Delayed tax refunds

Minister of Finance Mar'ie Muhammad's admission of the large amount of tax-refund arrears at the Directorate General of Tax once again demonstrates how a well-designed incentive to promote exports often turns out to be meaningless due to extremely inadequate and inefficient administrative arrangements. Mar'ie acknowledged at a House hearing last week that many exporters had often complained about the long delays in tax refunds by the Directorate General of Tax. Such delays obviously adversely affect their cash flow and this is especially harmful to local companies which have to pay high bank interest. The finance minister did not specify the amount of tax-refund arrears accumulating at the directorate general but he admitted it was fairly big.

Mar'ie assured the House members he had instructed the director general of tax to expedite the disbursement of tax refunds to eligible exporters without slackening the supervision to prevent abuse of tax incentives by unscrupulous businesspeople. But there is no reason to believe that this time the instruction will be effective. After all, businesspeople often complain about similar bureaucratic hurdles they encounter at other offices in getting the various incentives offered by the government to exporters. Officials in charge of administering the incentives often are held hostage by their inordinate worries about possible abuse of incentives. True, not all businesspeople are lily white and abuse is not impossible. This, however, should not prompt officials to hold up the granting of incentives to most exporters.

In so far as tax incentives are concerned, exporters are entitled to refunds of the value-added tax paid for the elements used in the production of their export goods. This incentive is administered by the Directorate General of Tax. They are also entitled to draw back the import duties and value-added tax paid for imported materials from the Export Service Facilitating Agency under the finance ministry.

We believe most exporters, especially those who rely largely on the international market, would not risk their reputations by attempting to abuse the tax incentives. Moreover, the officials or agencies in charge of administering the incentives should deal regularly with exporters and should keep their track records (compliance history). They should not harass all exporters simply to catch several potential crooks.

We therefore tend to agree with exporters' allegations that the main reason for officials to subject them to arduous checks before granting them the incentives they are entitled to is not really to save government funds by preventing abuse, but to extort illegal payments. This kind of malfeasance, which businesspeople also encounter at licensing agencies, is obviously one of the major components of what analysts call Indonesia's high-cost economy.

In view of this bureaucratic behavior, we doubt there will be any benefits -- in so far as export competitiveness is concerned -- to come out of the industry and trade ministry's hard work in selecting exporting companies that are eligible to the tax and nontax incentives granted by the government to bolster exports.

There are two things that are likely to occur if the administration of export incentives remains mired in malfeasance or bureaucratic inertia. First, an increasing number of honest exporters who are constantly under the inordinate suspicion of officials and who have to pay officials to get things expedited may eventually resort to infringements, thinking that they can bribe their way out of official checks.

Exporters who do not want to take the corrupt route may simply abandon the export market and sell locally. Or if their licenses do not allow them to trade domestically, they may relocate their plants to countries which offer better, more efficient and more transparent administration of export incentives. Either way would have a devastating impact on Indonesia's balance of payments which already is under strong pressure from a huge, widening current account deficit.