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.