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 Then the money will be withdrawn and can be spent freely as a government regulation guarantees that the origin of this money will never be traced.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