Economists warn government over plans to increase VAT

Economists warn government over plans to increase VAT

JAKARTA (JP): Economists warned the government on Tuesday that
the plan to raise value added tax (VAT) to help stabilize the
2001 state budget deficit could be harmful to the overall
economy.

Economist Didik Rachbini said that the tax increase would hurt
the business sector as it would cut into sales volumes, which in
turn might create further unemployment.

"The business sector has been badly hurt by the current
economic crisis. What it needs is incentives not tax increases,"
Didik said.

Director General of Taxation Hadi Purnomo said last week that
in a bid to help limit the current budget deficit to around 3.7
percent of gross domestic product (GDP), the government was
considering raising the VAT rate, which currently stands at 10
percent.

Hadi said that raising VAT was the easiest way to increase tax
revenue within a very short period of time.

"According to the VAT law, the government can raise the VAT
rate up to 15 percent," he said.

The current budget deficit could widen to a critical level of
up to 6 percent of GDP, equal to about Rp 86 trillion, due to the
sharp plunge in the value of the rupiah and rising domestic
interest rates.

The government is finalizing several measures to limit the
deficit at 3.7 percent of GDP. The measures basically focus on
raising domestic revenue and cutting back spending.

The government plans to submit the set of measures, as well as
the revised version of the current state budget, to the House of
Representatives to be debated after it has been discussed at a
Cabinet meeting scheduled for May 16.

The government plans to raise the 2001 tax revenue target by
between Rp 2.5-10 trillion (US$899 million), from the initial
target of around Rp 180 trillion.

Hadi said that VAT receipts would be increased to between Rp
57-59 trillion from the initial target of Rp 48.85 trillion.

"Tax increases are not the answer. But what is crucial is how
to create a stable macroeconomic environment," Didik said.

University of Gadjahmada (UGM) economist Sri Adiningsih
concurred.

"Raising taxes or VAT given the current economic conditions
will be counterproductive for the overall economy," Sri claimed.

She said that tax increases could also encourage so-called
"footloose" industries to relocate to other neighboring
countries, particularly with the Asian Free Trade Area (AFTA)
only around two years away.

"Tax increases will make Indonesia a less attractive place for
investment," she said.

Sri agreed with Didik that the solution was not to raise taxes
but to establish stable macroeconomic conditions.

The rupiah has been under strong pressure over the past couple
of months, particularly due to domestic instability as calls from
the House for President Abdurrahman Wahid to step down have
intensified.

The rupiah dropped to a 31-month low of around Rp 12,300 per
U.S. dollar last month. Bank Indonesia has raised its benchmark
interest rate to the current level of around 16.26 percent in a
bid to help defend the rupiah and curb inflationary pressures.

Some economists had earlier said that macroeconomic stability
could only be obtained if Abdurrahman stepped down and handed
over power to the popular Vice President Megawati Soekarnoputri.

Although the rupiah managed to strengthen to the Rp 11,000 per
dollar level late last week, traders said that the rupiah would
still come under pressure amid signs that the President was not
willing to resign.

The House recently issued a second censure against the
President over alleged involvement in two financial scandals.
This second censure could lead to the impeachment of the
President.

"Without macro stability, all measures taken by the government
to solve the deficit problem will be useless," Sri said. (rei)