Rotary Club - HK East Newsletter October 11th, 2006

The 14th Rotary meeting of the year was started promptly by President Paul at 1pm. The total number of members in attendance was 16. Two visiting Rotarians, namely PP Meggie Tseung of RC Peninsula Sunrise and Rotarian Benny Ratnani of HK Northeast (who probably has attended more RCHKIE meetings than some home club members) were welcomed by Rtn Jason. There were no visitors but did have a delayed birthday boys in PP Andrew and PP John IV was requested to lead the birthday song.

Pres. Paul made 9 announcements as follows:

100th Anniversary Scouts Jamboree (December 27, 2006 ¨C January 1, 2007) [DG Tony Wong]
Hepatitis B Anqing Immunization Day in early {1st } November 2006 [DG Tony Wong] IPDG meeting with EMB next week
Group Study Exchange (GSE) Program [PP Tenny Leung] Deadline for team leader/team members expired on 30/9/2006 (Deadline for team member extended to 15/11/2006) one month programme for self development for young professionals
District Bowling Tournament on November 12, 2006 [IPP KL Cheng]
District Horse Racing Day on December 16, 2006 [IPP KL Cheng] [organized by Rotary Club of Kwai Chung]
Our visiting to Home of Loving Faithfulness Fellowship will re-schedule to November 2006.

REMINDER
District Vocational Service Seminar on October 24, 2006 [President Wendy Mung] Marco Polo HK Hotel
Fundraising Project of RC of HK Harbour Charity Ball on 21st October 2006. RC of HK Harbour has obtained 50 free table from Regal Hotel for fundraising for Hepatitis B
Rotary Club of Kwun Tong will hold their 33rd Annual Dinner on 13th October 2006 from 19.pm to 22 pm.

Acting SAA PP John IV reported the collections for the red box at $1600.

The highlight of the meeting was a talk by PP Tim Lui. PP Tim had been a member of the investigation Committee set up by the SAR Government, under the chairmanship of PDG Moses Cheng, since 2000, and he knows the problem inside out. He suggested that members should try to read the consultative paper put out by the Government and make a response. For those of us who were not able to do so, he summarised the issue in a very clear and easy to understand way.

PP Tim told us that The HKSAR Government unveiled in July a consultation document entitled " Broadening the Tax Base, Ensuring our Future Prosperity - What's the best option for Hong Kong ? The consultation will last until 31 March 2007 after which Henry Tang will prepare a report on GST for consideration by the Third HKSAR Government. PP Tim said that although the public has been focusing on GST, the consultation goes well beyond that. It is about sustaining the well-being and prosperity of HK in the future. It is about the need for tax reform and we are in the fortunate position of able to do it in a tax neutral manner.

In brief, the proposition is to implement a GST regime at 5% on goods and services with no exemption. The threshold for mandatory GST registration has been set at HK$ 5 million and as such would only involve about 65,000 companies in HK. The GST aims to yield $ 30 billion in revenue and after various compensatory payments, the net yield is about $ 20.4 billion. Given the tax neutral starting point for the proposal, the government is asking for suggestions as to how the money could be returned to the community. In essence, the entire amount could be applied to a 5% reduction in either profits tax or salaries tax. Alternatively, it could be a combination or used to make further investments in services.

PP Tim went on to discuss some of the commonly held comments and criticism towards GST. On the issue as to why we need GST, PP Tim said that it is widely acknowledged that HK has a narrow tax base and fairly unstable sources of revenue. The situation is compounded by the fact that birth rate in HK is 0.94 per female adult and we are faced with an acute aging population. The latter factor will have a significant impact on HK as more people will be outside the salaries tax net when they reached retirement age and the Government has to incur more expenditure on providing CSSA and benefits to our senior citizens. Another reason is GST will afford the opportunity to reduce our direct taxes in order to stay competitive when compared with our neighbours. Singapore being the prime example of being able to reduce profits tax from 26% to 20% and the gap with HK has been shortened to 2.5%.

On the question of whether there are other options that could be deployed. PP TIm said that the issues were thoroughly examined by the Advisory Committee on New Broad Based Taxes back in 2002 in which he participated as a member under the Chairmanship of PDG Moses Cheng. Amongst the 13 options examined ( including capital gains tax, dividend tax, interest tax, worldwide basis of taxation etc. ), the other viable option is to reduce or eliminate the personal allowances and deductions for salaries tax purposes. A complete withdrawal in personal allowances will result in revenue yield of $40 billion but as personal allowances have traditionally been used to subsidise taxpayers taking care of children and dependent relatives, the Government is not keen to remove it completely.

The retail and tourism sectors are most vocal in terms of opposition but their fears and concerns are not backed up by international experiences. It is true to say that the retail industry generally suffered a reduction in volume following a GST implementation but let us not forget that in many countries, the consumption prior to implementation has experienced significant increases. In any case, the shopping paradise of HK will not suffer significant adverse impact as tourists can reclaim a tax refund. As for the tourism industry, the important point being how to make HK more attractive to the tourists and build on the favourable factors. To enhance our tourism industry, the need is more acute to build more scenic or tourists attractions as well as putting on interesting events. In any case, most of our tourists are coming from jurisdictions which have GST, so the idea of paying GST and claiming a refund is not foreign to them at all.

Many have suggested that the Government does not need more revenue if it is able to keep its expenditure down. This sort of comment is perhaps valid some years ago but through the ongoing efforts of controlling public expenditure, HK is down to its bare bone. The government operates an expenditure envelope system to contain the expenditure of the various bureaus and this has worked well so far. One has to remember that 70%+ of
our public expenditure relates to payroll and related benefits for the civil servants and the remaining portion relates to cost of providing services. The number of civil servants has been reduced to about 160,000 and their pay pegged back to the 1997 level already ; there is not much room left to manoeuvre. Unless we are willing to reduce the level of service which is an unlikely scenario for HK, the prospect of further cutting public expenditure is indeed limited.

On a related issue of our ability to use some of the significant balance in the Exchange Fund which stands at $1000 billion+ at the moment. In considering this point, one has to understand the component parts of the Fund. About $350 billion is to ensure the HK$-US$ peg is maintained and therefore cannot be utilised. Another $320 billion relates to the fiscal reserves and after taking out a reasonable reserve level equating to 12 months public expenditure, one is left with say $80 billion only. The remaining portion relates to the accumulated reserves and theoretically can be utilised. However, one needs to bear in mind that HK has a civil service pension of $300 billion+ and it has to be funded one way or another. In a nutshell, the available reserve might be a lot less than what some commentators make it out to be.

Lastly, PP Tim accepted that on a pure numerical basis, GST is regressive to the less well to do sector of our community. However, this point need to be balanced by the fact there are compensatory arrangements being put in place to cushion the GST effect in that sector and they might also receive a tax break on the direct tax front. Furthermore, they are likely to receive more and better services as a result. The flip side of this is that the well to do sector of the community who might not be paying any form of tax at the moment will contribute whenever they consume any goods or services. There is a little re-distribution of wealth behind this and allows the middle and sandwich class to be better off taxwise in the long run. GST could lead to more detection of the black economic activities in HK thus enabling the Inland Revenue Department to recover taxes that should have been paid in the first instance. With the additional revenue yield, the Government could plough it back to the community in many ways thus benefiting HK as a whole.

At the end of the talk, a show of hands amongst the members and guests present indicated there was a majority in support of GST - PP Tim managed to convert a few doubters after his talk !

It was a very informative and interesting talk and the audience responded with quite a few nods, and no one fell asleep. Unfortunately time was pressing and no opportunities were given for questions. Our speaker was thanked by President Paul himself. But Rtn John Yao suggested a show of hands as an indication of the Club members' stand on the issue. Nine were in favour and two were against with the rest silent.

After a toast to the Rotary Clubs of Peninsula Sunrise, HK Northeast and HKIE, the meeting was closed on 2:04pm.