Forex tax canceled for IMF package

JAKARTA (JP): The government's decision to go back on its plan to impose a 5 percent tax on foreign exchange purchases is to allow the IMF-sponsored reform package to stabilize the rupiah, a senior official said yesterday.

Minister of Finance Fuad Bawazier said the cancellation of the plan, announced Friday and due to be effective yesterday, was a result of negotiations with the International Monetary Fund (IMF) review team.

"There wasn't any pressure from the IMF," said Fuad, who is also the director general of taxes.

Since both the tax plan and the IMF reform package are intended to stabilize the rupiah, "we are giving the (IMF) package the opportunity to work first ... and to prevent a distortion caused by the tax policy," he said.

He stressed, however, that if the package failed to stabilize the rupiah's exchange rate against the U.S. dollar, the government would implement other measures, including taxing foreign exchange purchases.

"It's a give and take process," he added, regarding the cancellation of the tax plan.

Fuad said that the government and the IMF team were currently reviewing the IMF reform package signed on Jan. 15 in exchange for a US$43-billion bailout.

There are many areas which are still being reassessed by both the government and the IMF review team to reflect the reality of the present state of the economy, he said.

Since the middle of last week IMF Asia-Pacific director Hubert Neiss has been in marathon meetings with Indonesia's new economic ministerial team reviewing the reform package. The final results are expected to be announced in a week.

Experts have criticized the foreign exchange tax plan, which was intended to curb further attacks on the rupiah.

Senior banker I Nyoman Moena said that the measure would only prevent dollar purchases by housewives and would fail to rein in speculators.

The speculators could dodge the tax by obtaining fake letters of credit from issuing banks, or forging Bank Indonesia letters confirming they have to repay offshore debts, he said.

The tax plan exempted importers or those repaying offshore debts.

Economist Anwar Nasution, dean of the University of Indonesia's School of Economics, said that introducing the forex tax would aggravate people's diminishing trust in the government.

It would only prompt people to transfer their rupiah to overseas banks and change them into dollar deposits, he said.

Law experts also criticized the procedure used to make the tax law because it bypassed the legislature.

The rupiah has been in a roller-coaster ride since July and sank to its lowest level of Rp 17,000 to the dollar in January.

The first version of the IMF reform programs, which included dismantling monopoly, scrapping subsidies, and banking reform, have been criticized for being in breach of the country's constitution and failing to strengthen the ailing rupiah. (08)