Business leaders doubt state budget targets

Tony Hotland, The Jakarta Post/Jakarta

Noted businesspeople have expressed doubt over the 2005 state budget draft, saying the targets contained in the budget are unrealistic and could harm investment.

Indonesian Chamber of Commerce and Industry (Kadin) chairman Mohammad S. Hidayat warned that the government's target of higher tax revenue for 2005 should not curtail the flow of investment.

"I think the target is ideal, but the government has to make sure it will not hamper new investment due to higher taxes," Hidayat said on Monday after the presentation of the draft budget by President Megawati Soekarnoputri.

The government hopes to collect some Rp 297.5 trillion (US$32.11 billion) in tax revenue next year, including Rp 141.9 trillion from income tax, Rp 98.8 trillion from value-added and luxury taxes, and Rp 28.9 trillion from excise duties.

That figure is higher than the 2004 tax revenue target of Rp 260 trillion. There are fears among the business community that higher tax revenue will be achieved through increases in the tax rates.

"The tax rate is used to support state revenue and to attract investment. No investment will come if taxes are too high. It is an important factor to meet the targeted economic growth of 5.4 percent because we cannot always rely on (domestic) consumption," Hidayat said.

The country's economic growth over the last few years has been largely driven by domestic consumption. Over this period, investment, particularly foreign investment, has lagged behind due to what is seen as an unfavorable investment climate here.

Hidayat also said the projected economic growth of 5.4 percent in 2005, compared to expected growth of 4.8 percent in 2004, was a bit too optimistic, pointing out that there were no adequate incentives to provide a significant boost to investment.

"Kadin sees 5 percent growth. But the government first needs to assure legal certainty, to simplify the bureaucracy at the Investment Coordinating Body and provide conducive laws on taxation and investment," he said.

Hidayat lamented the small allocation for the building of infrastructure, about Rp 12.4 trillion of total state expenditures of Rp 264.9 trillion.

"It should be about Rp 50 trillion to help jack up the economy. Unfortunately, we have to set aside as much as Rp 64 trillion just to service public debt. That's the problem," he said.

The chairman of the Indonesian Employers Association, Sofjan Wanandi, dismissed the possibility of increased tax rates, saying such a move was "impossible".

"There is no way the government can increase rates in a situation like now where investment is slack. In fact, the government should lower the rates to make us competitive with surrounding countries," he told The Jakarta Post.

Sofjan said the most feasible way to increase tax revenue was to increase the number of taxpayers.

"For example, if the government could combat all kinds of illegal economic activities (like smuggling), the government would surely reap more taxes," he said.

Sofjan said all of the economic targets in the draft bill were unrealistic, speculating that there was a political motive behind them to help Megawati win reelection.

"How is the economy going to grow by 5.4 percent with sluggish investment and a minimal allocation for development, since most of the expenses are for the gas subsidy and debt payments? The government does not even have money left for the maintenance of infrastructure," he said.