House asks govt to drop VAT increase

JAKARTA (JP): Legislators asked the government on Thursday to drop the plan to raise value added tax (VAT) to 12.5 percent from 10 percent as it would burden people from the lower income bracket and would have a serious impact on the overall economy.

Legislators said that the government should instead focus on intensifying income tax collection from people of a higher income bracket to help keep the 2001 state budget deficit at a safe level.

"The House of Representatives Commission IX asks the government to seriously reconsider its policy to raise VAT ... But if the policy can't be postponed, it must be implemented selectively, taking into account the impact on people of lower income and small businesses," Commission IX on state budget and finance concluded at the end of a preliminary debate on the revised state budget with the finance ministry.

The government has proposed to the House a revised version of the 2001 state budget as the budget assumptions are not longer valid considering the deterioration in the country's macroeconomic condition. The deficit could also widen to a dangerous level of 6 percent of gross domestic product (GDP), compared to the initial projection of 3.7 percent of GDP, caused by the sharp drop in the exchange rate of the rupiah against the U.S. dollar and rising interest rates.

The proposed revised budget includes measures to increase domestic revenue and cut spending to limit the deficit to a reasonable level of around 3.8 percent of GDP. Among the crucial measures are raising the VAT and reducing fuel and electricity subsidies by increasing fuel prices by an average of 30 percent and power rates by 20 percent.

Sources have said that the International Monetary Fund had insisted the government raise VAT to 12.5 percent, and fuel prices by 30 percent to decrease the budget deficit.

The approval of the budget revision by the House is one of the prerequisites set by the IMF to disburse its stalled US$400 million loan tranche to the country. The IMF loan is seen as a crucial factor to help revive investor confidence in the ailing economy, and to encourage other multilateral lenders to provide their financial support.

But the decision of the House Commission IX is not final.

Commission IX head Benny Pasaribu said that the recommendation on the VAT issue would be debated by the House special budget team.

The proposed budget revision is currently being debated by the various related commissions of the House. The commissions are expected to complete the debate on Tuesday and submit their recommendations to the House special team, which will hold a two- week debate session before final approval.

"I strongly reject the proposal to raise the VAT to 12.5 percent," said Aberson Marle Sihaloho, a legislator of the Indonesian Democratic Party of Struggle (PDI Perjuangan), who also sits on the budget team.

"The VAT increase will create higher inflation," he added.

He suggested the government intensify tax collection from people in the higher income bracket.

"Raising the VAT will be unpopular and it is bad for the people. Any government which raises VAT will surely collapse," said Golkar legislator Hengky Baramuli.

Meanwhile, Finance Minister Prijadi Praptosuhardjo said that the government had to take the difficult measure of raising the VAT because it was the only way to boost tax revenue by an additional Rp 4.2 trillion in the remaining six-month period.

Prijadi said that the full benefit from intensifying tax collection would only be obtained in the next couple of years.

"Raising the VAT is the quickest way to collect greater tax revenue," he said.

He said that raising the VAT to 12.5 percent would not have a significant negative effect on the economy.

He said that the contribution of the VAT increase to this year's inflation forecast of 9.3 percent was insignificant.

Director general of tax Hadi Poernomo said that the higher VAT would not be imposed on more than 500 items which were considered basic goods.

Legislators from House Commission IX did not indicate too much concern about the government plans to raise fuel prices by an average 30 percent in June, and power rates by 20 percent. House Commission VIII on energy and mining had decided earlier to accept the government proposal to raise the fuel prices by 30 percent, but demanded power rates be raised by only 17.5 percent. (rei)