Urges the new Government to implement fiscal policies to tackle expected surging expenditure
The Hong Kong SAR Government is set to record a consolidated budget surplus of HKD23.7 billion for the fiscal year 2012/13, against a deficit of HKD3.5 billion originally estimated by the Government, according to KPMG China forecasts. This is mainly being driven by increased revenues from land sales, tax collection and stamp duties.
With expenditure for infrastructure projects expected to rise in the coming years, KPMG China proposes the Government reviews its tax system to ensure it can cope with future challenges, and also implements plans to increase Hong Kong’s competitiveness in the long term.
Jennifer Wong, Tax Partner, KPMG China, says:”During the recent Policy Address, the Chief Executive demonstrated his determination to increase public housing and develop new land extensively in order to solve the housing problem and maintain a land bank by the Government. This will require considerable capital investment. In the last Medium Range Forecast, the Government had also forecasted huge annual capital expenditure in the region of HKD100 billion in the next few fiscal years. In order to stick to the principle of keeping expenditure within the limits of revenues pursuant to the Basic Law, the Government therefore needs to increase its revenues.”
Given the current narrow revenues collection base which is mostly driven from land sales, investment income and income tax collection from a small group of taxpayers, KPMG China urges the Government to review the current tax system and reconsider introducing a broad base indirect tax such as the Goods and Services Tax (GST), which will help to widen the tax base and stabilise income as well as to enable lowering of income tax rates to enhance Hong Kong’s competitiveness.
“The upcoming economic environment is expected to remain challenging and the Government therefore needs to offer relief measures and stimulate the economy and employment in Hong Kong,” adds Wong.
Proposed one-off relief measures for 2013/14 include an income tax reduction of up to 75 percent, with a ceiling of HKD 15,000, up from HKD 12,000, and a salaries tax band increase to HKD 45,000 from HKD 40,000.
In order to tackle housing issues faced by the general public, KPMG China also proposes the Government introduces primary home rental deduction of up to HKD100,000 per annum with a deduction period of 10 years; additionally to offer public housing tenants a rental wavier for two months.
The Government said it plans to put forward a health protection scheme for discussion this year. KPMG China believes tax incentives could encourage the middle class to purchase health insurance, which could help relieve the Government from the burden of public medical expenses.
“We suggest the Government introduces salaries tax deduction for medical insurance premium payments, not only for individuals, but also extended to their children, parents and grandparents, capped at HKD20,000 per insured person,” Wong explains.
KPMG China also suggests the introduction of a jumbo tax deduction and/or to provide subsidies for corporates that hire young individuals or persons with disabilities.
The Chief Executive also highlighted in the Policy Address his aims to promote Hong Kong as a hub for intellectual property development. KPMG China therefore proposes the Government doubles the tax deduction rate to 200 percent for research and development expenditure, and offer preferential tax rates/incentives for corporates engaging in the development of intellectual property. This will help to induce corporate investment in research and development and enhance Hong Kong’s long term competiveness and sustainability.
Wong concludes: “Despite holding around HKD700 billion reserves in hand, the Government should continue to pursue a prudent approach in planning its public spending amid the global economic uncertainty. Revenues from tax collection, investment income and land sales fluctuate severely with the global economic situation, therefore the Government needs to urgently widen the revenue stream while not relying heavily on the currently narrow tax base.”
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