Creativity sought to avoid burdening business

The government's plan to increase tax revenue and cut subsidies on fuel and electricity has raised concern in the business community and among analysts. Economist Sri Adiningsih of Gadjah Mada University in Yogyakarta spoke to The Jakarta Post's Sri Wahyuni about the issue.

Question: What is your comment on the government's plan?

Answer: From a tax ratio point of view, our tax ratio is very low compared with other countries that are highly competitive, such as Malaysia, Singapore and even the U.S., where the tax ratio is some 20 percent. Ours is estimated at only 13.3 percent for the year 2003. This means that the country's existing tax potential has not been exploited very well.

However, we have to be very careful in doing so because if we collect taxes haphazardly, it will directly affect the country's competitiveness.

We have to remember that we entered the ASEAN Free Trade Area in Jan. 1 this year. Yet our competitiveness is quite low, the lowest in the region, and our export growth is also very low while investment is stagnant.

Therefore, if we are not careful about increasing tax revenue it (the plan to increase tax revenue) will backfire.

Could you elaborate?

If our competitiveness is unattractive it will be hard to increase exports, much less to achieve economic growth of 5 percent. To have that kind of growth we need to increase exports and investment growth by up to at least 10 percent. This will obviously have something to do with taxation.

Indonesia's taxation and assessment system is not attractive compared to those of our competitors. Although tax revenue is generally not high, if we look at more detailed figures we will see that Indonesia applies a corporate tax of 30 percent. Compare that to Singapore, for example, where the corporate tax is only 26 percent, or Malaysia with a corporate tax of 28 percent.

Besides there are also various kinds of assessments and other levies, both official and unofficial, that businesspeople in Indonesia must pay, which explains why some businesses spend up to 50 percent of their operational costs paying taxes and assessments.

This is indeed a big problem. I agree that we need to increase the tax ratio, but we have to prevent it from backfiring on the country's already worrying competitiveness.

What is your suggestion?

The country's whole tax system should be corrected. As you may know, the inheritance tax is one of the biggest tax revenue producers in developed countries. We don't have such a tax here. This is a mistake.

Let's say that the value of Indonesia's moving assets is some Rp 250 trillion a year. If we apply an inheritance tax rate of 20 percent, for example, then the country would have additional revenue of some Rp 50 trillion a year. This is obviously quite a large sum of money.

The point is, again, that we need to look for new taxes, but never ever squeeze the (sectors) that will directly affect the country's competitiveness. Putting the taxation and assessment system in order will also help increase the country's competitiveness, because taxes and assessments have for a long time burdened the industrial sectors, not just the unofficial ones but also the official ones.

Therefore, I think it's time for the government to consider taxation as a form of investment, by regulating and putting it in order so that the effort to increase the country's tax ratio will not hit its competitiveness.

In this case, creativity in creating new taxes that will not burden the business world is urgent. And the inheritance tax is an example.

Is such a tax possible in the near future?

If we started preparing it now, I think we would be ready to apply it in within a year or two. Remember that we have to find a way to pay the public debt interest without burdening the state budget. If we can create a new tax source, for example the inheritance tax, we would be able to at least pay a part of the public debt interest.

What of the government's plan to cut subsidies on fuel and electricity? Would this have a large effect on business?

The subsidy cuts for fuel and electricity will not directly affect the business world. And if it does, it will not be that great. That is because businesses pay the market price for fuel and electricity. What will be directly affected by the cuts is inflation.