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It Is Good Old Budget Time In Asia

By Laurence E. Lipsher - Email Editor

March/April volume 8

Dear Valued Reader,

At budget time — at least in Singapore and Hong Kong — the professional accounting societies are anything but reticent in proposing what they’d like the government to do in advance of the annual budget report. Frequently these are actually ideas emanating out of the respective governments, sort of like running things up that proverbial flagpole to see if anyone salutes it! The January 15 issue of the Singapore Business Times reported the highlights of an event organized by the Institute of Certified Public Accountants of Singapore to explore industry views on what an ‘‘expansionary budget’’ — in light of the worldwide depression — should include."

And yet, in this same article, Gerard Ec, chair of the Singapore nongovernmental organization the Kidney Foundation, said, ‘‘There seems to be a shyness to tax people who speculate on property and drive prices up,’’ making it difficult for Singaporeans to own homes unless the government is more proactive in curbing property speculation through taxation. This is a very definite reference to the mainland Chinese investment boom in real estate being experienced throughout Asia, particularly Singapore and Hong Kong. Will there be a Brazil-like tax on foreign investment in real estate and the stock market? I doubt it, even with the IMF finally coming out with a statement (as reported in the February 20 Wall Street Journal) in support of taxation to regulate the flood of capital coming in from outside a jurisdiction. Let’s face it: The property developers are too strong a political influence for jurisdictions (in Singapore and especially Hong Kong) to do anything to curtail the flow of profits they are making from this influx.

Commenting on this situation, Prabhu stated that the absence of taxation on capital gains is a major competitive attraction for Singapore. Clarity over what constitutes a capital gain, which is nontaxable, and what constitutes speculative and trading gains, which are taxable, is not really the issue. You’ve got to buy the property first, before selling it for what would presumably be a capital gain, and that flow of money coming into Singapore and driving up prices is the issue of the day.

If the influx of foreign investment driving up prices in Singapore continues, I think it more likely that Singapore, rather than Hong Kong, will adapt to the new IMF suggestions.

Then There Is Hong Kong

Chun-ying Leung, convenor of the Executive Council (Hong Kong Chief Executive Donald Tsang’s ‘‘cabinet’’) also speculated on tax rate reductions — particularly a reduction of the corporate tax rate from 16.5 percent to 15 percent as proposed by the Hong Kong Institute of Certified Public Accountants. In a February 5 story in the South China Morning Post, Leung mentioned the ever-widening wealth gap in Hong Kong:

We need to look at the whole issue of wealth distribution in Hong Kong. I think those people who propose cutting corporate tax rates (the Hong Kong Institute of Certified Public Accountants [HKICPA] and the Hong Kong General Chamber of Commerce) should reflect on why this proposal should be laid out when 1.1 million people do not benefit from Hong Kong economic growth.

This sums it up in a nutshell — there’ll be no corporate tax rate decrease. What interested me most about this article was a statement from the Hong Kong offices of Deloitte suggesting that Hong Kong will have a budget surplus this year.

Deloitte Touche Tohmatsu, according to this article, estimated what they believe will be approximately a HKD 5 billion surplus for the fiscal year ending March 31, 2010. Yet Deloitte also believes there will be a fiscal shortfall of HKD 7.5 billion for the 2010-2011 fiscal year.

I just wonder: Does Deloitte think that the tsunami of money leaving mainland China for outbound investment is going to subside? Obviously, only time will tell.

PricewaterhouseCoopers also has gotten into the act of predicting a budget surplus. In the February 9 edition of China Daily, PwC predicted an HKD 8.8 billion budget surplus, once again substantially different from the HKD 40 billion deficit predicted less than a year ago by Hong Kong Financial Secretary John Tsang (no relation to Donald Tsang).

It is interesting to note that Hong Kong has financial reserves of approximately half a trillion Hong Kong dollars. That is enough for just under two years of running the government without any additional tax revenues coming in. This is a result of 10 successive years of surpluses, and this trend is likely to continue, contrary to Deloitte’s prediction of a deficit next year.

PwC has proposed a repeat of last year’s 50 percent tax rebate, with a maximum rebate of HKD 6,000 per taxpayer, as well as a 5 percent increase in dependent allowances for inclusion in the Hong Kong budget, but no change in either the corporate or personal income tax rates. I think there will be a repeat of last year’s rebate.

Frankly, I cannot help but think that both Deloitte and PwC are running possible proposals up that flagpole on behalf of the treasury secretary.

One of PwC’s additional budget proposals called for reduction of the 0.2 percent stamp tax duty to a flat HKD 100 for properties valued between HKD 2 million and HKD 3 million to encourage people to buy property.

Alas, mainland buyers are now going directly into this market, expanding their sights from solely the luxury market. Full cash payments seem to be abundant, rather than taking out mortgages for the smaller properties, even though the Hong Kong banks are offering loans readily. Real estate values are skyrocketing, and a bubble has developed.

My under-300-square-foot Hong Kong apartment is valued at HKD 2.5 million — there’s no way I’m going to buy so little for so much, especially with rent being a far more reasonable alternative!

The Sun Sets on India

We’re at the end of an era: The budget report as India has known it — as both Singapore and Hong Kong still know it — is going to be the last of its type.

On February 4, dnaindia.com had an article by Sandeep Shanbhag describing the evolution of the Income Tax Act of 1961, under which the current tax system has operated, and how it will be replaced. The British system of common law will cease on April 1, 2011, and in its place, the new Direct Tax Code will incorporate the Indian system of taxation under a code of civil law.

As a result of this major event taking place in just a little over a year, it is highly unlikely that there will be any earth-shattering announcements that will affect the current system.

Finance Minister Pranab Mukherjee is further limited in what he may be able to do because the current 10 percent operating budget deficit is approaching a danger zone.

Regardless, what impressed me most about this article were Shanbhag’s suggestions for tax changes for the benefit of the salaried class of the Indian population (the people who have to file tax returns and pay taxes).

The Indian individual income tax return itself is quite simple. There are several online sites available to assist in preparing one’s tax return.

This all sounds sophisticated, widespread, and presumably covers a large range of the population, right? Wrong! To start with, only 35 million out of a 1.1 billion population file tax returns. Thus, while it might not mean much now, it will have more impact as development takes place in the country and as the resultant growth brings more payers into the tax system. Either that or I’d have nothing to write about and I really do prefer to write.

The salaried class files and pays tax. This constituency prepays its taxes month to month through TDS, the Indian withholding tax system. The salaried class is the largest single category of tax filer. Yet this class is also the one with the fewest benefits. Shanbhag went on to itemize a number of things he’d like to see happen for the salaried class, including:

• Reinstatement of the standard deduction. While homeowners and landlords get a 30 percent standard deduction, the salaried class is left out in the cold.
• Increase in the transportation allowance from its current INR 800 per month. Come on now, Mr. Mukherjee, US $17.35 per month is not much allowance — even for public transportation — anywhere in this day and age. While it does matter how much you increase it, it simply matters more that you do increase it.
• Increase in the medical expense deduction. The current maximum deduction allowed is INR 15,000 per year, per family. If India had a national healthcare system, this would be an acceptable amount for deduction. Alas, there is no national healthcare system.
• Raise in the rent expense deduction for the selfemployed from INR 24,000 per year to something a bit more realistic — especially because INR 24,000 is more likely to be equal to that sole proprietor’s monthly rent.

These are good suggestions. Do I think they’ll make it to this year’s budget as far as taxation is concerned? No — there are no elections soon, for which pandering to a specific element of the electorate will bring any gains. I’d guess that there’ll be no major changes made.

By Laurence E. Lipsher

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