ENG-2003 — Page 101

THE ECONOMY

departments operating on a trading fund are allowed to retain revenue generated to meet its expenditure and to finance future expansion.

Financial Results

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.

Revenue Sources

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.

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