India and the EU are requesting clarification from Indonesia's Industry Ministry over plan to scrap the value-added tax (VAT) on locally manufactured raw materials.
The request, sent in a letter last week, comes as the Indonesian government tries support manufacturers using local raw materials, Ansari Bukhari, the ministry's director general for metal, machinery, textile and miscellaneous industries, said over the weekend.
"(India and the EU) are protesting the plan, citing discrimination practices because we're treating locally produced raw materials and imported raw materials differently, and thus breaching an article of WTO regulations," he said.
The ministry's textile director Arryanto Sagala said India and the EU had even previously threatened to block Indonesian products from their markets.
"But finally they said they wanted to sit down with us to seek clarification," he said.
But both Ansari and Arryanto refused to show the letter, citing "confidentiality".
In the 2009 state budget, the government has earmarked a total of Rp 12.5 trillion (US$1.05 billion) for the reduction and elimination of VAT and import duties to help the manufacturing sector withstand the impact of the global economic slowdown.
Of that amount, some Rp 10 trillion will be spent on VAT cuts, with the remaining Rp 2.5 trillion going to duties cuts.
Ten industrial sectors will benefit from the cuts, including food and beverages, electronics and electronic components, automotive and auto parts, telecommunications and information technology, ship components, chemicals, heavy equipment, and components for small-scale steam-generated power plants.
Ansari said although the government would study the request and issue an immediate response, it was unlikely it would scrap its plans.
"What we're trying to do is save our domestic industry from the impact of the global economic turndown, much like the U.S. has done with Citibank and General Motors," he said.
"Mass retrenchment -- a result of the global economic turndown -- will be inevitable if we comply with what (India and the EU) say about the WTO regulation."
Commenting on the demand and a possible ban on Indonesian products, both Indonesian Chamber of Commerce and Industry (Kadin) chairman Mohamad Suleman Hidayat and Indonesian Employers Association (Apindo) chairman Sofjan Wanandi urged the government to stick to its guns.
"In a crisis situation like we face these days, many countries are making policies in support of their domestic (economies)," Hidayat said.
Likewise, Sofjan said: "The government should go ahead with its plans as long as they are designed in our national interests.
"Other countries are doing exactly the same. India, for instance, is protecting its pharmaceutical industry."
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