Hong Kong is planning to make a significant move to invigorate its economy and re-establish itself as a leading destination for nightlife, dining, and shopping. Sources familiar with the matter reveal that the government is considering lowering taxes on spirits, a measure anticipated to be announced in Hong Kong Chief Executive John Lee’s policy address in mid-October.
Currently, spirits with an alcohol content exceeding 30% face a hefty duty equivalent to 100% of their value in Hong Kong. This rate is among the highest globally, making Hong Kong an expensive place to enjoy a drink. To address this, the government is exploring a tiered system where more expensive spirits would be taxed less. This approach, according to one source, is intended to encourage spending on premium liquor among a higher-income clientele while simultaneously discouraging consumers from stocking up on cheap spirits, contributing to potential health risks.
This move signifies Hong Kong’s determination to revive the struggling restaurant, bar, and retail sectors, all of which have been impacted by the decline in tourism following the COVID-19 pandemic. The city is also facing a slowdown in domestic spending due to sluggish property and financial markets.
Adding to the pressure, Hong Kong faces growing competition from other metropolises in mainland China, as well as Singapore and Japan, which are experiencing a travel boom thanks to the weak yen. Hong Kong’s retail sales fell 12% in July compared to the previous year and are still 25% lower than 2018 levels, before the city’s economy was hit by years of political unrest and pandemic isolation. While restaurant receipts for the second quarter haven’t fallen as drastically compared to 2018, bar sales have plummeted by almost 30%, making them the hardest-hit segment.
The planned tax cut reflects Hong Kong’s ambition to become a prominent center for spirits trade, aiming to capture a larger share of a global industry estimated to have contributed $730 billion to the global economy in 2022, including $390 billion in tax revenue, according to a July report by the World Spirits Alliance.
Hong Kong’s previous experience with duty removal suggests a potential for success. In 2008, the city eliminated all duties on non-spirits-based alcohol drinks, leading to a surge in the wine trade the following year. Wine imports jumped by 80% to HK$3.2 billion ($411 million), according to government data. In the subsequent two years, over 800 businesses related to wine emerged, encompassing traders, retailers, restaurants, bars, and logistics firms. The total industry revenue witnessed a 30% growth over two years, reaching HK$5.5 billion.
While tax on spirits accounts for a relatively small portion of Hong Kong’s overall revenue from duties (estimated at HK$717 million this financial year, or 5.6% of the total), the government believes that a lower tax rate could significantly boost the spirits industry, attract investment, and contribute to the city’s economic recovery.
