Analysis: Goods & Services Tax
Introduction
Hong Kong was among the countries in the region that has been greatly affected by the Asian crisis during the latter part of the 1990s. In order for the country to remain stabilized, the government proposed a plan of introducing a new tax system called the Goods and Services Tax (GST). This system is also known as the sales tax or the value added tax (GST). Primarily, the goal of this paper is to analyse the proposed tax system of HK government and to compare it with the current tax system imposed within the country.
Simple and Low-Tax Regime
In order to ensure that the government will be able to manage the taxes, the government of Hong Kong had modified its tax systems numerous times in the 1980s and 1990s to make it more reasonable and impartial. Some of these modifications include widening tax bands and increasing tax exemptions. These changes were required to accommodate rising inflation rates.
The changes have been considered because in the early 1990s, Financial Secretary (1992-95) emphasized the importance of ensuring equity by balancing market forces with government intervention which includes implementing an appropriate tax system. Since, then the country imposes a more simple and low tax system.
It has been noted that the territorial tax system of Hong Kong still remains unchanged. The country is still implementing low and simple tax approach wherein the people and business corporations enjoys no taxes on dividends, interests, no capital gains tax and no value added tax or goods and services tax.
The Hong Kong collect tax in various forms, for Hong Kong trades the business and firms are subject to a profits tax. On one hand, the income gained from employment or pensions are subject to an individual salaries tax and the income which is gained from selling properties is called property taxes. These taxes are only considered when the income occurs in or derives from Hong Kong. Nonetheless, the determination of the location of the income is a complex matter. In addition, it is also noted that foreign-sourced profits is not taxable in Hong Kong even if it is remitted to HK.
Furthermore, the current tax system or regime of Hong Kong does not charge any direct value-added, turnover, payroll or even capital gains taxes as mentioned above. However, the country indicates charges on products like tobacco and alcohol. The current tax regime of Hong Kong has been subjected to different reviews by various scholars and they have found out that this current tax regime needs a major transformation.
The profits tax rate is noted to be 17.5% (2007) which is equal for foreign and local industries. On one hand, the salaries tax rate is 16% on its maximum rate and the government implemented all salary income of people derived in or from HK. Currently, because of the simple and low-rate tax regime, the HK government has been able to identify two major conflicts in terms of their public revenue. The government believed that because of the narrowness of the tax system, only about 37% of the employees pay tax on their salaries and only few companies contribute to 60% of the profits tax. On one hand, the second dilemma is attributed to the stability of the revenue. It has been found out that many of the emerging taxes in HK are easily influenced by the ups and downs of HK economy. With this evaluation, the country is now trying to seek stable and broad-based tax sources in the long-term to enhance the structure of the Hong Kong revenue (2003).
Goods and Services Taxes
It has been raised that significant developments and progress had already been achieved by Hong Kong since the Asian financial crisis; certain threats still put the country under considerable financial pressures. These issues include the increasing prices of oil, terrorism, high interest rates as well as health problems such as the probable Avian Flu outbreak. Other internal concerns including the aging population of the country and the decreasing working population are also some issues that could add to the possible financial burden of Hong Kong in the future. These identified issues however, can be addressed through the implementation of the GST.
In general, this tax system is charged based on price spending or consumption rather than on the income earned. The GST is different from other wholesale or retail taxes as this is enforced on the good or service’s net value at every economic life cycle stage of that particular merchandise or service. This is then different from single level taxes where taxes are only imposed once. Prior to the proposed GST system, Hong Kong is already known for using simple and low-tax regime, which makes the country the most favourite international business location. The low income tax rates have been the norm in Hong Kong, which implies that these economies need to invent another stable source of government revenue. In fact, although tax revenue appears to have stagnated, nontax revenue such as receipts from land sales
With this, most scholars who opposed to the GST believed that this will take a great impact on the current position of Hong Kong in the world market.
There are several points which have been attached with the proposed Goods and Services tasks. As has been said by pro-GST, GST is applicable to services in general whereas sales taxes are only applied to certain services. While GST has long been applied in other nation, this system has been a highly debatable issue in Hong Kong. In particular, analysts had been in wonder as to how this tax system will be of benefit to the country.
Significant business resources such as vehicle registration taxes as well as the duties on petroleum and other similar products will also be reduced. Hotel accommodation taxes will also be lowered by 3%. Capital fees will also be eliminated along with the implementation of GST; this would motiGSTe more business owners to operate in Hong Kong. The features of the proposed GST plan for Hong Kong also suggest various benefits of the system including low compliance cost, ease in administration, avoidance of complexities, and maintenance of fair treatment and promotion of tourism and export competitiveness.
Although the benefits of the GST for Hong Kong are clear, several analysts, economists and citizens are against the application of this system in the country. In particular, the opposition is concerned that the enforcement of the GST would negatively affect the country’s vulnerable sectors such as the small and medium enterprises as well as the low income households.
One of the debatable topic under the consideration of GST in Hong Kong is the notion that the introduction of a GST would probably cause a one-time increase in prices, but it need not cause inflation to accelerate. It would not in itself improve the competitive position of the United States, aside from any effect of deficit reduction, because the export rebates and collection of GST on imports merely compensate for GST levied on domestic output. The same result occurs, though somewhat less completely, under the retail sales tax. Substituting the GST for part of the corporate income tax might, however, have a beneficial effect on U.S. trade. The longstanding view that introducing a national sales tax would lead to the expansion of federal spending by providing the Congress with a relatively painless "money machine" has recently been challenged, but not convincingly.
Probably the primary economic disadvantage of the GST is it’s regressively. As a tax on consumption, the GST would constitute a smaller fraction of higher incomes than of lower ones. Perhaps more important, it would impose a significant burden on low-income families. Even though that burden would be reduced or eliminated by the indexation of many transfer payments, including social security, the coverage of indexing is not complete, and a substantial number of low-income households would bear the burden of a GST.
Burdens on low-income families and regressively can be reduced or even eliminated by exempting food, medicine, and a few other necessities from the tax base and applying increased rates to items that appear predominantly in the market basket of high-income families. This is, however, an extremely expensive, complicated, and blunt instrument to use in the attempt to avoid regressively, and the weight of expert opinion is that it should be avoided.
Analysts stressed that due consideration should be placed on this matter as this could cause the considerable decrease of public confidence and loyalty towards the government. As this system would directly impact tourism and retail industries, operators are apprehensive of the possible inflationary pressure the GST could bring ( 2007). Opposing parties have also pointed out that despite financial or economic benefits GST could bring to Hong Kong, the credit only goes to the government; however, should this tax system falls, the effect will involve all taxpayers ( 2007).
With a value-added tax, every enterprise collects tax on its sales and pays tax on its purchases. The enterprise is reimbursed for tax paid on its purchases when it collects tax on sales to its customer. Accordingly, if one tax is better than the other, the reasons must lie in that administrative difference, in how that administrative difference actually applies, and in how that administrative difference plays in the political process that constructs basic tax law. A further complication is that most claimed advantages of one over the other are not herent. It can still be concluded that both systems are subject to abuse and neither system completely removes all intermediate business purchases from tax. Both systems require policing to prevent abuse by final consumers attempting to avoid tax by claiming relief of business inputs. The value-added tax or the goods and services tax requires policing to ensure that businesses do not receive credit for tax not paid or for tax paid on purchases for household use.
In addition, it can be also noted that he goods and services tax may be regarded as a kind of personal taxation and therefore compatible with some version of the ability to pay principle, albeit the indirect method of implementing the principle cannot be tailored to personal situations as precisely as the direct. Similarly, when under the benefit principle the tax is intended as a method of taxing final purchasers, it may be viewed as a personal tax distinguished by the fact that the allocation of the tax burden is designed to reflect the benefits which the final purchasers derive from governmental services rather than ability to pay considerations. The extent to which the allocation of the tax burden under the benefit principle will differ from that under the ability to pay principle will depend upon the formulas used to implement the principles. In any event, the use of the value-added procedure has no significance as such because another method of collecting the tax might have been used if the value-added procedure had not been thought to offer certain technical advantages. If the value-added tax is recommended as a substitute for profits taxation under these principles, it reflects a wish to lighten the tax burden on business profits, sometimes because shifting of the profits tax makes its retention irrational; it is not because the value-added tax is expected to rest on such profits.
It can be said that GST represents a new technique for collecting taxes on the output of economic enterprises. Like income or sales taxation, it is a generic term applicable to more than one type of measure; and the measure may be either general or partial in nature. By and large, Hong Kong has been interested in general measures which would encompass a society's total economic output or at least the total output of those enterprises which are classified as business firms (2007).
Because output or product is merely an alternative view of the nation's income, value added may also be regarded as society's aggregate income. Value-added taxation is therefore closely related to direct income taxation, differing from the latter only by its impersonal character and its method of allocating the base among taxpayers.
Conclusion
The concept of the tax on value added has been developed through two different approaches. Through one approach the tax has been devised merely as a method of collecting a sales tax viewed as a tax on the value of a product collected from business enterprises selling it and expected to be shifted forward to purchasers by means of an increase in prices equal to the amount of the tax. Through the other approach the tax is expressly related to some version of the benefit principle of taxation, usually one formulated in terms of a benefits to business thesis. In that case, the tax may or may not be regarded as a tax on ultimate purchasers of taxable products, the concept of the tax being dependent upon the particular version of the benefit thesis involved.
Given the first approach, the value-added tax will naturally reflect one or another policy of sales taxation compatible with the view of the tax as a burden on purchasers of final products. However, no particular policy is implied through use of the value-added measure as such, except possibly that the tax applies to a wide range of products. In other words, the value-added procedure is most suitable for a general tax as contrasted with a selective sales tax or special excise.
From the cited sources, it is clear that GST will contribute to the benefit of Hong Kong, particularly on its economic and financial sectors. However, despite these apparent advantages, several analysts have raised GST’s flaws, which would mainly affect low-income households as well as SMEs that are considered Hong Kong’s main economic asset. In conclusion, it is then necessary for the local government to consider various affective factors before implementing the new tax system.
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