Plans to slap tax on mutual funds on track: Tax office

The Jakarta Post, Jakarta

The Directorate General of Taxation said it would go ahead with plans to tax the country's mutual fund industry despite growing protests, saying the policy was fair.

"In principle, the concept is to give equal treatment to all parties. Income from any business should be taxed. It's only a matter of upholding the principle of justice," Wahyu Santoso, head of the tax potential division at the taxation office, told The Jakarta Post last week.

He added that a thorough analysis and study was being made to examine the details of the policy, as well as its impact on the industry.

His remarks came amid rising protests from industry' players rejecting the plan, saying it would kill off the industry as investors would no longer find it attractive to invest in mutual funds.

There have even been reports suggesting that last week's drop in the rupiah against the U.S. dollar was partly caused by the planned policy as concerned investors swapped into dollar assets.

According to Tax Law No. 17/2000, interest income gained by mutual funds investing in bonds is not subject to income tax. The tax incentive is valid for mutual funds during their first five years.

This tax facility has attracted many investors into the mutual fund industry. Even banks are teaming up with fund managers to launch mutual fund products to keep depositors (the government imposes a 20 percent tax on bank time deposits).

As a result, the amount of money invested in mutual funds jumped from Rp 15.9 trillion in 2001 to Rp 56.1 trillion in 2002 and Rp 67 trillion in May 2003. Around 80 percent of these assets are rupiah bonds, mostly government bank recapitalization bonds.

The declining trend in time deposit rates, triggered by the lower Bank Indonesia benchmark rate, has also been a contributing factor. Foreign investors including Indonesians who have stashed their cash overseas since the late 1990s financial and political crisis also reportedly invest heavily in local mutual funds because of the higher returns compared to investing in dollar- denominated assets amid the lower global interest rate.

Director General of Taxation Hadi Purnomo said recently that the plan to impose income tax on revenue from mutual funds would be included in the draft of the amendment of the tax law, which would be submitted to the House of Representatives in December.

The tax office is increasingly concerned that the growing number of banks offering mutual funds to their depositors could threaten the government's income tax revenue target.

Indeed, the growth in bank deposits has been steadily falling from 15 percent (of third party funds) in 2000, to 12.3 percent in 2001 and to 4.4 percent in 2002.

According to one estimate, the government could suffer some Rp 2.5 trillion in potential tax revenue losses because of the tax- free facility given to mutual funds.

The tax-free facility was initially intended to lure local retail investors into the local capital market.

But, some analysts have said that investors in the mutual funds industry are mostly large investors including foreign ones wishing to escape tax.

Citibank economist Anton Gunawan agreed that the tax incentive should be eliminated gradually, "because to some extent, it can be said that the government is 'subsidizing' wealthy foreigners by this policy".

However, Anton added, the adjustment had to be made gradually, so as not to give a shock to the industry as well as investors.

"The best way is to set a reasonable rate of tax that will be imposed. I do not think 20 percent, as imposed on depositors, would be wise, otherwise, there is a risk the industry could collapse."