VAT rate may be raised to curb budget deficit

JAKARTA (JP): With the 2001 state budget deficit threatening to reach critical levels, one option available to the government to check the deficit is increasing the value added tax (VAT), which currently stands at 10 percent.

Director general of taxation Hadi Purnomo said on Thursday the easiest way to increase tax revenue in a very short period was to focus on "indirect taxes", particularly VAT.

"Yes, there have been some demands to raise the VAT rate, but we have not yet decided on this ... According to the VAT law, the government can raise the VAT rate up to 15 percent," he said.

But some observers fear raising the VAT would have a negative impact on the business sector by cutting into sales volume.

A number of economists warned earlier the business sector would have to shoulder the burden of the budget deficit, particularly those businesses offering goods and services for middle to upper-income people. They said it would be political suicide for the embattled government to impose new burdens on low-income people.

Hadi declined to disclose the new tax revenue target, saying the overall state budget revision was still being discussed by senior economic ministers and had yet to be delivered to the House of Representatives for approval.

But he said the provisional figure ranged from more than Rp 180 trillion (US$16.33 billion) to nearly Rp 190 trillion. The original tax revenue target for 2001 was Rp 179.89 trillion.

Hadi said the preliminary figure for the revised VAT receipt target was between Rp 57 trillion and Rp 59 trillion, compared with the original target of Rp 48.85 trillion.

The budget deficit this year could widen to the critical level of 6 percent of gross domestic product (GDP), from the initial projection of 3.7 percent of GDP. This widening is primarily the result of the sharp plunge of the rupiah against the U.S. dollar and rising domestic interest rates.

The government has said it is determined to check the budget deficit at about 3.8 percent of GDP by introducing several measures focusing on increasing domestic tax revenue and cutting subsidy spending, notably on fuel products.

Coordinating Minister for the Economy Rizal Ramli said on Wednesday the government might have to increase fuel prices by an average of 30 percent later this year if the fuel subsidy in the state budget was to be cut by about Rp 5.6 trillion, as was originally planned.

Rizal, however, said any fuel price increase should not affect those in the lower income brackets.

The government was to have submitted the budget revision to the House last week, a deadline it obviously missed. Minister of Trade and Industry Luhut B. Pandjaitan said the government would submit the budget revision after it was finalized by the Cabinet on May 16.

However, according to sources this deadline may also be in danger. The sources said the government had yet to decide on several crucial issues, particularly taxes and the fuel subsidy.

Rizal admitted on Wednesday that cutting the fuel subsidy by raising fuel prices was a difficult choice for the government because of the possible political consequences.

He pointed to the increase in fuel prices in April 1998 which led to social unrest and the eventual downfall of former president Soeharto in May of that year.

The House's approval of the budget revision is a prerequisite for the International Monetary Fund to disburse the third $400 million tranche of its $5 billion bailout program for Indonesia.

Rizal said President Abdurrahman Wahid met with IMF Jakarta representative John Dodsworth and World Bank country director Mark Baird on Thursday to discuss the budget revision.

Elsewhere, Hadi said tax revenues in the first four months of this year totaled Rp 53.5 trillion, higher than the Rp 52.2 trillion target.

The director for tax planning and revenue, Petronius Saragih, said income tax revenue in the January-April period was Rp 35.2 trillion, value added tax and luxury sales tax revenue was Rp 16.5 trillion, land and building tax revenue was Rp 1 trillion and the revenue from other taxes was Rp 718 billion.

Petronius said the oil and natural gas industry accounted for Rp 9.2 trillion of income tax receipts, the result of higher-than-estimated oil prices and the depreciation of the rupiah against the U.S. dollar.

Other sectors accounted for Rp 25.9 trillion of total income tax revenue, which was well below the targeted figure. (rei)