New tax target, subsidy cut will hurt businesses

New tax target, subsidy cut will hurt businesses

A'an Suryana, The Jakarta Post, Jakarta

The government's plan to increase tax revenue and cut subsidies
on fuel and electricity next year will increase the burden on a
business sector already struggling to survive from years of
downturn, businessmen said on Monday.

The chairman of the National Economic Recovery Committee,
Sofjan Wanandi, and the director of the Indonesian Textile
Association, Lili Asdjudiredja, both urged the government to
revise their plans.

"The tax revenue hike will discourage businessmen from making
new investments here," Sofjan said.

The two were commenting on the 2003 state budget draft
unveiled by President Megawati Soekarnoputri last week. In the
draft, the government proposes an 18.7 percent hike in tax
revenue to Rp 260.8 trillion, to help finance a state budget
heavily burdened by public debt.

The government is also proposing a 39 percent cut in subsidies
to Rp 25.3 trillion, compared to the Rp 41.6 trillion allocated
in the 2002 state budget.

The lower subsidies will translate into higher fuel prices and
electricity rates.

Megawati said that with the lower subsidies, the government
would have to raise electricity rates by an average of 6 percent
every quarter next year.

The cut in expensive subsidies is crucial to help bring down
the state budget deficit to 1.3 percent of gross domestic product
from an estimated 2.5 percent in 2002, as part of a policy aimed
at achieving fiscal sustainability.

The state budget draft is still to be debated by legislators.

"These belt-tightening measures will hurt business in
general," said Lili.

The textile association said earlier many of its members were
forced out of business following the drastic cut in energy
subsidies earlier this year, coupled with various uncertainties
including labor conflicts, security problems and falling export
orders.

There is concern among the business community here that to
meet the higher tax revenue target, the tax office will squeeze
existing corporate tax payers.

Lili warned that forcing companies to pay more taxes would
move them to shift their investment to neighboring countries with
more favorable tax regimes, such as Malaysia, Thailand and
Vietnam.

He said that these countries had cut corporate taxes to
attract foreign investment.

He added that investors in the manufacturing sector would
rather shut down their operations and deposit their money in
banks, or shrink their operations to cut costs if they were
squeezed for more taxes.

"There could be mass layoffs," he warned.

Unemployment is one of the country's most pressing problems,
with a record high of more than 40 million out of work.

"The government must revise the new tax revenue target. It
must focus on curbing corruption," Lili said.

Sofjan said that without new investments, it would be
impossible for the government to meet the 5 percent economic
growth target in the 2003 state budget draft.

Meanwhile, economist Muhammad Chatib Basri said the higher tax
revenue target would not necessarily be harmful to the business
sector, because the country's tax ratio was still relatively low
compared to other countries in the region.

He said the 2003 tax revenue target would merely raise the
country's tax ratio to 13.3 percent from the 13 percent in the
current 2002 state budget.

Chatib Basri added that the tax target would not frighten
away foreign investors, because taxes were not singled out as a
main factor in making investments.

"Foreign investors are mainly concerned with uncertainties
rather than the tax issue," he said, pointing to legal
uncertainties, security problems, corruption and labor conflicts.