Exporters need faster process for VAT refund

Exporters need faster process for VAT refund

JAKARTA (JP): Procedures for the refund of value added tax (VAT) paid by export-oriented companies need to be reformed in order to promote the development of local trading companies, says an analyst of the World Bank.

Surinder Malik said that reform may guarantee speedy refunds of VAT which has been paid on domestic inputs used for the production of export goods or paid on export products.

Exporters are exempt from duties and VAT on materials imported for the production of export goods. Because they are required to pay duties and VAT on materials upon their arrival -- if they are not processed in a bonded zone -- they are entitled to a refund of the duties and VAT which have been paid.

"Otherwise, it would be difficult to achieve backward linkages and promote the development of local trading companies," Malik told a World Bank-sponsored seminar held here last week.

The seminar, with the theme of Building on Success: Maximizing the Gains from Deregulation, featured a dozen economists from local and foreign institutions, such as Akihiko Nishio of the World Bank and Mari Pangestu of Indonesia's Centre for Strategic and International Studies.

Speaking about the government's duty and indirect tax facilities, Malik said some of the facilities often fail to perform as expected.

Many exporters, for example, consider the VAT refund administration ineffective because of the inability to claim refunds of VAT on inputs purchased domestically from suppliers for indirect exporters.

"This discourages the development of backward linkages," he said, citing that an Indonesian synthetic leather manufacturing firm, in order to avoid VAT payments, preferred to export its products to Singapore rather than supply local shoe exporters.

Import

In return, he said, shoe manufacturers prefer to import synthetic leather from Singapore in order to also avoid the costs associated with VAT.

Malik said that similarly, some firms in the electronics sector import components from Singapore that are made in Indonesia, due to the difficulties in the administration of incentives for indirect exporters.

"Under such a system, a strong synergy between direct and indirect exporters cannot be expected," he said, adding that the system also discourages the activities of trading companies and that it is a major reason why every manufacturer prefers to export their products themselves.

The refund of VAT on domestic inputs used for the production of export goods is one of the export facilities introduced by the government with the aim of promoting exports. The facilities are administered by the Export Facility and Financial Data Analysis Agency. The other export facilities include the exemption and refund of duties on imported materials used for the production of export goods. In addition, all investments approved by the Investment Coordinating Board are also exempt from duties and indirect taxes on machinery, equipment and intermediary inputs for the first two years of production.

Concerning the duty exemption facility, he said that a common bonded manufacturing warehouse (CBMW) system needs to be introduced to facilitate small direct and indirect exporters' access to the duty exemption facility.

"CBMW licenses should be issued for private enterprises or associations," he said.(hen)