Lawmakers have suggested a rate cut in value-added tax (VAT) in an amendment to the VAT and luxury tax law in the hope of making the country's manufacturing sector more competitive in coping with the impact of the global economic downturn.
The proposal was put forward during joint deliberation between the House of Representatives' commission XI for financial affairs and Finance Minister Sri Mulyani Indrawati on Thursday.
Commission member Dradjad H. Wibowo of the National Mandate Party (PAN) said the VAT base rate for priority sectors should be cut to 8 percent, while relaxing the upper ceiling rate.
At present, the VAT rate is pegged at 10 percent for all sectors.
"We suggest this scheme in a bid to help companies to be able to cushion the impact of the crisis," he said.
The House is expected to finish the amendments to the law by the end of the year for implementation next year.
A lower VAT rate will help reduce production costs, which will enable businesses to cut prices in the context of a predicted fall in people's purchasing power, Dradjad said.
"It has been calculated the cut will push up revenues of businesses and increase taxpayer compliance. The completion of the amendment is crucial so that the real sector will be better protected from the impact of the crisis," he said.
The head of the House working committee on the amendment, Vera Febyanthi, said the government could be given the authority to determine the VAT rate through Finance Ministry regulations.
"Perhaps the mechanism (to change the floor and ceiling rates) can be done through Finance Ministry regulations to help certain businesses," said Vera of the Democratic Party.
However, Finance Ministry's director general of taxation Darmin Nasution said developed countries tended to raise the VAT rates.
The European countries, for example, impose rates of between 18 percent and 20 percent VAT, according to Darmin.
"It is more manageable to top up VAT rather than income tax," he said.
Darmin argued the directorate preferred to tap taxes from production businesses rather than from retailers as most retailers here were small and medium enterprises, which were difficult to squeeze for more tax.
Minister Mulyani said the government wanted to create a "competitive" tax rate scheme for businesses, while at the same time making VAT a crucial part of state revenue raising.
Tax revenue accounts for about 70 percent of state revenues.
"We want to provide a more competitive investment climate for businesses," Mulyani said.
The government has already cut several tax rates in the law on income tax to improve the country's investment climate. (iwp)
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