The introduction of a goods and services tax (GST) is a viable option for Hong Kong to broaden its tax base and ease the budget deficit, but it does not give government a license to squander money or delay the need for a smaller, more efficient civil service.

This was the message coming out of the Chamber's June 7 seminar, held in cooperation with international accounting firm KPMG, entitled "GST: What Business Needs to Know."

If a GST were decided for Hong Kong, careful planning and education would have to start sooner rather than later if mistakes that other tax jurisdictions have made in implementing their sales tax are to be avoided.

Ayesha Macpherson, Partner, KPMG Hong Kong, predicts a 5 percent GST could be introduced in Hong Kong by March 2008. Other countries have implemented a GST more quickly -- notably Singapore and New Zealand -- but in general it takes three to four years to do so. This would fit in with Tung Chee-hwa's pledge of not introducing any new taxes during his administration. It would also be good to introduce the tax before the Legislative Council elections in September that year, she added.

Why 5 percent? Singapore, Japan and Taiwan all have a 5 percent GST, while our Southeast Asian neighbours, as well as South Korea and Australia each have a 10 percent sales tax. But Ms Macpherson also pointed out that these countries also raised their GST after implementing it. Singapore, for example, launched its GST at 3 percent in 1994. An additional 1 percent was tacked on in 2003, followed by another 1 percent rise this year to its current 5 percent.

The introduction of a goods and services tax by these governments always impacted their economies briefly. This, however, was due more to people bringing forward purchases before it came into effect -- so a surge in demand followed by a lull -- rather than actually weakening demand, David Stevens, Partner, KPMG Australia, told the audience.

"There are a lot of myths that the introduction of a GST undermines economic growth and causes recession, inflation, damages consumption expenditure, increases bankruptcies and induces poverty," he said. "But once the initial fear-factor had subsided in places that introduced a GST, it was business as usual and governments that had implement it said they all wish they had done so earlier."

If Hong Kong does decide to bring in a broad-based GST, careful study of what products and services are exempt or recoverable will have to be conducted.

Government also needs to avoid double taxation on goods and services that already pay indirect taxes, such as alcohol, hotel accommodation, vehicle registration, air passenger departure tax, etc.

But would a GST endanger Hong Kong's attraction as a shopping and dining paradise for tourists? Or worse, even deter visitors from coming here altogether? The Chamber's Chief Economist, David O'Rear, also speaking at the seminar, thinks not.

"The highest spending tourists spend on average HK$5,000 during their stay," he said. "A 5 percent GST would be equivalent to HK$150, which is the same as our airport departure tax, which the government could even decide to waive for tourists so that they wouldn't have to go through the procedure of claiming the sales tax back when they leave."

Michael Evans, Partner, KPMG Australia, pointed out that many transactions conducted under a GST have no revenue impact on businesses, because no tax is collected on business-to-business transactions. Instead, it is the end consumer that actually pays.