Tax on deposit interest

Tax on deposit interest

The government has issued a regulation stipulating that as of
Jan. 1, 2001, the income tax imposed on the interest accruing
from term deposits and savings accounts in banks is increased
from 15 percent to 20 percent and this is final in nature. The
minimum level of taxable deposits is lowered from Rp 10 million
to Rp 7.4 million.

Allow me to comment on this hike:

* This tax increase is highly burdensome to the people because
there are quite a lot of unemployed people that can save their
money as term deposits.

* Banks and Bank Indonesia will have to raise the rate of
interest on loans, deposits and savings and consequently the rate
of interest on loans in the community will also rise. Corporate
costs will be on the way up while at present many Indonesian
companies are already in great financial trouble.

* As a result, there will be capital flight from Indonesia.
Rupiah will be changed into strong U.S. dollars or the ASEAN
dollar as Indonesia adheres to the principle of free-float
foreign exchange. In other countries there is no tax imposed on
the interest accruing from deposits and savings.

This policy will only benefit corruptors. The money they
collect from corruption will be placed in banks as term deposits,
let's say for just one month. Then the money will be withdrawn
and can be spent freely as a government regulation guarantees
that the origin of this money will never be traced. Also, it does
not have to be declared in the annual income tax assessment as it
is tax-free. This is really the function of a term deposit in
Indonesia. (I personally do no have any deposits, mind you.)

To raise the tax on the interest accruing from deposits will
be the easiest method the government can adopt to get additional
revenue from income tax. Let's just wait and see whether
Indonesia's economy will be improving or worsening.

Director General of Taxation Dr. Machfud Sidik has recently
said that there should be no concern over capital flight from
Indonesia. Everybody depositing their money abroad will be taxed
in Indonesia when they submit their annual income tax assessments
at the end of the year. Unfortunately, there is no guarantee that
these people will ever submit their annual income tax assessments
in Indonesia. Will the Directorate General of Taxation be able to
exercise control over this matter? This is sheer nonsense.

SUHARSONO HADIKUSUMO

Jakarta