Jakarta. In order to boost the competitiveness of small and medium enterprises, the Indonesian Young Entrepreneurs Association has urged the government to waive the value-added tax for many SMEs with turnover up to Rp 2.5 billion ($280,000) annually.
In accordance with a 2003 decree from the Finance Ministry, the VAT exemption currently applies only to SMEs with annual turnover up to Rp 600 million.
“SMEs are facing tough competition right now. In addition, they are also burdened with high interest rates and high cost due to poor infrastructure,” Erwin Aksa, chairman of the entrepreneurs association (also known as Hipmi), said on Sunday.
“We hope by increasing the exemption cap, the SMEs will have healthier cash flow.”
According to current laws, SMEs are businesses with annual turnover no greater than Rp 2.5 billion. Erwin said many, but not all SMEs, should qualify for the VAT exemption.
“We’ve proposed the sectors to the ministry, but we cannot disclose them yet. But for sure, export-oriented SMEs are not included. They have enough incentives,” he said.
Ahmad Erani Yustika, an economist at the Institute for Development of Economics and Finance (Indef), offered his support for increased tax incentives, noting that they would help SMEs manage cash flow.
“Many incentives in the past did not conform with SMEs’ nature - that they have simple management,” Ahmad said.
Erwin said the government would also benefit from broader exemptions because they would encourage more SMEs to register as taxpayers.
According to Erwin, most of Indonesia’s SMEs don’t practice proper bookkeeping. As a result, many are reluctant to file for the VAT tax, or simply have difficulty doing so.
But with the exemption, Erwin said businesses will only have to report their income tax. “If SMEs get tax exemptions, their tax reports will be simpler. More would voluntarily register as taxpayers.”
Mochamad Tjiptardjo, director general of tax at the Finance Ministry, said the government is considering expanding VAT exemptions, but is still studying the potential impact of doing so.
“Of course it would impact our state revenue, but it would also impact the real sector by providing more jobs,” he said. “If the Finance Ministry sees that the policy impact is worth the cost, maybe we will go with it.”
The government has estimated that some 51.3 million SMEs in Indonesia contribute around 56 percent of the GDP.
Considering the size of SMEs’ contribution to the economy, the government has launched programs to support them, such as The People’s Business Loan (KUR), introduced in November 2007.
The KUR scheme allows SMEs to borrow from banks while providing little or no collateral.