HK compassionate budget needs more relief for middle-class and SMEs

Deloitte had called for a 150% deduction (up from 100%) on office rental expenses for SMEs.

The Financial Secretary delivered a compassionate Budget which provides more healthcare, education and social security for those in need. It also catered for the middle classes with a mandatory provident fund (MPF) payment and relief for taxpayers supporting parents or children but has not addressed the rising burden of the sandwich class. The failure to consider reducing the corporate profits tax rate for companies and provide measures to support small to medium-sized enterprises (SMEs) was somewhat disappointing.

“We are pleased the Financial Secretary accepted suggestions from Deloitte and others by offering some tax reliefs and waiving rates, which is capped at a ceiling of HK$1,500 per quarter in the coming year. The welfare measures were designed to meet rising public expectations and overall the Budget is compassionate, conservative and pragmatic,” said Mrs. Yvonne Law, National Chief Knowledge Officer and Tax Partner of Deloitte China.

“It may be seen by most as a ‘no surprises’ Budget. With the threat of inflation and continuing economic uncertainty the Budget should have provided greater tax relief for individuals and businesses to boost the economy in a way which would not contribute to rising prices or asset bubbles. SMEs are dealing with a more challenging business environment, particularly with the introduction of the minimum wage, and require more tax concessions,” added Mrs. Law. SMEs have not been offered any initiatives to deal with rising costs, from both inflation and higher salaries when the minimum wage law takes effect on May 1. The electricity subsidy of HK$1,800 is also for domestic accounts only.

For SMEs, Deloitte had called for a 150% deduction (up from 100%) on office rental expenses for SMEs. It had also suggested business more generally would benefit by eliminating the differing profits tax rates for incorporated and unincorporated businesses over a three-year period as well as a double deduction on research and development costs. A study on the current profits tax rate was recommended to ensure the Hong Kong corporate tax rate was the most competitive in the region.

One “out of the box” and innovative idea in this year's budget is the iBond, issuing $5 billion to $10 billion worth of inflation-linked bonds to retail investors. “With the interest rate linked to the level of inflation during the last six-month period and a guaranteed fixed rate of interest, the iBond should prove more attractive to investors with savings than current bank deposit rates. It is a new idea for helping individuals cope with inflation though it is unlikely to have any direct impact on the inflation rate itself,” said Mrs. Law.

Facing rising demands for more affordable housing, the Financial Secretary introduced measures such as an increase in land supply, more government-initiated land auctions and more land to supply subsidised homes under the My Home Purchase Plan. “These measures, which can help slow down the rising property prices, would provide a supply side effect. They will complement those introduced last year to deal with speculative activity. Rental increases can also be slowed down.” Mrs. Law does not expect the measures to dampen interest from Mainland buyers.

Other effective ways to help people cope as well as address concerns about affordability of housing expenses could include a deduction on either rental or monthly repayment on mortgage including interest and principal, as proposed by Deloitte. Deloitte had also suggested a “super” housing deduction, a household expense deduction on self-owned or rented homes of up to HK$100,000 per year for 10 years. This measure would have benefitted not just homeowners but also those renting a flat, and estimated to cost the government HK$6.5 billion.

Deloitte believes that taxpayers would welcome a tax rebate of HK$6,000 rather than an injection into MPF accounts. “Reducing the amount of tax paid would provide more effective short-term relief for taxpayers than the payment into MPF accounts which cannot be accessed for a number of years in most cases,” added Ms. Mona Mak, Tax Partner of Deloitte China. Deloitte believes that increasing tax bands for salaries tax together with a number of other reforms such as deductions for medical insurance would provide relief for increasingly-squeezed taxpayers.

The Government on Wednesday revised its estimate of a surplus of HK$71.3 billion for 2010-11, which is very close to Deloitte’s forecast of HK$72 billion, and up from its own original forecast of a deficit of HK$25.2 billion. “We think it may be up to HK$78 billion by the end of March,” said Mrs. Law. For the 2011-12 surplus, Deloitte has forecasted HK$30 billion compared with the Financial Secretary’s forecast of HK$3.9 billion. This is based on Deloitte’s more bullish prediction for Hong Kong’s GDP to grow at 6% this year, compared with the Financial Secretary’s forecast of 4% to 5%, and an increase in stamp duty revenues from share transactions, according to a Deloitte report.

“Inflation is likely to be one of the most significant economic problems that Hong Kong will face in the next year or so. As the spectre of rising prices begins to bite harder for individuals and SMEs in particular as they also deal with the impact of newly introduced minimum wages, we hope the SAR Government will develop more specific and targeted measures to provide assistance and fight inflation,” said Mrs. Law.