Abolishing levies

Abolishing levies

At the stroke of a pen, Minister of Home Affairs R. Hartono
has abolished 73 levies and taxes imposed by provincial, regency
and city administrations throughout the country. In two separate
decrees signed last month, the minister also ordered all local
administrations to terminate any other forms of levies and taxes
not covered under the 1997 Law on Regional Taxes and Levies.

The move is expected to end, once and for all, the practice by
local administrators of imposing levies, legitimate or otherwise,
for various services rendered. The sheer number of levies
abolished, as listed in one of the decrees, indicates that these
charges have gotten out of control for far too long. Some of
these levies were downright ridiculous. And the illegitimate
charges were usually nothing other than official extortion.

These levies have been a source of complaint, not only by
businesspeople, but also by citizens. They have made everybody's
lives miserable. Businesspeople refer to these charges as
"invisible costs" which they incorporate into their overall
operational costs and pass on to consumers. They broke their
silence, and their complicity in this scheme, when they came
under strong pressure to compete globally. In a competitive
environment, these "invisible costs" have become a big liability
and have undermined their own survival. And since businesses have
come under pressure to pay more humane wages to their workers in
recent years, their demand for the abolition of these levies has
become louder.

The government has attempted to phase out these taxes and
levies, but each time it has met resistance from the powerful
bureaucracy. Local administrators have grown to rely on these
charges for their operation or to supplement their income. Like
the campaigns against corruption, the drive to abolish levies met
a stumbling block.

What makes this latest campaign to abolish levies different
from past ones is not so much the political will as what is at
stake if the government fails to live up to its promise. The
elimination of these levies is part of the latest economic reform
package negotiated with the International Monetary Fund (IMF) to
lift the nation out of its economic doldrums. And it is not so
much the US$43 billion in support that the IMF has promised that
is at stake. What is being tested is the credibility of the
government in the eyes of the domestic and international public.

For better or for worse, it appears that real and meaningful
changes in this country, like the abolition of these levies,
hinge more on external, rather than internal, pressures. This
must speak volumes about the ineffectiveness of our political
system and structure. One often wonders what it will take to
forge the political reforms this country badly needs.

For the moment, we can take comfort that when it comes to
abolishing levies, the message has finally sunk in on the
government. Last week, President Soeharto ordered Hartono to make
sure that "these levies don't happen again". Hartono has also
said that he will send teams to the regions to ensure compliance.
At least one cannot complain about a lack of political will.

But if past experiences are any lesson, political will alone
is not enough to break the established levy systems of local
administrations. Replacing their revenues with a local gasoline
tax and higher tax rates for the transfer of property titles will
not likely make up for lost funds. The Jakarta city
administration, for example, has slashed its 1998/1999 budget 35
percent because of projected revenue shortfalls.

The abolition of business levies must also be accompanied by a
restructuring of local authorities' organizations and their
finances. These officials do provide valuable services for the
community and are at the frontline of government operations.
Their operation must be based upon solid financing schemes. Even
within the parameters of current local government regulations,
there is room for innovation to create a more effective and
efficient administration. To borrow an overused phrase, we need
to reinvent local government.

Without a complete overhaul of local administrations and their
finances, the government's latest campaign could be short-lived
and doom to fail, just like past campaigns. The difference this
time is that the government, should it fail, would lose all of
its remaining credibility, while the international community
would pull the rug from under us. And that would be a very high
price to pay.