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The Government controls its finances through a series of fund accounts.
The General Revenue Account is the main account for day-to-day departmental
expenditure and revenue collection. There are eight other funds established
by resolutions of the Legislative Council for specific purposes such as
to finance capital works expenditure or government loans and investments.
They are the Capital Works Reserve Fund, Capital Investment Fund, Civil
Service Pension Reserve Fund, Disaster Relief Fund, Innovation and Technology
Fund, Land Fund, Loan Fund and Lotteries Fund.
The Capital Works Reserve Fund finances the public
works programme, land acquisitions, capital subventions, major systems
and equipment items, computerisation and the payment of redemption money
in respect of land exchange entitlements. Its income is derived mainly
from land premia and appropriation from the General Revenue Account.
The Capital Investment Fund finances the Government's
capital investments, such as equity injections in the Airport Authority,
the Kowloon-Canton Railway Corporation and the MTR Corporation Limited,
and capital investments in the Hong Kong Housing Authority and the Urban
Renewal Authority. Its income is derived mainly from appropriation from
the General Revenue Account and dividends.
The Civil Service Pension Reserve Fund acts as a reserve
to meet payment of civil service pensions in the unlikely event that the
Government cannot meet such liabilities from the General Revenue Account.
Its income is derived from appropriation from the General Revenue Account
and investment income.
The Disaster Relief Fund finances grants for humanitarian
aid in relief of disasters that occur outside Hong Kong. Its income is
derived mainly from appropriation from the General Revenue Account.
The Innovation and Technology Fund finances projects
that contribute to innovation and technology upgrading in the manufacturing
and service industries, as well as those that contribute to the upgrading
and development of the manufacturing and service industries. Its income
is derived mainly from investment income.
The Land Fund was established on July 1, 1997 to enable
the investments held by the former Trustees of the HKSAR Government Land
Fund to be formally brought into the Government's account. Its income
is derived from investment income.
The Loan Fund finances loan schemes such as housing
loans and student loans. Its income is derived mainly from loan repayments
and interest.
The Lotteries Fund finances welfare services through
grants and loans. Its income is derived mainly from the sharing of the
proceeds of the popular Mark Six lotteries.
The principles underlying the Government's management of the public
finance are set out in the Basic Law: to keep expenditure within the limits
of revenues in drawing up the budget, to strive to achieve a fiscal balance,
to avoid deficits and to keep the budget commensurate with the growth
rate of its gross domestic product. The Budget presented by the Financial
Secretary to the legislature each year is developed against the background
of a medium-range forecast to ensure that full regard is given to the
longer-term trends in the economy.
In accounting terms, public expenditure is taken to include government
expenditure from the General Revenue Account and the other funds except
loans and investment from the Capital Investment Fund, plus expenditure
by the Housing Authority, the Lotteries Fund and government trading funds.
Government grants and subventions to institutions in the private or quasi-private
sectors are included, but not spending by organisations in which the Government
has only an equity stake (such as the MTR Corporation Limited, the Kowloon-Canton
Railway Corporation and the Airport Authority). Similarly, loans and equity
injections by the Capital Investment Fund are excluded as they do not
reflect the actual consumption of resources by the Government.
The Housing Authority, operating through the Housing
Department, is financially autonomous. The Government provides the Authority
with capital and land on concessionary terms to finance housing loans
to eligible families and to build public housing for rent and for sale.
However, as part of the measures to stabilise the property market, the
Government announced in November 2002 that the production and sale of
subsidised Home Ownership Scheme flats would cease indefinitely from 2003
onwards.
A trading fund is an accounting entity enabling a
department to provide services on a commercial or quasi-commercial basis.
Unlike a vote-funded department, departments operating on a trading fund
are allowed to retain revenue generated to meet its expenditure and to
finance future expansion.
Public expenditure in 2002-03 totalled $263.5 billion. The Government
itself accounted for $236.2 billion. The growth rate over the preceding
year was 2.2 per cent in nominal terms or 0.2 per cent in real terms.
Some $51.8 billion, or 19.7 per cent of the public expenditure in 2002-03,
was of a capital nature. An analysis of expenditure by function is at
Appendix 6, Table 6. The growth rate of public expenditure is compared
with the rate of economic growth at Table 7.
Total government revenue in 2002-03 amounted to $177.5
billion. The consolidated cash deficit for the year was $61.7 billion.
Details of revenue by source and of expenditure by component for 2002-03
and 2003-04 (Revised Estimate) are at Table 8.
The Government's consolidated account recorded a deficit
of $61.7 billion in 2002-03. The accumulated balances at the end of 2002-03
stood at $311.4 billion. These balances form the Government's fiscal reserves
and are available to meet any calls on its contingent liabilities and
enable it to cope with any short-term fluctuations in expenditure relative
to revenue.
Hong Kong's tax system is simple and relatively inexpensive to administer.
Tax rates are low, and the Government accords a high priority to curbing
tax evasion and minimising opportunities for tax avoidance. The major
sources of revenue are profits tax (22 per cent) and salaries tax (19
per cent). Other significant sources include revenue from investment returns
(7 per cent), utilities, fees and charges for services provided by the
Government (7 per cent), land transactions (6 per cent), betting duty
(6 per cent), rates (5 per cent), stamp duties (4 per cent) and duties
on dutiable commodities (4 per cent). (For major sources of revenue,
see Appendix 6, Chart 2)
The Inland Revenue Department collects about 52 per
cent of total revenue, including profits tax, salaries tax, property tax,
stamp duty, betting duty, estate duty and hotel accommodation tax. Profits,
salaries and property taxes, which together accounted for about 39 per
cent of total revenue in 2002-03, are levied under the Inland Revenue
Ordinance. Persons liable to these taxes may be assessed on three separate
and distinct sources of income: business profits, salaries and income
from property.
Profits tax is charged only on net profits arising
in or derived from Hong Kong, from a trade, profession or business carried
on in Hong Kong. In 2002-03, profits of unincorporated businesses were
taxed at 15 per cent and profits of corporations at 16 per cent. The respective
rates for 2003-04 are 15.5 per cent and 17.5 per cent. For 2004-05, profits
of unincorporated business will be taxed at 16 per cent while that of
corporations will remain at 17.5 per cent.
Profits tax is paid initially on the basis of profits
made in the year preceding the year of assessment and is subsequently
adjusted according to profits actually made in the assessment year. Generally,
all expenses incurred in the production of assessable profits are deductible.
There is no withholding tax on dividends paid by corporations. Interest
income, other than that received by financial institutions, and dividends
received from corporations are exempt from profits tax. In 2002-03, the
Government received about $38.8 billion in profits tax, or about 22 per
cent of total revenue.
Salaries tax is charged on emoluments arising in,
or derived from, Hong Kong. The basis of assessment and method of payment
(including provisional payments) are similar to the system for profits
tax. Tax payable in 2002-03 was calculated on a sliding scale that progressed
from 2 per cent, 7 per cent and 12 per cent on the first, second and third
segments of net income (that is, income after deduction of allowances)
of $35,000 each, respectively, and then to 17 per cent on the remaining
net income. No one, however, needed to pay more than the standard rate
of 15 per cent of his or her total income. The respective rates for 2003-04
are 2 per cent, 7.5 per cent, 13 per cent and 18.5 per cent with segments
of $32,500 each and a standard rate of 15.5 per cent. For 2004-05, the
respective rates will be 2 per cent, 8 per cent, 14 per cent and 20 per
cent with segments of $30,000 each and a standard rate of 16 per cent.
The earnings of husbands and wives are reported and assessed separately.
However, where either spouse has allowances that exceed his or her income,
or when separate assessments would result in an increase in salaries tax
payable by the couple, they may elect to be assessed jointly. Salaries
tax contributed some $29.7 billion, or about 17 per cent of total revenue,
in 2002-03. Owing to generous personal allowances under Hong Kong tax
law, only 37 per cent of the workforce had to pay salaries tax.
As part of a package of relief measures to help the
community tide over the difficulties due to the outbreak of SARS and revive
the economy, a 50 per cent rebate of 2001-02 final tax on salaries tax
and personal assessment, subject to $3,000 per case, was made in July
2003. The rebate cost approximately $2.3 billion with around 1.3 million
taxpayers benefiting from it.
Owners of land or buildings in Hong Kong were charged
property tax in 2002-03 at the standard rate of 15 per cent of the actual
rent received, less an allowance of 20 per cent for repairs and maintenance.
The standard rates for 2003-04 and 2004-05 are 15.5 per cent and 16 per
cent respectively. There is a system of provisional payment of tax similar
to that for profits tax and salaries tax. Property owned by a corporation
carrying on a business in Hong Kong is exempt from property tax (but profits
derived from ownership are chargeable to profits tax). Receipts from property
tax accounted for about 1 per cent of total revenue, or about $1.2 billion
in 2002-03. The Stamp Duty Ordinance imposes fixed and ad valorem duties
on different classes of documents relating to assignments of immovable
property, leases and share transfers. The revenue from stamp duties accounted
for about 4 per cent of total revenue, or about $7.5 billion, in 2002-03.
A duty is imposed on bets on horse racing administered
by the Hong Kong Jockey Club, on proceeds of Mark Six lotteries and on
gross profits of the Hong Kong Jockey Club's football betting operation
— the only legal forms of betting in Hong Kong. The rate of duty
on betting proceeds from horse racing was 12 per cent on standard bets
and 19 per cent on exotic bets in 2002-03. The rate on exotic bets was
increased to 20 per cent with effect from August 1, 2003. The duty on
football betting, which was introduced on August 1, 2003, is charged at
a rate of 50 per cent of gross profits. The yield from betting duty in
2002-03 totalled some $10.9 billion, and accounted for about 6 per cent
of total revenue.
In 2002-03, estate duty was imposed on estates valued
at over $7.5 million, at levels ranging from 5 per cent to a maximum of
15 per cent, while a hotel accommodation tax of 3 per cent was imposed
on expenditure on accommodation by guests in hotels and guesthouses.
Under the Dutiable Commodities Ordinance, duties
are levied on only four types of commodities — hydrocarbon oil,
alcoholic beverages, other alcohol products (i.e. methyl and ethyl alcohol)
and tobacco products, both locally manufactured and imported. The Customs
and Excise Department is responsible for collecting these duties. In 2002-03,
the department collected duties worth $6.6 billion or about 4 per cent
of total revenue.
The Rating and Valuation Department is responsible
for the billing and collection of rates, which are levied on landed properties
at a specified percentage of their rateable value. For the 2003-04 financial
year, the rates charge is 5 per cent.
The rateable value of a property is an estimate of
its annual rent in the open market as at a designated date. In order to
better reflect prevailing market rents, revaluation of rateable values
is now conducted on an annual basis. The current Valuation List took effect
on April 1, 2003 with rateable values reflecting rental values at October
1, 2002. The Valuation List as at March 31, 2003 contained about 2 089
000 assessments. In 2002-03, the revenue from rates was $8.9 billion,
accounting for about 5 per cent of total revenue.
A one-off concession was granted to all ratepayers
as a relief measure to help the community tide over the difficulties due
to the outbreak of SARS. The concession was equivalent to the actual rates
payable for the July to September 2003 quarter, subject to a ceiling of
$5,000 for each non-domestic property or $1,250 in the case of domestic
property. About 90 per cent of ratepayers were not required to pay any
rates in the July to September 2003 quarter, while the remaining 10 per
cent of ratepayers had their rates bills reduced by the full concession
amount of $5,000 or $1,250, as the case might be. The concession produced
a total saving of $2 billion for ratepayers.
The Rating and Valuation Department is also responsible
for the billing and collection of government rent which is payable from
July 1, 1997 for land leases granted on or after May 27, 1985, and on
the extension of non-renewable land leases. The latter group comprises
all land leases in the New Territories and New Kowloon north of Boundary
Street which were renewed on June 28, 1997. Government rent is levied
at 3 per cent of the rateable value of the lot and is adjusted in step
with any subsequent changes in the rateable value. There were about 1
535 000 assessments in the Government Rent Roll as at March 31, 2003.
The total government rent collected in 2002-03 was $4.3 billion.
The Government derives significant amounts of revenue
from other sources. Fees and charges for services provided by government
departments generated about $9.7 billion, or about 6 per cent of total
revenue, in 2002-03. It is government policy that fees should in general
be set at levels sufficient to recover the full cost of providing the
services. Certain essential services are, however, subsidised by the Government
or provided free of charge. Government-operated public utilities generated
about $2.1 billion which accounted for about 1 per cent of the total revenue;
the most important of these, in revenue terms, is water charges. The Government
has frozen most government fees and charges since February 1998 to ease
the burden on the community at a time of economic setback. Owing to the
outbreak of SARS, the Government announced a package of relief measures
in April to help the community tide over the difficulties and revive the
economy. As part of the package of relief measures, the Government provided
some one-off concessions by reducing water and sewage charges and trade
effluent surcharge for a four-month billing period and waiving certain
licensing fees for a maximum of one year. In addition, the Government
announced that it would not propose any further upward adjustment to fees
and charges until the end of October 2003. All these concessions produced
total savings of $0.8 billion for households and businesses.
Also, in 2002-03, the Government collected $17.6 billion,
amounting to about 9.9 per cent of the total revenue, from investments
and interest income on the fiscal reserves.
Lastly, some $11.5 billion, or about 6.5 per cent
of the total revenue in 2002-03, was generated from land transactions.
All revenue from land transactions is credited to the Capital Works Reserve
Fund to help finance the Public Works Programme.
The Government has identified two major problems besetting the public
revenue. First, the tax base is narrow. Only about 37 per cent of the
workforce pay tax on their salaries. Among them, only 100 000 contribute
about 60 per cent of the salaries tax. Similarly, as few as 500 corporations,
only about 1 per cent of the total number of profit-making corporation,
contribute 60 per cent of the profits tax.
The second problem is the stability of the revenue.
Many of the existing taxes are easily affected by the ups and downs of
the economy. Owing to the economic downturn and deflation brought about
by the financial crisis and the slump in the property market, the recurrent
revenue has dropped from $201.6 billion in 1997-98 to an estimated $149.2
billion in 2003-04, representing a decrease of $52.4 billion or 26 per
cent. Hence it is necessary to explore stable and broad-based revenue
sources in the long term to improve the Government's revenue structure,
thereby laying down a solid foundation for the public finances. In this
connection, a broad-based Goods and Services Tax (GST) is considered to
be a reasonable and equitable way of smoothing out bumps in the revenue
stream. However, the Government is not contemplating the introduction
of a GST in a deflationary environment. This would only be levied against
the backdrop of a healthy and growing economy. An internal committee has
been set up to study the feasibility of a GST.
The Government Logistics Department was established on July 1, 2003
upon merging of the then Government Supplies Department, Government Land
Transport Agency and Printing Department.
Purchases of goods and related services required by
government departments are undertaken centrally by the Government Logistics
Department. These goods and related services are normally obtained by
competitive tendering, without giving preference to any particular source
of supply, to ensure that users' needs are met at the best possible price,
having regard to life-time cost and reliability of supply. Helping users
to derive the best value in their purchases, the department formulates
a specific strategy for each type of purchase based on market conditions,
focusing on meeting requirements for high-value and critical items by
cost-effective and reliable means.
'Hong Kong, China' is a signatory to the World Trade
Organisation Agreement on Government Procurement (WTO GPA). Government
procurement is undertaken in accordance with the principles of openness,
transparency, fairness and non-discrimination. Public tender procedures
are widely used for general and common items. Restricted or single tender
procedures are used where open competitive tendering would not be an effective
means such as in cases involving compatibility with existing equipment,
or patented/proprietary items, or unforeseen urgency. For complex and
critical purchases, suppliers may be required to undergo a prequalification
exercise before tendering to ensure that they are capable in terms of
financial and technical standing and reliability in performance. To facilitate
sourcing and market research, the department maintains and regularly updates
the Supplier Lists which comprise local and overseas suppliers for different
categories of commodities and services.
Invitations for public and prequalification tenders
are published in the Government of the Hong Kong Special Administrative
Region Gazette and local newspapers. Firms on the department's Supplier
Lists and in the case of procurements covered by WTO GPA, consulates and
overseas trade commissions, are also informed. To allow easy access by
suppliers outside Hong Kong, the department also puts its tender invitations
and related information on the Internet. The Electronic Tendering System,
which was introduced in April 2000 and enabled subscribers to download
tender documents and to submit tender offers by electronic means, has
been running smoothly with the number of subscribers rising steadily.
In 2003, the department awarded contracts at a total
value of $7.35 billion, purchasing items from 35 different territories.
Major items of purchase included computer equipment and software, pharmaceuticals,
telecommunications equipment and spares, medical consumables, books and
marine equipment and spares.
Supplies of common-user goods and essential and emergency
items are purchased in bulk and held in the purpose-built Government Logistics
Centre in Chai Wan which came into operation in 1996. The operations are
assisted by a modern computerised system with international bar-coding
functions that provides, among other services, online communication with
customers. In 2003, the total values of stock items acquired and issued
to customers were $223 million and 236 million, respectively. The department
has progressively transferred the common-user items to allocated term
contracts for direct delivery from the contractors to user departments
on an as and when required basis with a view to avoiding stocking and
double handling.
The department also deploys supplies staff to other
departments to ensure there is a professional approach to procurement
and maintenance of stores and equipment.
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