GST is collected at each stage of the production and distribution chain but is finally borne by end consumers, while RST is a single stage tax levied at the retail stage only when goods pass from retailers to end consumers.  RST is normally only applied to goods – but not services, which represent the greater and growing part of a modern economy's consumer spending.

As RST is levied at only one stage of the production and distribution chain, it requires detailed rules to define when a seller is a "retailer" and should be registered and levy RST on its sales.  Moreover, clear rules are required to distinguish the circumstances in which a buyer is only an intermediary, such as a wholesaler or trader, in the production chain, and should therefore be exempt from payment of RST.  From this we can see that a RST regime involves legislative and administrative complexities and is very susceptible to abuse or fraud, as RST is all collected at only one stage.  In contrast, GST, being a multi-stage tax, is self-policing and has a lower risk of revenue leakage.  

In view of GST's inherent advantages over RST, many jurisdictions, over the past two decades, have replaced their RST or similar systems with a GST.  More than 135 jurisdictions around the world have already implemented a GST.

While individual consumption would fall during economic downturns, its fluctuation would be smaller than that of revenue from real estate, business profits and salaries. We have modelled the revenue that could have been generated by the proposed GST as compared with our other major revenue sources on the basis of Hong Kong's economic situation in the past eight years. During this period, revenue from land sales fluctuated by up to 540%, Profits Tax fluctuated by 85%, stamp duties by 140% and Salaries Tax by about 50%. Assuming that a 5% GST had been implemented during this period, the revenue generated would have fluctuated by a mere 25%. Therefore, as the proposed GST would be less susceptible to economic conditions than our existing major revenue sources, it can produce a more stable revenue source for the Government.

Article 108 of the Basic Law stipulates that: "The Hong Kong Special Administrative Region shall, taking the low tax policy previously pursued in Hong Kong as reference, enact laws on its own concerning types of taxes, tax rates, tax reductions, allowances and exemptions, and other matters of taxation." The GST proposed by the Government is based on the major principles of a simple tax system with a low, single rate and is therefore not inconsistent with the requirements of the Basic Law.

No, GST would only be imposed on goods or services consumed locally. GST will not be charged on exports, re-export, and goods or services not consumed locally.

The tax that the vendor has paid for the purchase of its inputs is known as "input tax". On the other hand, the GST that is charged and collected on behalf of the Government by the vendor on its supply of goods or services is known as "output tax". Take the example of a fabric maker purchasing cotton from a raw material vendor for $500 plus $25 GST. For the fabric maker, he has paid $25 of "input tax". If the fabric maker processes the cotton into fabric and sells it to a tailor for $1,000 plus $50 GST, then the fabric maker has collected $50 of "output tax". The "input tax" and the "output tax" can be "netted off". For instance, when the fabric maker submits his GST return, he would account for the $50 output tax collected from his sale to the tailor, less the $25 input tax that he has paid on his purchase of the cotton, giving him a net GST amount of $25, which he would pay to the tax authority.

GST is a tax that is collected at each stage of the production and distribution chain and is finally borne by end consumers. A registered vendor would pay "input tax" (collected by the supplier) for the purchase of its inputs, and would charge and collect on behalf of the Government "output tax" on its supply of goods and services. Input tax and output tax can be "netted off" against each other. If a registered vendor's output tax exceeds his input tax, he has to pay the difference to the tax authority; if his input tax exceeds his output tax, he can reclaim the difference from the tax authority. The total amount of GST paid by registered vendors to the tax authority should be equal to the amount of tax finally borne by end consumers.

Assuming a 5% GST rate, the tax paid by end consumers would only be 5% of the price of the goods or services they have purchased. Although this tax involves collection on behalf of the tax authority by each registered vendor in the production and distribution chain, the registered vendors can "net off" the tax collected by them against the tax on their purchases of goods and services under the GST tax credit mechanism. So each registered vendor only has to account for the tax on the value that they have added to the goods and services. Under the GST framework, the total amount of GST paid by the registered vendors would be equal to the amount of tax finally borne by end consumers. Therefore, the tax paid by end consumers would not exceed 5%. For illustrations of how GST is collected, please refer to Chapter 4 of the Consultation Document.

International experience shows that granting exemptions to such items would complicate the tax system and increase administrative and compliance costs for business and the Government. To simplify the work involved, ensure a secure, steady and simple tax base, and to achieve equity, the coverage of GST proposed in the Consultation Document is very broad, including transport, food, medical services, education and the majority of other household expenditure items.

If we were to exempt or zero rate these household expenditure items, we would benefit high-income more than low-income families because high-income families usually spend more on these items (For details, please refer to Box 3 and Box 4 on pages 39 to 41 in Chapter 5 of the Consultation Document). To relieve the impact on low-income families, the Government has proposed to implement, upon introduction of GST, a series of tax relief and direct offset measures for the most vulnerable groups in particular. Such measures include providing an upfront supplement to CSSA households, providing non-CSSA low-income households with a cash allowance of $2,000 a year and annual GST credits of $500 against water and sewage charges and $3,000 against Rates (For details, please refer to Chapter 6 of the Consultation Document).

During the consultation, many people proposed that the Government should exempt basic necessities items from GST in order to minimize the impact of GST on the low-income families. We have promised to study this issue.

The registration threshold is the level that determines whether a business is required to register for GST or not. We propose setting the threshold at an annual turnover (not profits) of $5 million or above. That means GST registration would be mandatory for those businesses with a turnover exceeding $5 million and would be optional for those with a turnover below the registration threshold. Businesses that are not registered would be excluded from GST compliance obligations, but they would not be entitled to reclaim input taxes that they might have paid on their purchases.

At present, there are around 750 000 businesses on the Business Register of Hong Kong. Of these, 65 000 businesses have an annual turnover of $5 million or above. A $5 million registration threshold would be high by international standards. The purpose of setting a high registration threshold is to exclude most small and medium-sized businesses from the proposed GST system and therefore exclude them from GST compliance obligations.

Unregistered businesses would not be required to levy or collect GST in respect of the goods and services they provide, but they could not reclaim any GST they might have paid on their purchases. Thus, large businesses would not necessarily split their businesses to avoid registration.

The GST system proposed by the Government is simple, and the tax base is broad with few exemptions. According to overseas experience, the Government estimates that the compliance costs for businesses could be maintained at a low level. According to a survey conducted in Singapore in 1996, the compliance costs for businesses represent less than 0.01% of turnover for large businesses or an average of S$1,000 a year per registrant. In addition, a one-off set-up assistance for the purchase of GST-related IT equipment and software would be provided to small and medium-sized businesses that voluntarily register for GST.

As the proposed GST registration threshold is set at an annual turnover of $5 million, many small and medium-sized businesses would be exempt from registration and hence not required to bear the compliance costs. As businesses that are not registered would not be entitled to reclaim input taxes that they might have paid on their purchases, their costs would increase. However, they might offset the increase in costs arising from the GST by adjusting their sales prices. Since only the GST that has been paid on their purchases would be taken into account in any increase in their sales prices, it is expected that the increase in sales prices would be lower than the GST rate.

To avoid distortions in the market operation of individual businesses, we would propose to adjust some existing indirect taxes if we decide to introduce GST. Our principle is to avoid "tax-on-tax" and not to increase the total taxation on those products currently subject to high levels of indirect tax.

The Consultation Document sets out some proposed indirect tax adjustments, including the abolition of Hotel Accommodation Tax and the downward adjustments of Motor Vehicle First Registration Tax, duty on liquor, petrol, diesel, aircraft fuel and methyl alcohol. For details, please refer to page 73, Chapter 7.

While the Government has not finalised the associated administrative procedures for the introduction of GST, the proposed GST system is simple, and the Government would also ensure the administrative procedures be simple and convenient.

Currently, our indirect taxes on certain goods like liquor, petrol, diesel and aircraft fuel are already quite high. We propose to lower the indirect taxes on these goods accordingly upon the introduction of GST so as to avoid pushing up their prices further, thus maintaining the competitiveness of these products. International experience also shows that certain existing taxes would be adjusted upon the introduction of GST.

In considering the treatment of immovable property, we have taken into account the practices of other economies in the region and the recommendations of the International Monetary Fund Mission. In this respect, we consider that we should tax non-residential property (both sales and rentals) and exempt residential property (both sales and rentals). The merit of exempting residential property is that it would be simple and certain. An added advantage is that we would not need to formulate complex special rules to cover the transitional period in the light of Hong Kong's unique property transfer system. This approach would also ensure that the introduction of GST would not have a major impact on home buyers.

International experience shows that the administrative cost of collecting GST would be about 1% to 2% of the net GST revenue. However, as there is no infrastructure to collect GST in Hong Kong, the administrative cost for installing and operating the new system would come closer to 2% in the first few years. According to the findings of a study conducted by the Government, each percentage point of the GST rate would yield approximately $6 billion in revenue a year. If a single rate of 5% is set, the gross revenue of GST would be approximately $30 billion, and with very few exemptions (which could reduce the administrative cost), the administrative cost is estimated at about $500 million a year.

We have assumed that the GST rate to be 5% to facilitate the illustration of how the tax would operate and the associated GST impacts in the Consultation Document. While there is no predetermined view on the GST rate, we consider that it should be set at a low level. The International Monetary Fund has also recommended that the GST rate should be in the range of 3% to 5%, as a rate below 3% would not be cost-effective.

As Hong Kong's current economic circumstances are positive and the Government's finances are in a much healthier position (with both our Operating and Consolidated Accounts currently in surplus), now is a good time to consider a reform to our tax system without the pressure to generate additional revenue. The Government has pledged that all key elements of the tax reform, once finalised and introduced, would be unchanged for at least the first five years. As the Government's timeframe for medium-term forecast is five years for public finance management purposes, five years have been used as a reference point. This is the minimum pledge that the Government has made, and it does not mean that there would be changes immediately after five years.

According to overseas experience, it is not true that GST rates would always increase and have never been reduced. For instance, there have been reductions in the GST rates of some countries in the last five years, including the Czech Republic (reduced from 22% to 19%), Hungary (reduced from 25% to 20%), Romania (reduced from 22% to 19%) and Canada (reduced from 7% to 6%).

In Hong Kong, the Government must observe Article 108 of the Basic Law to ensure Hong Kong maintains a low-tax policy. As the proposed GST has a broad tax base, we can maintain the GST rate at a low level. Moreover, Article 73 of the Basic Law stipulates that one of the Legislative Council's powers is "to approve taxation and public expenditure". Therefore, the Legislative Council has the authority to reject any proposals of the Government to increase the GST rate. Any adjustments to tax rates must be implemented under reasonable and justifiable circumstances, and any such proposals must be debated and approved by the Legislative Council.

In designing the offset package for households, we have identified three proposed target groups. "Non-CSSA low-income households" refer to those households who would be provided with the offset package proposed for Group 2 households, while "non-taxpaying lower-middle-income households" refer to those households who would be provided with the proposed across-the-board measures for Group 3 households. However, we have not reached any conclusion on how Group 2 households should be defined. In the Consultation Document, we have assumed Group 2 households to be those with household income within the lowest 20% in the community and not in receipt of CSSA.

The Group 2 households mentioned in the Consultation Document are those households not drawing CSSA, but with income within the lowest 20% income households in Hong Kong. According to the data obtained from the Household Expenditure Survey, the Group 2 households include approximately 400 000 households with monthly income of less than $11,000. The Government would grant these households an annual cash allowance of $2,000. Since we do not have a database to identify this group, we intend to adopt a self-identification system whereby households belonging to this group would have to apply to the Government. Applications would then be assessed against a set of objective criteria. At the present stage, we have not yet decided on how to identify this group of low-income households that need additional assistance.

Based on our calculation, if the proposed GST framework with a rate of 5% is implemented, the expenses of low-income households with a monthly income below $11,000 would increase by approximately $3,144 a year. In addition to the proposed direct cash allowance of $2,000, we propose to provide these households with an annual GST credit of $3,000 against Rates and an annual GST credit of $500 against water and sewage charges. In other words, the households in this group could receive up to $5,500 compensation a year. This should result in these households being no worse-off following the proposed implementation of the GST package.

Based on our calculation, each low-income household would incur approximately $1,200 in Rates payment a year, and approximately $200 in water and sewage charges a year. We are aware that many low-income households could not fully avail themselves of the benefits from the annual GST credit of $3,000 against Rates and the annual GST credit of $500 against water and sewage charges. We therefore propose to also provide these households with a direct cash allowance of $2,000 a year.

During the consultation, some citizens proposed that the amount of direct cash allowance be increased to ensure the standard of living of low-income families would not be affected by GST. We have promised to study this issue.

The purpose of formulating the proposed offset package on the basis of household needs, rather than household size, is to streamline the application and approval procedures so as to raise efficiency.

Our rationale in designing the offset package is to ensure that assistance would be given to all those in need. As for retirees, they would also be provided with relief according to the proposed household groups they belong to.

It is estimated that approximately $20 billion would remain per year after all administrative cost and the cost of providing the proposed compensation measures to household, business and charities have been met. It would be returned to the community during the first five years after introduction of GST though we have not yet decided on how to do so. We could use the remaining funds to reduce direct taxes, like Salaries Tax and Profits Tax. We could also use the remaining funds to increase expenditure on specific public services. We are open-minded about the ways to return the revenue to the public.

Adopting a low-rate, simple and broad-based GST is the best way to introduce GST in Hong Kong. Granting any exemption or special treatment to a particular sector or to goods and services providers in a particular sector would not only complicate the GST system, but also make it difficult for the Government to turn down requests from other services or providers for special treatment. Moreover, granting an across-the-board exemption cannot ensure that the precious resources would be used to meet the needs of the most vulnerable families. During the consultation, some people proposed that school education be exempted from GST. We have promised to study this issue.

As stated in the Consultation Document, spending on education would not be exempted from the proposed GST because most of the community can benefit from the nine-year free education and the heavily subsidised senior and university education provided by the Government. If we were to exempt all educational services, we would benefit high-income families more than low-income families because students of private schools normally come from high-income families. Moreover, we believe that there should be as few exemptions as possible in order to broaden the tax base and ensure a simple tax system.

As a school would be considered to be a "taxable person", those schools with an annual turnover (excluding grants from the Government) of $5 million and above have to register and collect GST, no matter the nature of their operation (e.g. private, government, aided or Direct Subsidy Scheme). Once registered, these schools would be entitled to reclaim input taxes that might have been paid on their purchases. Registration would be optional for those schools with a turnover below the proposed registration threshold of $5 million.

For the purpose of GST, "charities" refer to those organisations granted tax exemption under section 88 of the Inland Revenue Ordinance. Given the unique role of charities, the Government proposes that all charities can register for GST regardless of whether they are undertaking any commercial activities. By doing so, registered charities would be able to reclaim input tax, thereby avoiding increased operating costs as a result of the introduction of GST.

If registered charities undertake commercial activities, they would be subject to GST, and would have to collect GST on the taxable goods and services they provide.

Receipts in the form of donations, gifts and government subventions would not be subject to GST.

The price of consumer goods would increase marginally following the introduction of a low-rate GST. However, the price increase would only be on a one-off basis. Furthermore, the proposed abolition of Hotel Accommodation Tax and the proposed reductions in excise duties on liquor, petrol, diesel and aircraft fuel could partially offset the effect that GST may have on prices and could benefit the tourism and other associated service industries. Moreover, tourists could take advantage of the Tourist Refund Scheme to claim a refund of GST for goods purchased in Hong Kong and subsequently taken out. It is therefore expected that the impact of GST on the tourism and associated service industries would not be significant.

We propose to set the threshold for tourist refunds at HK$1,500 after having taken into account the administrative costs involved and the need to maintain the competitiveness of Hong Kong's tourism. In determining the threshold, we have made reference to levels currently adopted in other region, e.g. the threshold of about HK$1,650 adopted by Australia. We have also considered that the per capita spending of an overnight visitor to Hong Kong on "shopping" in 2005 was about HK$2,500. We believe that each tourist's spending on shopping should easily reach the threshold of HK$1,500.

As the proposed threshold could enable Hong Kong to maintain its competitiveness in the region and ensure refunds for most tourists, it is expected that the impact of GST on tourism would not be significant.

We propose that to be eligible for the GST refund, the aggregate value of the goods purchased in a shop would have to meet the proposed threshold for a tourist refund, which would be no less than $1,500. Multiple purchases from the same shop (including different outlets of the same retailer) could be aggregated, but purchases made at different shops could not be aggregated to meet the threshold level.

Not necessarily. According to Australia's experience, the "sealed bag" scheme will be subsidised by the participating retailers because they realise the benefits of implementing such a scheme for the customers. The Government would work closely with the trade on the detailed arrangements for the Tourist Refund Scheme so as to ensure that the scheme is convenient and cost-effective to tourists.

Under the proposed GST framework, individual incoming travellers must declare to Customs their goods with value exceeding the threshold allowance (proposed to be $3,000). Customs would apply the risk management principle in the clearance of inbound visitors under the existing Red & Green Channel System. In case of false declaration, Customs would impose fines or take prosecution actions.

Given the much higher time and transport costs involved in travelling to other parts of the Mainland, purchasing daily necessities of Hong Kong residents in Shenzhen would be the most relevant in the context of the GST impact.

According to a survey conducted by the Census and Statistics Department in 2005, the total consumption expenditure in respect of personal travel in non-package tour mode to Shenzhen by Hong Kong residents was about $6.6 billion, which was equivalent to about 0.8% of the total consumption expenditure by Hong Kong residents in that year. Most of Hong Kong residents' spendings in Shenzhen were on meals, entertainment and other services while shopping accounted for only around 15-20%.

Though it is expected that the imposition of GST would push up the retail prices of most expenditure items, it would be a one-off increase and be expected to dissipate quickly. Assuming a GST rate of 5%, our modelling reveals that the Composite Consumer Price Index would rise by only around 3% immediately after GST introduction. Businesses registered for GST would increase the price of their goods and services but not higher than the GST rate. Unregistered businesses would not be required to levy or collect GST in respect of the goods and services they provide.

Given that there would be a relatively slight increase in local prices and that our retail industry has the advantage of being reputed as selling genuine goods at fair and clearly marked prices, the Government believes that impact of the GST on the business volume of the local retail trade would not be significant.

The Government proposes that all prices be GST-inclusive. That means the quoted, advertised or printed prices would include GST. This would avoid confusion for consumers.

GST is ultimately borne by end consumers. Registered vendors only collect the tax on behalf of the Government throughout the production and distribution chain. The prices of goods and services would be dependent on the market conditions in which the relevant business is conducted.

Registered businesses might also be able to enjoy a small cashflow advantage by holding their GST receipts prior to remitting them to the tax authority. In some cases, the cashflow advantage might outweigh the compliance costs. Further, if other indirect taxes (such as duty on liquor, petrol and diesel) are adjusted downwards because of GST introduction, the cost of registered businesses purchasing these products would be lower.

Besides, any possible reductions in Profits Tax would definitely increase the overall profitability of businesses. Therefore, GST introduction should not have an adverse effect on business profits.

In respect of the retail industry, based on our assessment, the introduction of GST could have moderate short-term effects in changing the pattern of consumer spending, particularly during the initial stages. Based on overseas experience, consumers might bring forward some discretionary purchases of goods and services that could be expected to increase in price. Thus, in the short term, after an initial increase in spending immediately prior to GST commencement, there could be a drop in private consumption demand as a result of perceived and actual price changes resulting from GST introduction. However, the impact on the overall level of consumer spending would likely be small.

The Government does not intend to exempt commercial premises as this would mean that the input tax paid on the costs for the construction and maintenance of this type of premises would not be eligible for input tax credit relief, thus increasing the cost of doing business for those who purchase or rent this type of premises. The Government also does not support a zero-rating approach for commercial premises as this is against the nature of a simple broad-based GST. Moreover, the proposal to tax commercial premises is completely in line with the common international practices and is recommended in the study on the implementation of a GST in Hong Kong conducted by the International Monetary Fund.

The Government proposes that export and re-export of goods be zero rated, i.e. no GST (output tax) would be chargeable on the goods, but GST-registered exporters could, when submitting GST returns, reclaim the GST (input tax) paid on their purchases. Goods passing in transit or on transshipment through Hong Kong would not be chargeable to GST.

For the sake of facilitating trade and maintaining the competitiveness of Hong Kong, the Government has proposed that export and re-export of goods be zero rated. Ancillary and supporting services that are related to exports would also be listed as zero-rated items. Moreover, the Government has proposed a number of cash flow relief schemes for importers, including a Deferred GST Payment Scheme, bonded warehouses, and a Qualifying Exporters Scheme. The reduction of other taxes would also benefit the affected importers, exporters, and re-exporters.

The introduction of GST would not substantially increase the demand for bonded warehouses by importers. As importers who have registered for GST could reclaim the tax paid on imported goods ("input tax"), they would not need to store their imported goods in bonded warehouses. In addition, they could choose to join the Deferred GST Payment Scheme or Qualifying Exporters Scheme to defer or suspend the GST payment for imported goods. Only importers who are not GST-registered and have not joined the above-mentioned schemes might require bond facilities for temporary storage of their GST payable goods pending re-export.

To ensure Hong Kong's competitiveness as a major international financial centre and having regard to the complexity of the charging mode of financial products, it is proposed that certain financial services defined as "financial supplies" be zero rated. Financial services that do not fall within the defined scope of "financial supplies" would be taxable. Items of financial services preliminarily proposed to be zero rated are set out in Box 7 of page 49 of the Consultation Document. Since trading in shares falls within the proposed scope of "financial supplies", it would not be chargeable to GST. However, we would decide on whether brokerage commissions derived from trading in shares should be taxable after consultation with the trade.

Insurance is one of the items covered by the proposed scope of zero-rated "financial supplies". However, the detailed scope of insurance that would be subject to zero-rating treatment would be drawn up with the trade to ensure practicability and avoid abuse.

Interest on bank deposits falls within the proposed scope of "financial supplies", and therefore would not be chargeable to GST.

Although GST would lead to a rise in the cost of raw materials, we expect that the increase should be moderate. Moreover, through the GST tax credit mechanism, registered businesses are entitled to reclaim from the IRD the "input tax" paid on raw materials. Therefore, registered businesses are actually not required to bear the cost of GST for the raw materials purchased.

The proposed GST would only be imposed on local consumption, and goods re-exported or exported after being processed in Hong Kong would be zero rated. Therefore, GST would not have any negative impacts on local processing industries.

Manufacturers are required to pay GST upon importation of semi-manufactured goods. However, registered manufacturers are entitled to reclaim the "input taxes" paid on their imports (and their expenditure costs) through the GST tax credit mechanism. Hence, the actual costs should not be driven up by GST. Notwithstanding this, we understand that some manufacturers might face cashflow problems. We therefore propose implementing some special schemes such as the Deferred GST Payment Scheme and Qualifying Exporters Scheme to allow deferral or suspension of GST payment on imports.

Assuming a 5% GST rate is set, the cost of living of a low-income household (with a monthly income below $11,000) may increase by approximately $3,144 a year. The Government has proposed to provide low-income households with relief measures annually, including a direct cash GST allowance of $2,000, a GST credit of $500 for water and sewage charges and a GST credit of $3,000 for Rates, which would be enough to offset the GST impact. Therefore, the introduction of GST would not increase the financial burden of low-income people and drive up the number of CSSA application.

The measurement of fairness should not be restricted to any single factor. We should take into consideration the interaction of all relevant factors with the tax system, as well as public finances and allocation of resources.

GST is a fair tax according to the "capacity to pay" principle. GST is applied on consumption; hence, in general, the more income one earns the more money one spends and then the more tax one pays. As such, this tax is still in line with the principle of affordability.

The Government also appreciates that GST would have implications for the low-income households and has therefore proposed a series of measures for relieving the likely impact of GST on these households.

This is because some businesses with annual turnover below the registration threshold need not register for GST. Consumers purchasing goods or services from these businesses would not be liable for GST. If a 5% GST is introduced, it is expected that, on the whole, the rise in the inflation rate as a result of GST would be lower than the GST rate. According to our projection, the rise in the inflation rate as a result of GST would only be around 3% on top of the underlying prevailing inflation rate at the time.

We have to understand that the proposed tax reform is aimed at broadening the tax base and provision of a stable revenue source for the Government to tackle long-term development but not increasing revenue. Therefore, the additional revenue thus generated by tax reform would be used to provide tax relief, offset measures and to improve the quality of public services. In parallel, the Government will continue its efforts to ensure the efficiency of public services and effective allocation of resources.

Furthermore, the Government has all along strictly maintained the principle of managing our public finances prudently. It is the Government's policy to control the proportion of public expenditure to 20% or below of GDP. More importantly, the Government must comply with Article 107 of the Basic Law in managing public finances, i.e. to "follow the principle of keeping the expenditure within the limits of revenues in drawing up its budget, and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of its gross domestic product." Moreover, Government financial arrangement should be examined and approved by the Legislative Council. The mechanism to monitor resources allocation by the Legislative Council is sufficient to ensure that the Government financial arrangement is appropriate. Therefore, even with the substantial increase in government revenue after the introduction of GST, there would not be a significant increase in expenditure.

This tax has been implemented in more than 135 jurisdictions around the world. Although we have no predetermined view, the Government would ensure that the GST rate would be kept at a low level. Moreover, after the introduction of GST, there would be a wider scope for reducing income tax rate, which would enhance our ability to attract capital and talent. All in all, the introduction of GST is conducive to Hong Kong's competitiveness.

The Government has no intention to change our simple and low-rate tax system. The proposed low and single-rate GST would be a simple tax as it would have very few exemptions and a high turnover threshold for registration by businesses. Currently, there are around 750 000 businesses on our Business Register. Of these, only 65 000 businesses have an annual turnover of $5 million or above; hence, most small and medium-sized businesses would not be required to register.