system. Although Hong Kong is the capitalistic city, but for the broader frames of network of taxes, it is essential that the Government pay attention to the privatization of the several Government institutions and cuts down of the Government expenses. The privatization helps Hong Kong to generate more Funds and the Profits from which the tax deductions are possible at large scale.

In Hong Kong, the Government is playing many roles in many of the institutions if the Government took the step of privatization in many Departments, it would be helpful for generating the revenues. So, at present, there is no need to change in the tax system, however, the change that is needed is the change in the Government setup over institutions. The Government has no any idea about the different types of deficits that occurs in the economy and they don’t know about the nature of the deficits are they structural or the cyclic deficits? In this case the Government needs to reform the tax system for the evaluation of the different types of deficits in the economy. There is the need to explain the changes in taxes in front of public before going to implement and reform the tax system. The tax reformation needs the tax payer public to inform the changes in the taxes otherwise these changes may result in worse in the economy rather then for the development of the economic conditions or the broadening of the tax base system in the economy. (French, et. al, 1999)

If the deficit found in the economy that is the structural deficit then it means that Hong Kong has used the resources in the inefficient way these ways are used by the Government. So in this way, there is a need to change the Government policies and to cut off the Government expenditures in order to control the inefficient use of resources in the economy. The main priority in case of the structural deficit is the reformation of the tax systems with the cut down in Government expenses and increase in the value of money. There is need to change the tax base in Hong Kong by changing the present system of taxes in the economy because the economic condition is unstable due to the problems of narrow based taxes. But the thing here is that which change Hong Kong made in the taxes system the changes in salaries properties or businesses or the changes in the standard rates? There is no need to make the changes in the taxes that are generated from the public because the taxes that are taking by the Government from the tax payers are already so high.

There is no need to make he changes in the personal allowances. The thing to change is the changes in the mortgage interests and the housing allowances. There is large number of resources to be used in the inefficient way one of the factor is also that there is large number of investments used in those areas that are not beneficial for the economy. Hong Kong needs changes in the use of resources in the efficient way that is useful for the economy. In the last years budgets of Hong Kong Government has made large number of deductions that are made on other personal allowances. So they are already very high so there is a no need to make changes in the personal allowances. This was one of the mistakes of the Government that it has made in the past that is the large number of deductions from the personal allowances. Beside these every salary earner is paying the taxes even they are the less salary earners they are also paying the taxes at short rates.

There is no need to make the changes in the tax incomes capital gains offshore dividends income or any other types of income in Hong Kong because they create more badly off the situation of taxes in the economy. If the Government levied taxes on the employer and the employees these must creates the situations of unemployment so the economy would be harmful in this way. There is the small need of the fiscal changes and the Government policies and setup for privatization in the economy.

The land related taxes are the upper most priority of the fiscal system they need changes because the large number of profits that the Government takes from land is capable of making the Government more efforts to lower the direct taxes rates. If the property at higher rates sales to the public then it will also capable of causing much distortion in the economy the Government fees and charges that it received from the public is very high in many cases they need to be cut off, the cost of such services are not known by the Government also. There is the need of the proper study of the tax system and to make the changes in that tax system from time to time not at instant. (French, Massy & Young 2001)

“Hong Kong’s tax system is one of the most businesses friendly in the world, simple and low. Taxes are levied on three types of income only on Profits, Salaries and Properties. There is no Value-Added or Sales Tax or Capital Gains Tax. Only income sourced in Hong Kong is taxable. Profits are taxed if they arise in or are derived from Hong Kong as a result of a trade, profession or business. The tax rate is 17.5 per cent for corporations and 16% for other businesses”. (Henkel, 2000)

Salaries Tax

“Everyone with a Hong Kong income arising from any office, employment or pension is liable to salaries tax. The rate of tax after deductions and allowances is applied on a graduated scale, but the total salaries tax charged will not exceed 16 per cent of a person’s total assessable income after deductions”. (Hong Kong, 2000)

Property Tax

“Owners of land and/or buildings in Hong Kong are charged property tax, which is based on the property’s rental income. The rate of tax is 16 per cent on the annual rent receivable less a statutory deduction of 20 per cent for repairs and outgoings”. (Hong Kong 2000)

Mandatory Provident Fund

This was introduced for the employees having the age limits from 18 to 65 and to contribute 5% of their relevant incomes in the inland department of taxes. This system of mandatory provident funds was introduced in 2000 for the broader base of the Hong Kong taxes but not much successful and it raised large number of economic distortions also. (Hughes, 1998)

Profit Taxes

The taxes are levied on the persons, corporations, partnerships, trustees and the different types of business corporations. In Hong Kong, they are liable to pay the taxes on any type of profit to their organizations. There is no distinction in this type of taxes paid by the corporations of Hong Kong. The residents of Hong Kong have the right not need to pay the taxes in profits from abroad and those who are the non-residents of the Hong Kong are liable top pay taxes with if profit raised from the business. The non-residents are liable for the payment taxes either to pay the direct tax or with the help of an agent to pay the taxes any non resident in Hong Kong who gains profits for certain type of activity. In Hong Kong, such if he or she is the sportsmen or women they are liable to pay the taxes from their profits. The business in Hong Kong has the liability to pay taxes over any type of business activity that generates the profits to the organizations.

They have to show the receipts of many types of trading to the Commissioner Tax Collection. The true profits that the non-residents have taken from Hong Kong businesses or trade have the certain sum of exemption involve for the deduction of taxes to the commissioner tax collection in Hong Kong. Dividends Taxes on Revenues Certificates, the Interests on Bond Issuance, Debt Instruments, Loans Interest Income and Trading Profits that are derived from the Long Term Debt Instruments do not involve the payment of Profit Taxes to the Department of Tax Collection. (Lee and Gopinathan, 2001)

1. Normal rate (for the year of assessment 2006/07) –

• Corporations: 17.5%;
• Unincorporated Businesses: 16%

2. Concessionary rate. A tax rate at 50% of the normal profits tax rate will be applied to trading profits and interest income received or derived from qualifying debt instruments issued in Hong Kong, and to offshore business of professional reinsurance companies. (Marginson and Considine, 2000)

All of the taxpayers in the Hong Kong who are the part of any corporation or unincorporated business are liable to pay the taxes as the tax payer. However those who are just on temporary basis they have the right to take certain types of relief in the taxation of Standard Fixed Tax Payment in Hong Kong.

Hong Kong Special Administrative Region Government

They have made the changes in the previous tax system of Hong Kong and made the taxation system of Hong Kong changed as compared to the previous system. This is made because of brining the changes in the narrow based tax system in Hong Kong that made the economy unstable. They issued the consultation document on July 18, 2006 for making the changes in the current taxation system of Hong Kong. They have considered so many suggestions to broader the tax base in Hong Kong. They have formed so many options for the reduction of the narrow tax base system in Hong Kong. In the view of Government, the reformation with the introduction of Good and Services Taxes (GST) in Hong Kong would be beneficial for broadening the tax base in Hong Kong. (Massy and French, 2001)

These options for the changes in the present system of the Hong Kong taxation system is made with the view of making Hong Kong’s future prosperity towards the economic conditions and stabilizes the economic system. In the view of Government, they have suffers from many years with the limited sources that generate the revenues to the Government but now they are reforming the tax system in order to take the advantage of the Taxes on the Good and Services in Hong Kong too.

“Hong Kong Financial Secretary Mr. Henry Tang said the proposed reforms to the tax system were necessary to ensure Hong Kong’s future prosperity. For many years, we have been overly reliant on a limited number of widely fluctuating, cyclical sources of revenue,” said Mr. Tang. “The introduction of a GST is a viable option for Hong Kong. This would secure the long-term sustainability of our revenue base and our capacity to meet public expenditure needs. “I want to emphasize that the Government has no intention of altering Hong Kong’s envied position as a low-tax environment.” (Ministry of Education, 2000b)

They said that the Government has known the changes made with the change in the taxation system, the introduction of GST and its impact other economy and also the low income households. With the introduction of Goods and Services Tax, the Government has also made some of the relief’s for those who have the worse effects with the changes in taxes. The Government in Hong Kong has put forward the goals of the Government by making the changes in the tax system and they want to show off them all to the community. In the view of the Hong Kong’s Government, the communities has also the rights to participate in this discussions that’s why they have placed the idea of introduction of Goods and Services Tax in front of the community in Hong Kong. The Government said that the Hong Kong existing tax base is very narrow tax base as compared with the tax base of the other countries of the world. There are only the limited ranges of taxes ands non taxes to the Government to spend at the public expenditures and for the development of public departments. There is the need to increase the Government revenues to use in the public expenditure. (Ministry of Education, 2000c)

This is necessary for the development of Hong Kong’s future because of the less revenue to the Government the Hong Kong. Government is unable to make the long term investments plans and other long development projects. This was the reason that the Hong Kong Government wants to reform the tax system by making the tax base broader instead of using the narrow tax base. The Government of Hong Kong needs funds to stabilize the economy and because of the narrow tax base in Hong Kong. These plans of the Government are not successful at large scale. According to Mr. Tang, Hong Kong needs the widening use of resources in several sector of the economy which is only possible by broadening the tax base of Hong Kong. The narrow tax base has not provided many funds to Government for such plans. (Ministry of Education, 2001a)

“Mr. Tang said Hong Kong needs to respond to this challenge by identifying new sources of secure, steady income from a broader and growing tax base. A broader tax base would also give us room to cut our Salaries and Profits Tax rates sustainable, thus enhancing our attractiveness to internationally mobile talent and capital, he said. Additionally, the rapid ageing of Hong Kong’s population will be accompanied by higher spending pressures on healthcare and services for the aged. At the same time, the higher number of senior citizens will mean fewer people in the workforce generating Salaries Tax revenue”. (Ministry of Education, 2001b)

A broader tax base system is necessary for the development and stability in the economy of Hong Kong that is lacking there. There is much narrow frame of collection of taxes in Hong Kong that’s why the Government has reformed the tax system in order to generate more revenues for the public sector development plans. “The low rate on the Goods and Services is capable of providing the broader tax base to the Government of Hong Kong’s low simple GST is helpful in the reduction of the narrow based tax system used in Hong Kong for several years”. (Ministry of Education, 2001b)

For example the GST tax rate may provide:-

It provides the stable and the already predicted revenues to the Government as it is based on the consumption expenditures which have not such fluctuations like the fluctuations in income or assets. The consumption expenditures to household are nearly same for each household. The fewer rates of taxes are capable of attracting the foreign investors from outside which will be helpful for the development of Hong Kong’s business environment. It is the tax that creates the revenues for the Government at large scale and broader the tax base of Hong Kong. If the individual spends the large number of money on the consumption, he has to pay the large amount of taxes that is the rule of high consumption means high rate of taxes.

It is capable of producing the changes in the consumption in the economy. If the Government plan to introduce the goods and services tax in the taxation system of Hong Kong failed with in the five years of its introduction and it is not successful then all of the revenue which the Government has generated with the tax reform will be pay off to the public in the form of tax relief’s and other compensation measures. But it is declared that the Government has made the changes in the present tax system of Hong Kong for large period and there is no need to change the GST rates between the five years of its introduction. Within these five years, Government watched the whole working of generating the revenues by the tax reformations ands broader base of taxes. So the primary elements of tax reforms remain the same for at least five years of their assessment. The most important features of the GST include the following things these are:- (Ministry of Information and the Arts, 2002)

• The rate of tax isn’t levied on the exportable goods international supplies financial supplies these are not the part of GST.
• The GST is concerned with the cash flows issues such as it is concerned with the importers.
• The tourist refund scheme is the part of tax reform they have to pay the small rate of GST when they purchased something in Hong Kong and take it with them to the other countries.
• The residential property sales and those residents who are at rents are not concern with the GST tax system.
• The Government is also responsible to report the transactions involves the GST and it is the GST registered Governments in their transactions with the privatize systems.
• Charities are treated with GST.

The formation of the broader network of taxes is the provision of relief’s to those who have the large number of cost incurring on many transactions such as for those who have effected for the impact on livelihood with the increase in the living cost. The Government has also made the proposal for decreasing the tax rates to those who are the tax payers to the Government at present. These reductions include the reductions in property tax salary tax personal assessment and property tax. These are the reductions that are useful for the Hong Kong’s economy in future for the maintenance of the good competitions and talent environment. (Ministry of Trade and Industry, 2002)

“As our present economic circumstances and those in the foreseeable future are positive, we have an opportunity through this consultation process to think clearly about this important issue,” said Mr. Tang. “We do not need to rush into a decision and can take our time to consult, consider and plan the best approach to reform our tax base and manage our public finances.” (Mok and Lee, 2000)

“Mr. Tang noted that the introduction of tax reform would have implications for the entire community and thus progress on this issue will be made cautiously and carefully over a nine-month consultation period”. (Mok and Lee, 2000) The Government is not introducing the tax reform in the view of only the Government officials this is the broader tax base system that would be based on the communities advices also, so the Hong Kong Government gave the permission to the community to participate in the tax reform systems to broader the taxation system in Hong Kong. The Government of Hong Kong is on the view that the implementation of GST tax system takes place after the participation from the community also the Government must takes the views of the public before the implementation plans. The GST taxation system is for the widening of the present tax system it is capable of brining some of the essential benefits to the Government of Hong Kong and provides the revenues larger then the narrow based tax following in the last years.

“On the 13^th June 2007, the Government of Hong Kong announced the final consultation regarding the tax reforms in Hong Kong”. (Mok and Lee, 2002) There are several options available to Hong Kong Government for the widening of the narrow tax base. Although the public cannot accept at this point in time, the Government’s introduction of Goods and Services Tax, the public has generally obtained a better understanding of the problems of our narrow tax base during the consultation process and agreed that the Government should broaden the tax base to stabilize revenue to enhance fiscal health”. (Mok and Lee, 2002) Mr. Tang stated the options that were made by the Hong Kong Government for widening of the tax base are the:-

• Green tax
• Land tax
• Sea departure tax
• A tax on luxury goods
• A progressive profit tax
• The reduction of personal allowances from salaries.

In the view of the Hong Kong Government, they said that the Hong Kong’s economy has been improved after the tax reform. Because of the increase in population, the dependency of the public of Hong Kong has increased with the passage of time and the changes in the tax base helps to evaluate such problems and finance these problems. The main thing which the Government of Hong Kong wants to introduce to the public was that the narrow tax base effects on the Government plans and need of funds for the development of stable economic system. The options made by the Government in the taxation system of Hong Kong in order to increase the competition and talent among the peoples of Hong Kong and different organizations to increase the profit levels with which the tax rates also increases. In the view of the Hong Kong’s Financial Secretary, this tax reform is necessary for the Hong Kong’s future prosperity. The introduction of GST is helpful for the Hong Kong Government to make the long term decision making and planning for various projects and the need to increase capital inside to raise funds for long term projects. (Mora, 2001)

With the narrow based tax system the Hong Kong Government was in trouble and loosing much of the public sectors, Hong Kong needs fulfillment with the changes in the narrow tax base it is possible for the Government to develop the public sectors that are left behind due to the large privatization in the territory. The tax reforms of Hong Kong contains several different types of relief’s and tax offsets for those who have the severe impact of changes in the tax rates and the introduction of GST. The broader base of tax is capable of providing more revenues to the Hong Kong Government and the Government is able to do more for its economy in future.

After Implementation of GST

There was large number of changes made in the Hong Kong’s economy that was shown in Year 2006-07. These changes include some of the important changes that were brought to the Hong Kong economy were that there were three quarters of the taxpayers got relief of taxes under this proposal that was highlighted by the HK Secretary, it was said that the Government of Hong Kong has made the balance between the operating and consolidated accounts. This was happened for the first time in Hong Kong after several years because of the changes in tax reforms.

They made several efforts after the tax reforms in order to get recovery enhancement sharing and commitment. So the Government was successful after the introduction of the changes in taxes. The deficits in the economic conditions have been reduced after the fiscal balance within the operating and consolidated accounts. The Government spending reduced to the large extent large number of investments made by the Government in the educational projects to increase the talents and competitions among the public.

The Government provides the land for institutions and hostels in order to increase the education level. The changes in tax policy of the Government also made the changes in the strength of the financial markets which is increase now after the years when there was the narrow tax base, now it is following the broader tax base. Several types of businesses in the Hong Kong’s financial markets have encouraged generating more profits and provide the strengths to the Hong Kong’s financial markets.

This has increased the Hong Kong cities strengths in he international finance centers of the world. The Government of Hong Kong after the tax reform works best to improve the communities on Hong Kong and efforts to do more for the public sector all of the revenuers that has generated from the taxation to the Government are use for the construction of the long term projects for the people of Hong Kong in public sector. In 2005, the Hong Kong’s economy grows to 7.5% and the Gross Domestic Product (GDP) of HKSAR also increased which is more then the previous years GDP.

“Hong Kong’s unemployment rate dropped to a four-year low of 5.2 percent due to the robust economy growth of 7.3 percent. In 2005, the Financial Secretary of the Hong Kong Special Administrative Region said Wednesday. 240 000 new jobs have been created over the past couple of years as a result of our economy’s recovery, said Financial Secretary Henry Tang when presenting the 2006-2007 Government budget to the Legislative Council on Wednesday morning. HK GDP expected to increase by 4% to 5% in 2006”. (Morrow and Torres, 2000)

It is obvious from various facts of Hong Kong’s economy improvement that the territory has been developed after he changes in the narrow tax base system which was followed many years in Hong Kong. Now there are more funds for the Government to use in several projects for stability of the economy, there is large development takes place after the implementation of the changes policy of broader frame work of taxes in the territory. There is much strength increase of the financial sector in the Hong Kong and many investments projects made to make the long term development.

Different Types of other Taxes

There are also some other methods of generating the revenues with these includes several types of taxes on he utilities the banking sector unincorporated organizations and the taxes over consumption as there was the following of narrow tax based system in Hong Kong. In the past years that’s why there economic growth remains lower and that tax base was narrow then all other systems of taxes follow in several other countries of the world other then the Goods and Services Taxes. There are also the revenues which the Government can raise the funds from the utilities, corporations the sales taxes, excise duties the taxes on profits to the organizations and those taxes which the Government of Hong Kong has not included in the taxation policy of previous year which are helpful in broadening the area of tax base for the Government. But the immediate increase in the tax rates will be harmful effort the development in future so the basic need is to made changes with time to time and increase the rate of taxes over several things. (Nanyang Technological University, 2000)

Progressive, Regressive and Proportional Taxation

There are three types of taxes:

• Progressive tax
• Regressive tax
• Proportional tax

The progressive taxation has already followed by the Government of Hong Kong these days, in its new policy of broadening the tax base this is the taxation that is used in the salaries of the people. These taxes are from low to high that is the high rate of tax charged on the salaries. The regressive taxation includes the less rate of tax charged. And the proportional rate of tax is the same as the rate of tax and the amount at which the tax applied increase; it is the tax which increases with the increase of amount. Progressive taxation is however the large rate of taxes generated from the public salaries in Hong Kong this type of taxation not beneficial some times because it creates the distortions in the economy as large amounts have cut off from the incomes of the households. (Nathan, 2001)

Direct and Indirect Taxes

The Government of Hong Kong is taking the direct taxes from the corporation and the un-incorporated organizations from their agents or from the organizations. The direct tax system is much better then following the indirect tax system in the economy. The direct taxes pay directly to the Government instead of making the intermediate body to generate taxes in Hong Kong. The Inland Revenue Department of taxation is involved in taking the direct taxes from the corporations. In the economic view, these taxes are essential in transferring the wealth from the house holds to the Governments for businesses and public sector development.

If the Government involves several types of other taxes in its taxation policy such as the Capital Gains Tax, the Inheritance Tax, Excise Poll Tax, Retirement Tax, Tariffs Sales Tax Toll and Transfer Tax and Value Added Tax, this has introduced at present in Hong Kong as the Goods and Services Tax like other countries. Wealth Taxes, Property Taxes and many other types of taxes can also increase the Government revenues. However, the Government has used the development of the taxation system by the introduction of Value Added Tax in the economy which is now helpful for them in broadening the framework of taxation system.

Simple the Goods and Services Tax use by the Hong Kong Government is the type of tax on exchanges it is the tax that is levied on the Value Added of every exchange’s is the type of indirect tax in the previous years. The Government of Hong Kong has used the direct taxation methods that were very narrow and at the small scale. This tax is counted as the neutral tax. This is the tax that is collected from some other person rather then that person who bears the cost. The Goods and Services Taxation System is for the all types of businesses who sales the goods must have to pay the fraction of the price of the goods they sale. It is the tax that is charged to the goods at each stage of production rather than the Sales Tax that is charges only on the final goods it is the tax different from the Sales Tax. (Shih, 2002)

Generally speaking, it is to say that if the Sales Tax on the Goods and Services increased the people involve themselves in hiding of the tax that is called the tax evasion. So for its economic conditions betterment the Value Added Tax may results better than the Sales Tax. It is better to use the Goods and Services Taxes rather than using the Sales Tax in order to avoid the tax evasion. The Value Added Tax results much better than the other types of taxes because it may prevent from certain types of the frauds and other practices involves in hiding the taxes from the Government.

To Review Experience of Introduction of GST in Other Countries, such as Canada and

New Zealand____________________________________

Like the Hong Kong, China, Japan and many other countries at the international level have been introduced the Goods and Services Taxes. Australia has also changed the 1930s taxation system in to the new tax system. There is large number of countries that has made changes in the taxation system such as the tax changes to GST.

Goods and Services Tax in Canada

The Value Added Tax in Canada is the multi level taxation system. It was first introduced in Canada in January 1991. It includes the 6% charge on the sale of each Goods and Services in Canada except those services like those residents who are at rentals or the medical services and many other services like these services. The taxation of Value Added Tax which is used in Canada is the tax on each sale. Those businesses in Canada that are involve in purchasing the Goods and Services have the right to claim for the in put tax credits so the tax is borne by the final consumer in the business.

This is the system of taxation in Canada which was unfortunately had not much successful for the economic benefits because of the criminals who claims for the GST input credits. There is the less exemption on the exported goods and the relief’s for the households those who suffer from the changes in taxation. However in 1997, the changes in taxes take place in Canada when the different provinces combine the taxes with their respective Sales Tax that was they called the Harmonized Taxation System or Harmonized Sales Tax. This tax in Canada is administered by the Federal Government of Canada and the revenue from the taxes divided among the Government sectors for the betterment of the Canadian economy. At present the Goods and Services Tax in Canada is responsible for providing the 15 to 17% revenues each year to the Government it is also said that the transparent nature of GST has made the Canadian peoples know about their taxation systems. (Singapore Department of Statistics, 2000a)

Goods and Services Tax in New Zealand

“The goods and services tax is the tax on the most of the supply of Goods and Services in New Zealand. In New Zealand it is charged at the 12.5 %. The Goods and Services Taxes in New Zealand include Input Tax and Output Tax taxable supplies and many more. The persons that are liable to pay the GST are the companies that are controlled or owned by some persons those persons who have 25% or more than 25% investment in the companies the partnerships, partners and associates of the partners the relatives by blood marriage or adaptation of the second degree and the trustees who are benefited under the trust”. (Tan, 2000)

The trustees of the two trust that have the common settler the two persons that are associated with the third person. Those organizations that are concerned with the commercial businesses such as the hotels, motels, boarding houses, nursing homes, guest homes, rest homes and the part of hospitals that are for the residential establishment. Those parts of the hospitals that are not included the residential establishments are not charged with GST. (Tan, 2000)

“The financial planning services include the planning implementation and monitoring of the GST”. (Tan, 2000) In the Goods and Services Tax, their is the large variety of goods included in the taxation system these are the goods from the personal and real property except the money which is not included in the GST. “The input Taxation in the Goods and Services tax referred to the tax that when the registered person with GST uses the Goods and Services in a taxable activity the portion of the price that is concerned with GST is the input tax”. (Tan, 2000) Usually, this type of GST input is called the Credit Tax. This is the tax on the Imported Goods or the Goods that are held in Bond. The tax on the Goods that are used by the company and purchase from some non-registered person or the registered person, the non-profit bodies in the New Zealand laws are those organizations associations or corporations that are not run with the objective of making the money or to earn the profits and the income is not to be distributed among its members or participants. The non-resident is the person that is not living in New Zealand. “The out put tax is the legal term for GST that is charged by the registered person it is related with those goods and services that are supplied during the taxable activity this is called the GST payable or the GST collected”. (Tan, 2000)

“Planning services are those provided by an advisor when planning an investor’s portfolio of investments. The services are often provided when establishing a portfolio, but can also be an ongoing service. Planning services are subject to GST as they are not a financial service. Implementation services are those provided when an advisor implements an investor’s financial plan. Also included are the services provided when a custodian implements the plan and an advisor charges the investor a fee. However, if an advisor’s fee in this situation relates to monitoring services, the services are not implementation services. Implementation services come under the definition of “financial services” (see below) for GST purposes and are therefore exempt from GST.

“Monitoring services are services provided when an advisor monitors and evaluates the performance of an investor’s portfolio. Monitoring services are subject to GST, except for any services relating to the collection of income from investment or the arrangement of currency exchanges. These are financial services” (see below) and are exempt from GST”. (Teo, 2000)

Goods and services tax is applied to the:-

• An individual
• A company
• Incorporated club or society
• Joint ventures, corporations, trustees of the trust.
• A public or local authority
• The business which is going on partnership.

The public authorities related with GST in New Zealand includes all of the public departments that are related with the Governments and Government Departments, members of the Executives Ministers in the Government, all are liable to pay the taxes. The Tax Law of New Zealand is concerned with the residents of New Zealand or non-residents of New Zealand there are the distinction of taxes for those who are the residents of New Zealand and for those who are not the residents of New Zealand. The taxable activity under the Law of Taxation of New Zealand are all those activities that are concerned with the businesses trade financing and every day activities of the persons that are associated with the earning of profits. Taxable activities are not concerned with those activities such as the individuals who are dong the work for salaries, or being the Company Director, Private Transactions, exempt supplies.

“Businesses Exporting Goods and Services from New Zealand are entitled to “zero-rate” their products – effectively, they charge GST at zero percent. This permits the business to claim back the input GST but the eventual, non-New Zealand based consumer does not pay the tax (businesses that produce GST-exempt supplies are not able to claim back input GST”.(Teo, 2000)

This Goods and Services Tax was introduced in New Zealand in the past years such as on October first 1986.this tax was less at the beginning but now the Government of New Zealand has raised the taxes associated with the Goods and Services. There is the same rate of deduction of taxes at all types of food items in New Zealand. This is the tax system which is followed by the large number of countries including many countries like Canada, Japan, New Zealand, and China. Hong Kong and many other, this tax has its significant impact on the economic conditions and very helpful in widening the narrow taxation base. After its success in many countries of the world, there is an increase use of Goods and Services Tax in many countries, however, in most of the countries this taxation system results in good effects or some countries where its monitoring is worse there is a negative impact. (Teo, 2001)

Is GST Beneficial or Not?

This Goods and Services Taxation is the 10% tax on the Goods and Services of the businesses it is the Value Added Consumption Tax that is levied on its residents in order to raise the funds to be used in the long term development plans of the Government. “The GST is a 10 per cent tax on most goods and services supplied from 1 July 2000. It is a Value Added Consumption Tax in that private consumers ultimately pay the tax and the tax is only paid once on any qualifying supply (be it a good or a service). Businesses that are registered for the GST and that sell qualifying supplies include the GST component on their tax invoice and, in the context of their monthly or quarterly Business Activity Statement, remit the GST they collect to the Australian Taxation Office (ATO) and claim from the ATO, in most cases, an input tax credit for the GST which has been charged by their suppliers”. (Tung, 2000)

There is the increase in the Government common wealth with the inclusion of GST in the taxation system. This GST includes the collection of revenues from the corporations and the organizations that are associated with the taxable activities and are earning the profits this profit is used by the Government for raising the funds for development since for long years the Hong Kong’s taxable system was too narrow. It also not includes the goods and services taxation in the tax system of the Government there is the lack of the economic stability and the Government of Hong Kong was leaving the most important plans that need the long terms a funds and the development of the public sectors.

There was large number of development of the private sector goes on in Hong Kong in the past year but less consideration was given to the public sector. There was the need to make the changes in the tax system that was capable of providing mire funds to the Government for the long term plans for the development of the public sector. So the Value Added Taxation used by the Government for raising the funds from the residents this taxation system has made successful attempts and the Government of Hong Kong has benefited a lot from broadening the base of taxes, the value added taxes are beneficial to some extent in many countries for the economic development, so instead of using the narrow based system of taxation for the Government planning’s it is necessary to increase the area of taxation, but some times this widening of the taxation leaves large burden on the residents.

But the Hong Kong’s Government has made the steps to reduce the burden by providing several types of relief’s in their taxation system for those who have the large impact of the tax reforms. It has benefited large number of countries such as Canada, New Zealand and many other countries who have changes their taxation systems from the previous taxations systems to the new standards of taxes. The GST taxes are different from the other types of taxes because it involves the cost of inputs or the tax at each level of production the other sales taxes are concerned only with the final productions. So the taxation is used at each level of production to need the final stage of production this is the tax that prevents the Government from those fraudulent practices that may occur in the use of other types of taxes.

The Goods and Services Tax (GST) has been a feature of the Canadian tax system for over 15 years. It was introduced on January 1, 1991 as a replacement for the Manufacturer’s Sales Tax (MST), which had been in existence since 1924. From the time it became a part of the Canadian tax system, and the lives of Canadians, the GST has been plagued by controversy. “The debate over the GST was recently re-opened by the Progressive Conservative party and Prime Minister Stephen Harper. As of July 1, 2006, the Harper Government lowered the GST from 7 percent to 6 percent”. (University Grants Committee, 2000a)

Which things are necessary for Government be advocated to widen the tax base are the things that are necessary for the widening of the tax base includes the good taxation system and monitoring system. It includes some of the economic items for the widening of the tax base that uses to increase the taxes in the economy must have some of the main objectives that it develop with in the budget. These are related with the destruction of poverty. If the people living are so poor and they live from hand to mouth it is hard for the Government to increase the tax base even these countries people try to avoid the short taxes also due to their large number expenses on consumption. Its infrastructures need much development before going to make the policy of the widening of tax base because the profits that generated from the infrastructure are important in generating the revenues.

Fiscal consolidation must have balance between the operating accounts and the consolidated accounts. It must have the agricultural sector development and the development of the manufacturing and industrial sector of the economy. So the overall needs development of various sectors before the implementation of the policies that are related with the widening of the tax base. (University Grants Committee, 2001a)

Results of Questionnaire

A survey was conducted to understand the different target groups of the Goods and Services Tax (GST) and the other taxes, such as Green Tax (GT), Boundary-Crossing Tax (BCT) and Capital Gain Tax (CGT) in Hong Kong.

Methodology

The survey employed two data collection methods focusing on different target groups. Postal survey and face-to-face, filed interview were used.

Postal Survey

In the survey, 70 questionnaires were sent out to professors from different universities in Hong Kong, 20 retailing shops and 30 trading companies on 15 June 2007. 60 questionnaires were received. The response rate of 85% is generally considered satisfactory in postal survey. During 1 July 2007 to 31 July 2007, the one-month fieldwork period, the following follow-up measures were taken to boost up the response rate:-

1. Sending out reminder to target respondents who had not returned the questionnaires one week after the delivery of questionnaires;
2. Telephone follow-up with target respondents who had not returned the questionnaires one week after the delivery of reminders.

For questionnaires that were incomplete or contained ambiguous responses, I had followed up and verify with the respondents.

Face-to-face, Field Interview

I successfully achieved 100 interviews with different target groups. Firstly, I had gone to the entrance of Central Plaza to interview 20 executive managers and clerks. Secondly, I had gone to the entrance of Tak Nga Primary School to interview 20 housewives. Thirdly, I had gone to Wai Chai Branch of Labour Department to interview 20 unemployed persons. Fourthly, I had gone to the campus of City University of Hong Kong to interview 20 university students. At last, I had gone to a building site at Tai Kok Tsui to interview 20 manufacturing workers in July 2007.

Findings

I had gathered 160 questionnaires through two ways of data collection, 60 questionnaires from postal survey and 100 questionnaires from face-to-face, field interview. Findings of the survey are as follows:-

Key:-

The acceptance level of each tax is measured by a 5-point scale where 1-point represents “Strongly Disagreed” and 5-point represent “Strongly Agreed”.

Now the result of survey, the highest level of acceptance (Point 3.02) is attained in Goods and Service Tax (GST) and it is recommended to be introduced in Hong Kong. The least acceptance (Point 2.57) is attained in Boundary-Crossing Tax (BCT). (See Appendix A, B and C)

Conclusion

With the other types of revenues generating activities of the Government, the activities of the Government also includes generating the revenues with the help of taxes. These taxes are taken from the household sector of the economy and are used in the development of the Government and the public sector, for its financial development and the economical development it is necessary to increase the good taxation system and the good monitory system of taxation. Therefore, there should be balance between the operating accounts and the consolidated accounts in the fiscal consolidation. It must have the agricultural sector development and the development of the manufacturing and industrial sector of the economy. So the overall needs development of various sectors before the implementation of the policies that are related with the widening of the tax base.

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Appendix A-1

Questionnaire

Section I – Classification

Firstly, I would like to ask you some questions for analysis purposes.

1. What is your job?

• Professors
• Professionals
• Teachers
• Students
• Merchants
• Clerical
• Workers
• Un-employed
• Housewife

2. What is your company name (if applicable): ____________________________________
3. Type of Business of your Company (if applicable):

• Universities/Institutes
• Trading Firms
• Retailers
• Solicitors & Notaries
• Accounting/Audit Firms
• Banks
• Manufacturing Industry
• Others

4. What is your Annually Income?

• HK$100,000 or above
• HK$75,000 – HK$100,000
• HK$50,000 – HK$75,000
• HK$25,000 – HK$50,000
• Less than HK$25,000

Appendix A-2

Section II – Comments on different Taxes to be introducing in Hong Kong

A Goods and Services Tax (GST).

Appendix A-3

A Green Tax (GT).

Appendix A-4

A Boundary-Crossing Tax (BCT).

Appendix A-5

A Capital-Gain Tax (CGT).

Other Taxes

Appendix C

Acceptance Level of Goods and Services Tax (GST), Green Tax (GT), Boundary-Crossing Tax (BCT) and Capital Gain Tax (CGT)