New tax on time deposits and agricultural products 'to stay'

JAKARTA (JP): Finance Minister Prijadi Praptosuhardjo said on Friday that the government would not cancel the new value added tax (VAT) on agricultural products, and the higher income tax rate on time deposits and savings despite widespread protest.

"For the time being, we'll not revoke it (the new tax policy)," Prijadi told reporters following a closed-door consultation meeting with the House of Representatives budget committee on the two subjects.

He declined to provide further comments.

The new tax rules have created controversy and highlighted the lack of coordination among the government's economic team.

The House approved several new tax laws last year including a VAT tax law, which become effective earlier this year. Under the new tax law, agricultural products are no longer exempted from 10 percent VAT.

But Minister of Agriculture Bungaran Saragih demanded that the new VAT on agricultural products be dropped to protect local products from competing with overseas products.

Bungaran said last week following a meeting with President Abdurrahman Wahid that the President agreed to drop the agriculture tax.

Coordinating Minister for the Economy Rizal Ramli supported the President's decision.

Director general of tax Machfud Sidik, who is widely rumored to be soon dismissed by the President, said that the cancellation of the agriculture tax would affect the government VAT revenue target in 2001.

Machfud had earlier said that the tax office would have to seek greater VAT revenue from the country's automotive and retail sector in order to compensate for the possible cancellation of the agriculture tax.

Prijadi then decided to seek political support from the legislature to defend the new tax policy.

Legislator Aberson Marle Sihaloho defended the government's new tax policy.

"Formally, the House can no longer ask the government to drop new tax rules ... except if the tax law is revised first," Aberson said, pointing out that the legislature had already approved several tax laws last year which allowed the government to issue tax rulings to implement the new tax laws.

He said that among new government tax rulings were VAT on agricultural products and a higher income tax rate on time deposits.

Last year, the tax office issued a new tax ruling which raised income tax on the interest revenue from bank time deposits, savings and Bank Indonesia SBI promissory notes to a rate of 20 percent from the previous rate of 15 percent.

Many have criticized the new income tax policy, saying that it will trigger capital flight.

Bankers claim that higher tax on time deposits would prompt people to shift their money into other forms of investments.

But Machfud said that the concern over the new income tax on time deposits had been exaggerated.

He said that it wouldn't cause a capital flight, because tax was not the only factor affecting the domestic investment climate. Other factors such as interest rates, inflation, the exchange rate and political risks played a greater role.

He also said that the new tax rate would not discourage people from placing their money in banks because most depositors are risk-averse people by nature, and are therefore not likely to shift their money into other form of investments.

"Please stop making tax a scapegoat," he told a press conference.

"The controversy over the new tax policy only indicates the lack of coordination among the government economic team," said an economist working for the finance ministry.

Rizal seemed to accept the criticism. In a press conference following dialogue with staff members of the Gadjah Mada University in Yogyakarta on Friday, he said that the government would form a "fiscal synchronization team" to help fix the problem of the lack of coordination in designing fiscal policies.

Rizal said that the team would consist of senior officials of each of the ministries covering economic affairs.

"We have agreed to form a synchronization team in the fiscal area so that if we plan to introduce new policies such as tariffs, taxes, and others it will first be brought to the attention of the team," he said. (rei/44)