Purge levies, let small-scale enterpreneurs flourish

By Vanessa Johanson

BANDUNG (JP): Indonesia's struggling, small-scale entrepreneurs are obliged to pay out a large slice of their annual profits on legal and illegal levies.

At a recent, weekend focus group for small, local enterprises in Cirebon, West Java, the owners complained about paying illegal levies on top of the official charges for services. These levies were requested, sometimes in the form of cash payments and sometimes in the form of gifts.

Some small businesspeople regarded these contributions as an essential part of business life, even though they are illegal.

Levies have been blamed for stunting the growth of the businesses seen in most neighborhoods. When local officials and authorities impose charges, it force up production costs and hits, among others, the owners of vegetable stalls in markets, photocopy shops, small road-side eateries and factories employing a handful of people.

Micro-enterprises (businesses with annual turnovers below Rp 50 million), small enterprises (businesses with annual turnovers between Rp 50 million and 200 million) as well as larger companies all incur these charges.

Naturally, most enterprises are required to have some form of business license. These licenses have different names and procedures, including the Licensing Letter for Business Trading (SIUP) or Company Registration (TDP), depending on the size of the enterprise and its location.

In addition to the license fee there are a plethora of payments including: retribution obtained on a daily or weekly basis; taxation paid as deemed appropriate by a visiting team from the Tax Office; Land Development Tax; Market Authority; Development Tax: Advertising Tax; Sanitation Retribution; Safety Retribution; Use of Parking Area Retribution; and Land Rent.

On top of all of these costs comes the payments which represent the most formidable burden, according to an innovative study undertaken in Central Java by the Faculty of Economics at Satya Wacana University. These are the informal payments of sumbangan liar or illegal levies, requested by various government officials, police, army and so on who make on-site visits to enterprises. These payments are not usually receipted and the amount is not fixed.

A research team led by Roos Kities Andadari, Ina Hunga and Henry Sandee PhD, carried out a study in the small city of Salatiga and the town of Karanggeneng. They conducted detailed interviews with 202 small and micro-enterprises about levies and contributions. They also held in-depth interviews with representatives of local authorities and the larger business community.

The draft report of the study states that last year the average gross earnings for producers and their families was about 10 percent to 15 percent of the annual turnover. Micro- enterprises had to spend about 5 percent of those earnings on levies and illegal payments while small enterprises had to spend about 10 percent on these payments. In some specific cases, enterprises were spending approximately 20 percent of their earnings on these official and unofficial fees.

Often those demanding these donations arrived around Idul Fitri and Christmas, periods of high financial strain for the community. Thus the burden was accentuated at these times.

Many of those requesting payment thrived on the ignorance of the small business person. One example was a small chili farmer near Bandung, who was receiving a drastically reduced rate for each kilogram of his produce. The reduction was because the agent taking the chilies to market was paying several "levies" to market authorities and taking that levy from the payment for each kilogram.

Some small business groupings have greater bargaining power and so pay less for licenses and donations. In some sectors, business licenses in the town of Karanggeneng were almost twice the cost of those in the larger center of Salatiga. The reason, presumably, was the Salatiga enterprises were greater in number and more organized when dealing with local authorities, using agents or middlemen.

Some local authorities, however, are sensitive to the economic vulnerability of small and micro-businesses in relatively isolated areas. Therefore charges placed on businesses in Karanggeneng, for example, tended to be less than those in Salatiga for payments other than permits.

Non-indigenous (non-pribumi) entrepreneurs are also likely to pay less for all official charges due to their self-organization and bargaining power. On the other hand, indigenous (pribumi) enterprises are unlikely to form associations and use middle-men who offer to obtain the permit or pay the tax at "relatively low costs".

Business licenses demand a huge economic commitment, with businesses at times paying 20 times the official rate for a license. The study found that the cost of permits sometimes reached Rp 350,000 for small enterprises and Rp 100,000 for micro-enterprises, when the official rates are Rp 17,500 for businesses (SIUP) and Rp 12,500 for company registrations (TDP).

This phenomenon was caused by small businesses paying extra for a "special service", namely time-consuming tasks. The complexity and delay experienced in the licensing bureaucracy resulted in many small businesspeople opting to hire a specialist agent to obtain the license. This too added to the cost.

If the payment burden is high in small cities and towns, such as those mentioned in the report, what is the impact on businesses in larger centers and in large scale enterprises?

Such is the need for discussing the phenomenon of "illegal levies" that the Social Research Institute Akatiga, in Bandung, has set up a series of focus groups in different locations in Java. The aim is to pool knowledge and experiences about the multitude of charges placed on small businesses.

The focus groups involve local, small-scale entrepreneurs and non-government organizations. The entrepreneurs are proving to be highly vocal about the impact of these payments.

All groups involved are aware that if small enterprises in Indonesia are ever going to advance and flourish, all fees, levies and donations must be fair, non-corrupt, official and recorded.

The writer is a researcher at Akatiga Center for Social Analysis in Bandung.