Three days after China's No2 state leader Wu Bangguo told senior Hong Kong officials "to keep their fingers on the pulse of the people" and to foster "social harmony," the government announced Tuesday it was scrapping the proposed goods and services tax following its failure to convince the public.
The surprise announcement was made Tuesday by Financial Secretary Henry Tang Ying-yen, who admitted the plan had not won public support.
"It's clear ... that we've not been able to convince the majority to accept a GST as the main option to address the tax base problem," he said after an Executive Council meeting.
The government's about-turn also came four days before the subsector polls for the 800-strong Election Committee which will pick the new chief executive in March next year.
"We accept that, at this time, there is insufficient public support, nor are the conditions right for introducing a GST. So, for the remaining part of the consultation process, we'll not be advocating a GST as the only option [to broaden the tax base]," Tang said.
He said the government had collected 2,200 written submissions in the past five months of consultations - with 65 percent opposed to the plan and 30 percent in favor.
The government will continue to consult the public on the remaining options to widen the tax base as suggested by Moses Cheng Mo-chi, chairman of the Advisory Committee on New-Based Taxes, in his report in 2002, Tang said.
These options include raising rates, deducting personal allowances for salaries tax and introducing a land and sea departure tax. Critics claimed the government's change of mind may have been politically motivated, although Tang brushed aside speculation that the decision is linked to Sunday's Election Committee polls, claiming he had been thinking of scrapping the unpopular tax plan "for a while."
The proposal, hinted at for years before it was tabled for public discussion in July, could well have slapped on a levy of up to 5 percent. Tang had argued that the tax was needed to pay for an aging population and to provide a more stable revenue base for the territory, which has largely depended on "volatile income" streams such as land sales and investment returns.
The government had expected to generate extra revenue of HK$30 billion annually after introducing a GST. It claimed that because more than a quarter of the population would have retired by 2033, there would be a greater need for public services. But the public overwhelmingly denounced the plan from the start, saying the "regressive tax" would further widen the poverty gap and hurt the business environment and the tourism industry.
Tang had been determined to get the levy off the ground, vowing public consultation would continue, despite its rejection by lawmakers who in October voted 40-4 against the plan.
Tang said at the time the result might be seen as a victory for some political parties, but it would stop the public discussing an important issue.
Chief Executive Donald Tsang Yam-kuen expressed support for the latest decision Tuesday, saying it was a "pragmatic way of going forward."
"We believe the decision he [Tang] has made respects fully the wishes of Hong Kong people that we should seriously consider widening our tax base [while heeding] the opposition of the people to ... a GST at this time.
"I've all along emphasized the importance of gaining sufficient public support in formulating public policy, so what the financial secretary has proposed to do is in accordance with that view and it's certainly a pragmatic way of going forward. And it deserves all public support," Tsang said.
The chief executive had said in September the GST plan was a "bitter pill" that would better prepare Hong Kong for its next recession.
The debate on widening the tax base had been raised by five financial secretaries since 1989, including Tsang, but none has come up with a concrete plan because of strong opposition. Critics believe the government's change of heart fulfils Beijing's expectation that Hong Kong fully master the principal themes of "development" and "harmony."
During his three-day visit to the SAR last week, Wu - the country's No2 leader and chairman of the National People's Congress - stressed the significance of resolving social conflicts and urged the SAR government to "keep its fingers on the pulse of the people."
At a welcoming banquet, Wu also told the SAR government to "preserve the overall and long-term interests of Hong Kong, bear in mind the whole situation, strive for unity and be tolerant, manage disputes and conflicts over certain issues properly and diligently, and construct a favorable environment for social harmony."