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An analysis of the yield obtained by the special war taxation on salaries, property, and corporation and business profits (the three combined being intended to cover the field ordinarily covered by a straight income tax measure) has shown that the yield from business profits has been exceedingly disappointing, and the War Taxation Commission, which was the father of that substitute form of income tax, has been reconstituted to think again and devise some better system of taxing business profits.
The printed draft Estimates provided for a deficit of $7,500,000, but since then additional and new duties have been agreed to which reduce the Estimated Deficit to $3,800,000. If further unprovided expenditure has to be met during the year certain items of P.W. Extraordinary and other special expenditure will, as explained to the Legislative Council, have to be curtailed. It is satisfactory to note that it has been possible to meet the urgent representations of Hong Kong University by an increase of the Government grant by $100,000.
say
The criticism of the Unofficial Members has shown a certain distrust of the Government's intention to stir up again, as they, the furious contro- versy about income tax by reconstituting the War Taxation Commission to look into the matter of the failure of the Profits Tax; and the Senior Chinese Member, Mr. M.K. Lo, warned the Government particularly of the dangers of following up the previous suggestion of that Commission that estate duty rates should be increased if further revenue were needed. His representations about the importance of family inheritance in Chinese family life were regarded by the Government as sufficiently weighty to call for a responding statement from the Financial Secretary both on that matter and on Mr. Lo's other warning as to excessive inquisition by Government examiners into Chinese partnerships. The whole question of income tax in relation to Chinese companies, semi-companies, and business associations has always been recognised to be fraught with every difficulty and incentive to evasion, and it would be unprofitable to offer any advice from here in the local circumstances.
? Now telegraph approval of the Estimates; and I should follow up with a despatch by air mail regretting that it was not possible to telegraph earlier, and saying that the S. of S. has no comments on particular items of Revenue or Expenditure for which provision has been made, but he welcomes the decision recorded in paragraph 2 of No. 6 to obtain further revenue to reduce the estimated deficit, and the decision to re-examine the matter of the failure of the business profits tax to yield the estimated revenue from that source. Finally, say that the S. of S. recognises the heavy burden of special war expenditure which has to be borne by the Colony in present circumstances, and that he takes the opportunity of warmly acknowledging the generous assistance which Hong Kong has contributed not only for local defence expenditure but also to H.M.G. for general war expenditure.
Gant
5.6.41.
P.
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