The Hong Kong SAR government Tuesday announced detailed proposals of the controversial goods and services tax (GST) and kicked off a nine-month public consultation exercise.

Unveiling the long-discussed GST scheme at the Hong Kong Legislative Council, Financial Secretary Henry Tang said that the proposed tax was intended not to increase government revenue but to broaden the tax base, stabilize public finance and sustain Hong Kong's development.

Tang admitted that society had not reached the consensus on the GST and he was the fifth financial secretary in about 20 years to bring up this highly controversial issue.

"But as a far-sighted, responsible government, we shall not and will not turn a blind eye to the narrow tax base question," he said.

"Since economy is picking up well, inflation is mild and unemployment is low, I think this is the suitable time to discuss this question with the public.

"Even if the GST is not approved at the end of the day, I still consider it a gain for the society if people can enhance their understanding of the social responsibility to bear a fair share of the tax burden," he added.

The GST is a very wide-ranging tax that includes almost every single everyday expense such as groceries, utility charges, public transport, education, newspapers, meals and clothings.

Unchanged for the first five years, the GST rate will be standardized for all items and there will be very few exemptions, Tang said.

If the rate is pegged at 5 per cent, it is estimated that an annual income of HK$30 billion will be generated.

Less than HK$500 million in administrative costs and HK$9.5 billion for compensations, a HK$20 billion surplus will be generated and the money can be used to reward the people, say in form of salaries and profits tax reduction.

Assistance to low-income groups

To mitigate the impact on the disadvantaged community, financial assistance will be offered to social security recipients and the low-income group.

As for tourists, tax rebates will be provided at the departure check points for products with a value not less than HK$1,500 and purchased in one shop.

Financial services such as bank deposits, securities, money exchange and mandatory provident fund will be zero-rated.

Lease and purchase of residential buildings will be exempt from the GST. Although non-residential properties are subject to the GST, the registered companies can reclaim the tax so incurred.

On the part of the enterprises, only those who achieve a sales turnover of HK$5 million per annum will be required to register as a GST collector on behalf of the government.

It is estimated that only 65,000 of the 750,000 registered companies will be subject to mandatory registration. Other companies can choose to register, yet unregistered companies will not be able to reclaim GST on their input or purchase of goods and materials.

Calling it a discussion on tax reform to broaden the tax base rather on a single tax item, Tang said the GST was less vulnerable to tax evasion because it was collected at different stages.

He also did not fear that the GST, once levied, would prompt more and more Hong Kong people spending their money across the border.

Hong Kong is well known for the good quality of its products and people will not go to buy things in Shenzhen simply because of the extra 5 per cent, he commented.

"There are very few options with regard to broadening the tax base in Hong Kong," Tang said. "The 2002 report by a task force on this subject also said the GST was a viable option that will not defeat Hong Kong's competitiveness."

Starting from yesterday, public consultation will last for nine months until the end of March 2007 before he weighs the whole issue in June 2007.

The final decision, however, will be taken by the next government. Tang did not reply if he would stay on by that time and what post he would be holding.