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)