House asks govt to drop VAT increase

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)