Higher tax on time deposits 'won't cause capital flight'

JAKARTA (JP): Director General of Taxes Machfud Sidik has insisted that the increase in income tax on interest from bank time deposits and savings would not cause capital flight out of the country.

Machfud said here on Thursday that tax was not the only factor affecting the domestic investment climate, and that other factors including interest rates, the exchange rate, inflation rate and political risk all played a greater role.

"Please stop making tax the scapegoat," he told a press conference at his office. "The fear of capital flight is being exaggerated," he added.

He also said that money parked overseas would still be subject to tax.

The government issued a new ruling late last year which raised the income tax on interest income from bank time deposits, savings and Bank Indonesia SBI promissory notes to 20 percent from 15 percent previously.

Critics have argued that the new tax policy could trigger capital flight.

Bankers also said bank earnings would be affected as people shifted their money from time deposits and savings into other forms of investment.

"The government will not gain anything from the new policy," said an economist, pointing out that the tax increase would also raise domestic interest rates which in turn would inflate the cost of the government bank recapitalization program.

The government has issued hundreds of trillions of rupiah worth of bonds to help finance the bank recapitalization program. The government through the state budget covers the interest on the bonds, the rate of which is partly linked to the interest rate on the SBI notes.

Banks raised the interest rate on their time deposits following the increase in the tax rate.

The interest rate on one-month SBI notes rose slightly to 14.85 percent at Wednesday's weekly auction from 14.84 percent previously.

Elsewhere, Machfud said that government tax policy has always been the subject of public debate.

He pointed out that the government in 1983 delayed plans to slap income tax on time deposits following fears that it would precipitate capital flight.

But, he said, when the government finally introduced the tax in 1998, there was no capital flight of any kind.

Machfud also said that the new tax rate would not discourage people from putting their money in the banks, because most depositors were risk-averse people by nature, thus discouraging them from shifting their money into other forms of investment.

"The new tax rate is still reasonable," he added.

He also said that the new tax policy on time deposits and bank savings was aimed at protecting small depositors.

He pointed out that according to the new policy, individual time deposits of less than Rp 7.5 million (as long as it was not a split amount) would be exempted from the new final tax rate.

Under the previous ruling, only time deposits of less than Rp 1 million were exempted from the tax.

He added that the new tax ruling was aimed at eliminating loopholes that allowed people to avoid paying tax.

He stressed that under the new ruling, certain social organizations must also pay income tax on their time deposits or bank savings.

He said that in the past, certain people had tried to manipulate their tax obligations by using social organizations.

"The new tax policy is designed to ensure fairness for all sectors in the economy," he said.

The tax office seems to be more aggressive in collecting tax this year in a bid to help finance the state budget. The tax revenue target for this year is around Rp 180 trillion compared to Rp 101 trillion last year.

The government recently issued around 41 new tax rulings to provide the legal basis to back up this aggressive approach. (rei)