Govt urged to trim bureaucracy, revise tax system

Dadan Wijaksana, The Jakarta Post, Jakarta

Reducing the cumbersome and costly bureaucracy and fixing the current tax system should be at the top of the list of the government's economic agenda this year if it wants to reduce existing snags faced by the business sector, according to an economist.

Chatib Basri, an economist at the University of Indonesia's Institute for Economics and Social Research (LPEM-UI), told The Jakarta Post on Tuesday that such actions would have an immediate impact on the business sector.

"What's feasible would be to fix our tax system, for example revoking luxury taxes on certain industries, and eliminating illegal levies.

"The government would have no problems implementing it, and this would improve the competitiveness of our industries," Chatib said.

He was commenting on an earlier statement by Coordinating Minister for the Economy Dorodjatun Kuntjoro-Jakti that the government would give greater attention to the micro economic sector this year.

Speaking after a Cabinet meeting on Monday, Dorodjatun said that the government had been concentrating on trying to improve macro-economic conditions last year.

Indeed, macro-economic indicators in 2002 were relatively stable such as inflation, the exchange rate of the rupiah against the U.S. dollar, and the low interest rate environment.

According to an official estimate by the finance ministry, the rupiah stayed at Rp 9,300 per U.S. dollar on average during 2002, not far from the target of 9,000 set out under the 2002 state budget, while on-year inflation stood at 10.03 percent from a target of 9 percent.

The government has been boasting about the positive macro- economic development, trying to hide the fact that problems in the micro economic sector are getting worse as indicated by falling investments, and slowing export performance.

For instance, foreign direct investment (FDI) approvals plummeted by 35 percent to US$9.7 billion last year from $15.06 billion in 2001, the Investment Coordinating Board (BKPM) said.

A grimmer picture is given by the 57 percent drop in domestic investment approvals that fell to Rp 25.26 trillion from Rp 58.62 trillion.

This was due to various problems ranging from labor conflicts and legal uncertainty to poor implementation of the regional autonomy policy, which has often caused disputes between investors and local governments.

Businessmen have long been demanding the government re- formulate its tax system as it is creating too much burden on the business sector which has yet to recover from the impact of the late 1990s economic crisis.

Some businesses, for instance, have asked the government to drop the luxury tax to encourage new investment.

Even Minister of Trade and Industry Rini M. Soewandi previously proposed to the finance ministry that it drop the luxury tax on some electronics and automotive products.

Rini also called for the scrapping of the 10 percent value- added tax (VAT) on some agricultural products to help boost the country's export performance.

Director general of taxation Hadi Purnomo said late last year his office was reviewing its VAT and luxury tax policies in a bid to help promote investment in the country.

Based on Dorodjatun's statement, the government wants to be more aggressive in boosting the performance of exports and investments, two important ingredients to achieve a higher economic growth.

Aside from a revision to the taxation system, the government has pledged to address reform in the customs service, legal certainty, security, smuggling, labor-related problems and upgrading facilities and infrastructure.

Chatib saw the government's move as timely, saying it would help it deal with current objections from domestic businesses, which could well lead to massive relocations of their business operations to countries deemed more competitive, such as China, Thailand, Malaysia and Vietnam.

The recent decision of electronics producer Sony to close its operations in the country was the latest manifestation of how uncompetitive it is to operate a business in Indonesia.

"In this case, the government's move (to improve the business climate) is a must, otherwise soon our business operations will all be relocated to other countries," Chatib said.